Financial Analysis and Planning Review
Questions
Course Introduction
Financial Analysis and Planning explores the fundamental concepts and techniques used to assess the financial health of organizations and to develop strategies for sustainable growth. The course covers topics such as financial statement analysis, ratio analysis, cash flow assessment, budgeting, forecasting, and strategic planning. Students learn to interpret financial data, evaluate performance, identify potential risks and opportunities, and apply analytical tools to support decision-making within various business contexts. Through case studies and practical exercises, participants gain hands-on experience in preparing comprehensive financial plans and making informed recommendations for both short-term management and long-term strategic goals.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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19 Chapters
3308 Verified Questions
3308 Flashcards
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Chapter 1: Foundations
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Sample Questions
Q1) The agency problem can seriously restrain the economic success of a company. What avenues are available to shareholders to bring their goals and those of management into alignment?
Answer: The best method to align the goals of managers and stockholders is to tie management's compensation to profitability and/or stock price. This incentivizes managers to take actions that simultaneously benefit themselves and stockholders.
Q2) Because it historically provides a positive return, common stock is typically classified as a real asset.
A)True
B)False
Answer: False
Q3) Which of the following is not a financial market?
A) Bond market
B) A market in which small business owners buy and sell their companies
C) Stock market
D) All of these are financial markets
Answer: B
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) Which of the following is not included in the calculation of current assets?
A) Accruals
B) Accounts Receivable
C) Allowance for Doubtful Accounts
D) Cash
E) Inventory Answer: A
Q2) Preferred stock is referred to as a cross between debt and common equity because it has some characteristics of each.
A)True
B)False Answer: True
Q3) Which statement is true?
A) Beginning equity + net income = ending equity
B) Beginning equity + net income - dividends = ending equity
C) Beginning equity + net income - dividends + new stock sold = ending equity
D) All of these statements are true.
Answer: D
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) If the firm's total equity is $600,000, its long-term debt is $300,000, and its current liabilities are $100,000, then its debt ratio is:
A) 66.67%.
B) 40%.
C) 30%.
D) 33.33%.
Answer: B
Q2) A decrease in the equity multiplier indicates that the firm has increased its use of debt.
A)True
B)False
Answer: False
Q3) The purchase of real estate is:
A) a financing activity if the firm uses debt financing.
B) an operating activity.
C) an investing activity.
D) an investing activity only if the firm uses equity financing.
Answer: C
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Chapter 4: Financial Planning
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Sample Questions
Q1) Top-down planning tends to reflect more excessive and aggressive optimism than bottom-up planning.
A)True
B)False
Q2) Holding all other variables constant, which of the following would increase a firm's external funding requirements in the planning period?
A) An increase in assets
B) A decrease in accruals
C) An increase in dividends paid
D) Both a & c
E) All of the above
Q3) External funding requirements can be estimated using an equation called the EFR relationship. The simple concept behind this equation is that funds will be needed to the extent of forecasted:
A) growth in assets minus new retained earnings.
B) growth in sales minus all current liabilities minus all retained earnings.
C) assets minus current liabilities minus new retained earnings.
D) growth in assets minus growth in current liabilities minus new retained earnings.
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6
Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) An unapproved prospectus is called:
A) a red letter.
B) a saltwater investment.
C) a red herring.
D) an unapproved offering.
Q2) The money market is comprised of debt instruments that mature with-in one year.
A)True
B)False
Q3) Which of the following constitute the interest rate model?
A) k = risk free rate + inflation adjustment + default risk premium + liquidity risk premium
B) k = basic rate + default risk premium + liquidity risk premium + maturity risk premium + government risk premium
C) k = pure rate + inflation adjustment + default risk premium + liquidity risk premium + maturity risk premium
D) None of the above
Q4) The real risk-free rate of interest is determined by the Federal Reserve. A)True
B)False
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Chapter 6: Time Value of Money
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Sample Questions
Q1) What is the future value of $1,000, placed in a saving account for four years if the account pays 8%, compounded quarterly?
A) $1,320.45
B) $1,360.50
C) $1,372.80
D) None of the above
Q2) The present value of an amount can be represented as:
A) PV = FVn[PVF<sub>k,n</sub>].
B) PV = FVn[PVFA<sub>k,n</sub>].
C) PV = FV<sub>n</sub>[1 / (1 + k)<sup>n</sup>].
D) a and c
Q3) Assume that you have just won $5,000,000 in the lottery and will receive $250,000 per year for the next 20 years. How much is your prize worth today if the interest rate is 8%?
A) $1,072,731
B) $2,454,525
C) $2,185,219
D) $1,165,250
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) As per FASB 13, which of the following is a rule for a lease to qualify as an operating lease?
A) There is a transfer of ownership at lease expiration.
