Financial Analysis and Planning
Mock Exam
Course Introduction
Financial Analysis and Planning introduces students to the essential methods and tools used to assess the financial health and performance of organizations. The course covers key topics such as financial statement analysis, ratio analysis, cash flow analysis, and forecasting. Students explore techniques for budgeting, investment decision-making, and strategic financial planning to enhance organizational sustainability and growth. Emphasis is placed on interpreting financial data for informed decision-making, risk assessment, and long-term business planning, preparing students for roles in corporate finance, banking, and financial consulting.
Recommended Textbook
Intermediate Financial Management 12th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) You recently sold 100 shares of your new company,XYZ Corporation,to your brother at a family reunion.At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates.Which of the following statements best describes this transaction?
A)This is an example of an exchange of physical assets.
B)This is an example of a primary market transaction.
C)This is an example of a direct transfer of capital.
D)This is an example of a money market transaction.
E)This is an example of a derivatives market transaction
Answer: C
Q2) Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts.
A)True
B)False Answer: True
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Page 3
Chapter 2: Risk and Return: Part I
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Q1) Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?
A)If a stock's beta doubled, its required return under the CAPM would also double.
B)If a stock's beta doubled, its required return under the CAPM would more than double.
C)If a stock's beta were 1.0, its required return under the CAPM would be 5%.
D)If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%.
E)If a stock has a negative beta, its required return under the CAPM would be less than 5%.
Answer: E
Q2) If the returns of two firms are negatively correlated,then one of them must have a negative beta.
A)True
B)False
Answer: True
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4
Chapter 3: Risk and Return: Part Ii
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Q1) The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.
A)True
B)False Answer: False
Q2) The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by managerial actions.
A)True
B)False Answer: False
Q3) Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.
A)True
B)False Answer: False
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Page 5
Chapter 4: Bond Valuation
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Q1) The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A)All else equal, long-term bonds have less interest rate price risk than short-term bonds.
B)All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
C)All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
D)All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
E)All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
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Chapter 5: Financial Options
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Q1) Which of the following statements is CORRECT?
A)Call options give investors the right to sell a stock at a certain strike price before a specified date.
B)Options typically sell for less than their exercise value.
C)LEAPS are very short-term options that were created relatively recently and now trade in the market.
D)An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.
E)Put options give investors the right to buy a stock at a certain strike price before a specified date.
Q2) If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.
A)True
B)False
Q3) The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?
A)$77,000
B)$80,850
C)$84,893
D)$89,137
E)$93,594
Q2) Danielle's Sushi Shop last year had (1)a negative net cash flow from operations, (2)a negative free cash flow,and (3)an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?
A)The company had a sharp increase in its depreciation and amortization expenses.
B)The company had a sharp increase in its inventories.
C)The company had a sharp increase in its accrued liabilities.
D)The company sold a new issue of common stock.
E)The company made a large capital investment early in the year.
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Chapter 7: Analysis of Financial Statements
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Q1) A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving,i.e.,it is becoming more liquid.
A)True
B)False
Q2) Rappaport Corp.'s sales last year were $320,000,and its net income after taxes was $23,000.What was its profit margin on sales?
A)6.49%
B)6.83%
C)7.19%
D)7.55%
E)7.92%
Q3) Firms A and B have the same current ratio,0.75,the same amount of sales and cost of goods sold,and the same amount of current liabilities.However,Firm A has a higher inventory turnover ratio than B.Therefore,we can conclude that A's quick ratio must be smaller than B's.
A)True
B)False
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Chapter 8: Basic Stock Valuation
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Q1) Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF<sub>0</sub> in millions?
A)$0.95
B)$1.05
C)$1.16
D)$1.27
E)$1.40
Q2) Reynolds Construction's value of operations is $750 million based on the free cash flow valuation model.Its balance sheet shows $50 million of short-term investments that are unrelated to operations,$100 million of accounts payable,$100 million of notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital),and $160 million of retained earnings.What is the best estimate for the firm's value of equity,in millions?
A)$429
B)$451
C)$475
D)$500
E)$525
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) Which of the following statements is CORRECT?
A)The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
B)Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated.
C)The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
D)The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.
E)Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
Q2) If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q2) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q3) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q4) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A)To enable the firm to borrow at a below-market interest rate.
B)To make it easier to grant stock options to employees.
C)To help prevent a hostile takeover.
D)To help retain valued employees.
E)To increase worker productivity.
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Chapter 11: Determining the Cost of Capital
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Q1) The reason why reinvested earnings have a cost equal to r<sub>s</sub> is because investors think they can (i.e.,expect to)earn r<sub>s</sub> on investments with the same risk as the firm's common stock,and if the firm does not think that it can earn r<sub>s</sub> on the earnings that it retains,it should distribute those earnings to its investors.Thus,the cost of reinvested earnings is based on the opportunity cost principle.