B) There is a bargain purchase option.
C) The lease term is for over 75% of the asset's economic life.
D) The present value of lease payments is less than 90% of the fair market value at lease origination.
Q2) In valuing bonds, the most important consideration is:
A) the bond's past and future cash flows.
B) the bond's future cash flows.
C) the bond's past cash flows.
D) whether coupon payments are annual or semiannual.
Q3) List the following types of bonds in order of interest rates from low to high, all other factors being equal: Subordinated debt; Senior debt; Senior debt that is also convertible
A) Subordinated, Senior, Convertible
B) Senior, Convertible, Subordinated
C) Convertible, Senior, Subordinated
D) Convertible, Subordinated, Senior
E) Senior, Subordinated, Convertible
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Page 9
Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D<sub>0</sub>) that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B, Inc.?
A) No, because the stock is overpriced by $1.33.
B) No, because the stock is overpriced by $3.33.
C) Yes, because the stock is underpriced by $1.33.
D) Yes, because the stock is underpriced by $3.33.
Q2) The stock of Music City Inc. is selling for $37.50. The firm recently paid a dividend of $1.10. What is its implied constant growth rate if the market return is 14 percent?
A) 11.07%
B) 14.0%
C) 11.4%
D) 10.75%
Q3) The technical analyst forecasts a company's cash flows to arrive at value. The fundamental analyst relies on past price patterns repeating themselves.
A)True
B)False
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Chapter 9: Risk and Return
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Sample Questions
Q1) Happenings that causes unsystematic risk include:
A) inflation.
B) interest rates changes.
C) local strikes.
D) recession.
Q2) When a new stock is introduced into a portfolio and the ups and downs of its return appear to coincide with those of the portfolio's return, the stock's return is said to be perfectly positively correlated with the portfolio's, and its addition will reduce portfolio risk.
A)True
B)False
Q3) The risk remaining after extensive diversification is primarily:
A) unsystematic risk.
B) systematic risk.
C) coefficient of variation risk.
D) standard deviation risk.
Q4) What is the market risk premium?
Q5) The square of variance is the standard deviation.
A)True
B)False
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) In addition to justifying how capital dollars are spent, capital budgeting provides a basis for choosing among alternative capital projects.
A)True
B)False
Q2) A stand-alone project:
A) stands on its own merits.
B) competes against superior projects.
C) has the best cash flow.
D) has no competing alternatives.
Q3) The internal rate of return is analogous to the yield on a bond, because both are rates that equate inflows with outflows on a present value basis.
A)True
B)False
Q4) The replacement chain and the equivalent annual annuity methods are designed to evaluate stand-alone projects that have substantially different initial outlays.
A)True
B)False
Q5) When can IRR and NPV give different results? Explain how this can happen.
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Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) Which of the following is considered a relevant cash flow?
A) A market feasibility study already performed prior to the project
B) Interest expense associated with financing the project
C) Initial cost of hiring and training employees
D) Both b & c
E) All of the above
Q2) The interest rate associated with financing a capital budgeting project:
A) should be included in the estimate of the proposal's incremental cash flows.
B) should be ignored in the evaluation of the capital budgeting project.
C) is reflected in the cost of capital.
D) None of the above
Q3) It is generally best to forecast revenue with unit and price detail.
A)True
B)False
Q4) Subjective benefits:
A) based upon opinions are hard to quantify.
B) are unethical.
C) contain bias.
D) All of these are correct.
Q5) Define opportunity costs and explain their role in capital budgeting.
Page 13
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) Which of the following is true of the certainty equivalent approach?
A) It asks the decision makers to consider each forecast cash flow individually and come up with a lower, risk free cash flow that is equally acceptable.
B) It is accomplished by regressing the division's accounting return on equity in previous years against the return on a major stock market index.
C) It selects worst, middle, and best outcomes for each cash flow and computes NPV for a variety of combinations.
D) It models cash flows as random variables and repeatedly calculates NPV.
Q2) A company's cost of capital is the most appropriate discount rate to use when analyzing which type of project(s)?
A) Replacement projects
B) Expansion projects
C) New venture projects
D) Replacement and expansion projects
E) Expansion and new venture projects
Q3) A company is a portfolio of projects.
A)True
B)False
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Chapter 13: Cost of Capital
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Sample Questions
Q1) Williamson Manufacturing paid a $2 dividend last year and expects dividends to grow at a constant rate of 7%. The firm's stock is selling at $45 per share and flotation costs on a new issue would be 15%. Calculate Williamson's cost of new equity.
A) 10.2%
B) 11.8%
C) 12.6% D) 13.6%
Q2) Groves, Inc. pays an annual dividend of $1.22, which is expected to grow at a rate of 5 percent each year. The firm is in a fairly risky business and has a beta of 1.45. The return on the market is 13.5 percent, and the risk-free rate is 9.3 percent. What is the cost of Groves' equity from retained earnings?