A)True
B)False
Q2) If expectations for long-term inflation rose,but the slope of the SML remained constant,this would have a greater impact on the required rate of return on equity,r<sub>s</sub>,than on the interest rate on long-term debt,r<sub>d</sub>,for most firms.Therefore,the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
A)True
B)False
Q3) If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.
A)True
B)False
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Chapter 12: Capital Budgeting: Decision Rules
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Q1) If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital,the payback method and NPV method would always lead to the same decision on which project to undertake.
A)True
B)False
Q2) Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.
A)If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative.
B)If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
C)There is no necessary relationship between a project's IRR, its WACC, and its NPV.
D)When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.
E)If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
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Chapter 13: Cash Flow Estimation and Risk Analysis
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Q1) Because of improvements in forecasting techniques,estimating the cash flows associated with a project has become the easiest step in the capital budgeting process.
A)True
B)False
Q2) The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher,other things held constant.
A)True
B)False
Q3) The coefficient of variation,calculated as the standard deviation of expected returns divided by the expected return,is a standardized measure of the risk per unit of expected return.
A)True B)False
Q4) If debt is to be used to finance a project,then when cash flows for a project are estimated,interest payments should be included in the analysis.
A)True
B)False
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Chapter 14: Real Options
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Q1) Which one of the following is an example of a "flexibility" option?
A)A company has an option to close down an operation if it turns out to be unprofitable.
B)A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change.
C)A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.
D)A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.
E)A company has an option to invest in a project today or to wait a year.
Q2) Refer to Exhibit 14.1.Since the project is considered to be quite risky,a 20% cost of capital is used.What is the project's expected NPV,in thousands of dollars?
A)$336.15
B)$373.50
C)$415.00
D)$461.11
E)$507.22
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Repurchases
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Q1) If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.
A)True
B)False
Q2) Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity.Its capital budget this year is forecast to be $650,000.It also wants to pay a dividend of $225,000.If the company follows the residual dividend policy,how much net income must it earn to meet its capital requirements,pay the dividend,and keep the capital structure in balance?
A)$584,250
B)$615,000
C)$645,750
D)$678,038
E)$711,939
Q3) Stock dividends and stock splits should,at least conceptually,have the same effect on shareholders' wealth.
A)True
B)False
Page 17
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Chapter 16: Capital Structure Decisions
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Q1) Which of the following statements is CORRECT?
A)The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price.
B)The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share.
C)If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.
D)Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
E)A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
Q2) A firm's capital structure does not affect its calculated free cash flows,because FCF reflects only operating cash flows.
A)True
B)False
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to Exhibit 17.2.According to the MM extension with growth,what is Kitto's value of equity?
A)$1,492,000
B)$1,529,300
C)$1,567,533
D)$1,606,721
E)$1,646,889
Q2) In a world with no taxes,MM show that a firm's capital structure does not affect the firm's value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e.,its value rises as its debt is increased.
A)True
B)False
Q3) Refer to Exhibit 17.3.What is the value (in millions)of Wilson Dover's equity if it is viewed as an option?
A)$228.77
B)$254.19
C)$282.43
D)$313.81
E)$345.19
Page 19
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Chapter
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Q1) Going public establishes a market value for the firm's stock,and it also ensures that a liquid market will continue to exist for the firm's shares.This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
Q2) The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price.Since this dilutes the value of the public stockholders,it "carves out" some of their value.
A)True
B)False
Q3) The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information,the danger of losing control,and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.
A)True
B)False
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Page 20
Chapter 19: Lease Financing
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Q1) Stanley Inc.must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing.The company has a zero tax rate due to tax loss carry-forwards,and is considering a 5-year,bank loan to finance the equipment.The loan has an interest rate of 10% and would be amortized over 5 years,with 5 end-of-year payments.Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each.How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.
A)$177,169
B)$196,854
C)$207,215
D)$217,576
E)$228,455
Q2) Operating leases often have terms that include
A)full amortization over the life of the lease.
B)very high penalties if the lease is canceled.
C)restrictions on how much the leased property can be used.
D)much longer lease periods than for most financial leases.
E)maintenance of the equipment by the lessor.
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21
Chapter 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles
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Q1) Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.
A)True
B)False
Q2) Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.
A)True
B)False
Q3) Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,P<sub>c</sub>?
A)$40.00
B)$42.00
C)$44.10
D)$46.31
E)$48.62
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Page 22
Chapter 21: Supply Chains and Working Capital Management
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Q1) Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.
A)True
B)False
Q2) A lockbox plan is
A)used to identify inventory safety stocks.
B)used to slow down the collection of checks our firm writes.
C)used to speed up the collection of checks received.
D)used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
E)used to protect cash, i.e., to keep it from being stolen.
Q3) Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.
A)True
B)False
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23
Chapter 22: Providing and Obtaining Credit
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Q1) The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.
A)True B)False
Q2) The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.
A)True B)False
Q3) Gladys Turner borrowed $12,000 from the bank using a 10.19 percent "add-on",one-year installment loan,payable in four equal quarterly payments.What is the effective annual rate of interest?
A)9.50%
B)10.19%
C)15.99%
D)16.98%
E)20.38%
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Chapter 23: Advanced Issues in Cash Management and Inventory Control
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Q1) Each year,Holly's Best Salad Dressing,Inc.(HBSD)purchases 50,000 gallons of extra virgin olive oil.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to HBSD is $0.50 per gallon.Management currently orders the EOQ each time an order is placed.No safety stock is carried.The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time.Should HBSD take the discount?
A)From a cost standpoint, HBSD is indifferent.
B)No, the cost exceeds the benefit by $500.
C)No, the cost exceeds the benefit by $1,000.
D)Yes, the benefit exceeds the cost by $500.
E)Yes, the benefit exceeds the cost by $1,120.
Q2) Which of the following would cause average inventory holdings to decrease,other things held constant?
A)The purchase price of inventory items decreases by 50 percent.
B)The carrying price of an item decreases (as a percent of purchase price).
C)The sales forecast is revised downward by 10 percent.
D)Interest rates fall.
E)Fixed order costs double.
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Chapter 24: Enterprise Risk Management
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Q1) Which of the following statements about interest rate and reinvestment rate risk is CORRECT?
A)Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.
B)Interest rate price risk can be eliminated by holding zero coupon bonds.
C)Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
D)Interest rate risk can never be reduced.
E)Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.
Q2) Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09.What is the implied annual interest rate inherent in this futures contract?
A)6.32%
B)6.65%
C)7.00%
D)7.35%
E)7.72%
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Chapter 25: Bankruptcy, reorganization, and Liquidation
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Q1) Chapter 7 of the Bankruptcy Act is designed to do which of the following?
A)Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
B)Ensure that the firm is viable after emerging from bankruptcy.
C)Allow the firm to negotiate with each creditor individually.
D)Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
E)Protect shareholders against creditors.
Q2) In the event of bankruptcy under the federal bankruptcy laws,debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders.Moreover,in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.
A)True
B)False
Q2) Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.
A)True
B)False
Q3) The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
A)True
B)False
Q4) The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
A)True
B)False
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Chapter 27: Multinational Financial Management
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Q1) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
Q2) Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
A)$0
B)$1,834.86
C)$4,517.26
D)$5,712.31
E)$7,547.17
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Page 29
Chapter 28: Time Value of Money
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Q1) Your investment account pays 8.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?
A)5.14
B)5.71
C)6.35
D)7.05
E)7.84
Q2) Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?
A)$28,843.38
B)$30,361.46
C)$31,959.43
D)$33,641.50
E)$35,323.58
Q3) A "growing annuity" is any cash flow stream that grows over time.
A)True
B)False
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Chapter 29: Basic Financial Tools: a Review
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Q1) Recession,inflation,and high interest rates are economic events that are best characterized as being
A)company-specific risk factors that can be diversified away.
B)among the factors that are responsible for market risk.
C)risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
D)irrelevant except to governmental authorities like the Federal Reserve.
E)systematic risk factors that can be diversified away.
Q2) The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.
A)True
B)False
Q3) Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,its standard deviation.
A)True
B)False
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Chapter 30: Pension Plan Management
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Q1) Which of the following statements about defined contribution plans is incorrect?
A)In general, employees can choose the investment vehicle under a defined contribution plan. Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.
B)In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.
C)Defined benefit plans are used more often by large corporations than by small companies.
D)The PBGC insures a portion of pension benefits.
E)A defined contribution plan places the risk of poor pension portfolio performance on the employee.
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement,their pension rights are said to be vested.
A)True
B)False
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Q1) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q3) Not-for-profit firms have fund capital in place of equity capital.Since fund capital does not have to provide a return to stockholders,the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
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Chapter 32: a Values of the Areas Under the Standard
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Q1) There are 10,000,000 shares outstanding of O'Connell Co.'s stock,which now sells for $50 per share.The company plans to raise $100 million as new equity by selling common stock.Since the preemptive right is in the corporate charter,rights will be used.Management has decided that the rights should be worth $1 each: Such a price would assure that most stockholders would either exercise or sell their rights rather than just letting them expire,yet a careless failure to use the rights would not impose too severe a hardship on anyone.What subscription price should O'Connell set for its offering to obtain the desired price of the rights,and what will be the ex-rights stock price (M<sub>e</sub>),assuming the theoretical relationships hold? (Hint: N = Number of old shares/Number of new shares; Number of new shares = Dollars to be raised/Subscription price per share.) \(\text {Sub Price}\) \(\quad \) \(\text {Ex-rights}\)
a. \(\$ 39.65 \quad\quad \$ 42.50\)
b. \(\$ 40.25 \quad \quad\$ 43.50\)
c. \(\$ 42.65 \quad\quad \$ 47.50\)
d. \(\$ 44.55 \quad\quad \$ 49.00\)
e. \(\$ 46.65 \quad\quad \$ 50.00\)
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