A) 19.6%
B) 13.5%
C) 15.4%
D) 6.1%
Q3) The money paid to investors is a cost to the company and a return to the investor. Why then aren't component costs equal to investor returns?
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Page 15
Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) If a company sells 10,000 units at $25 each, has fixed costs of $20,000, and a variable cost of $20 per unit, what is its degree of operating leverage (DOL)?
A) 1.67
B) 2.5
C) 2.0
D) 1.6
Q2) Increasing a firm's financial leverage also increases ____.
A) the return on equity
B) EBIT
C) the amount of equity
D) the amount of dividends
Q3) The Degree of Financial Leverage(DFL) quantifies the effect of leverage by relating relative changes in EBIT to relative changes in EPS.
A)True
B)False
Q4) Explain the breakeven analysis.
Q5) Financial risk is defined as the expected variation in EBIT.
A)True
B)False
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Chapter 15: Dividends
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Sample Questions
Q1) The fact that dividends are discretionary means that companies are entirely free to pay whatever dividends they want.
A)True
B)False
Q2) Unlike a stock dividend or a stock split, share repurchase should increase stockholder wealth.
A)True B)False
Q3) Urguhart has just declared a 4-for-3 stock split. If the pre-split price of common stock was $54 a share, what do you expect the post-split price will be?
A) $72.00
B) $36.18
C) $42.23
D) $40.50
Q4) Firms often offer shareholders the option of receiving new shares instead of cash dividends. Such a plan has the advantage of raising new equity without incurring flotation costs.
A)True B)False
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Chapter 16: The Management of Working Capital Multiple
Choice Questions
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Sample Questions
Q1) Under a line of credit agreement between a firm and its bank:
A) the loan often must be completely paid off for a portion of the year.
B) the firm can borrow up to a specified maximum during a specified period.
C) the bank is contractually committed to lend the firm the money.
D) a and b.
Q2) Which of the following will cause working capital to increase?
A) A decision to tighten credit and collections policies
B) A decision to carry higher levels of inventory
C) A decision to take increased advantage of suppliers trade credit
D) Both b. and c. above will increase permanent working capital.
E) All of the above will increase permanent working capital.
Q3) Which of the following is an incorrect statement of an issue involved in receivables management?
A) Easier credit increases sales
B) Easier credit increases bad debt losses
C) Easier credit lowers the cost of financing receivables
D) Easier credit improves customer relations
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Chapter 17: The Management of Working Capital
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Q1) Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.
A)True
B)False
Q2) A bank line of credit usually requires both interest payments and a commitment fee.
A)True
B)False
Q3) Factoring involves the sale of accounts receivable by the firm that originally generated the receivables.
A)True
B)False
Q4) Trust receipts identify the specific units of inventory pledged as collateral for a loan. A)True
B)False
Q5) Explain the idea of spontaneous financing and explain why, in spite of it, we still have to fund working capital from outside sources.
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) A combination of two entities in which both legally cease to exist and a new legal entity is formed is:
A) an acquisition.
B) a merger.
C) a consolidation.
D) a partnership.
Q2) Tancesco Inc. is considering acquiring Aldine Corp. which it has estimated will generate the following after tax cash flows over the next three years ($000). After that management expects a growth rate of 3% indefinitely. \(\begin{array}{lr}1&2&3\\\$580&\$600&\$650 \end{array}\)
In addition, Tancesco thinks a merger will produce $40,000 per year in after tax synergies. Aldine has 65,000 shares of common stock outstanding. The company's beta is 1.6, the market is currently returning an average of 12% on stock investments and short term treasury bills are yielding 3%.
What should Tancesco be willing to pay per share for Aldine if management is willing to value the acquisition over an indefinitely long time horizon? ($000)
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Page 20
Chapter 19: International Finance
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Sample Questions
Q1) A recent direct quote for the euro was $.8845. The euro's indirect equivalent is:
A) 0.8845.
B) $1.1306.
C) 1.1306.
D) 0.1155.
Q2) A foreign currency quote of $1.00 : 0.85 British pounds is ____.
A) an indirect quote in Great Britain, but a direct quote in the U.S.
B) a direct quote in Great Britain, but an indirect quote in the U.S.
C) a direct quote in both great Britain and the U.S.
D) an indirect quote in both Great Britain and the U.S.
Q3) If the forward (direct quote) exchange rate is lower than the spot rate, the forward currency is said to be trading at a:
A) premium.
B) gain.
C) discount.
D) loss.
Q4) Companies that have divisions and branches in other countries are referred to as multinational corporations, or MNCs.
Q5) Describe the difference between fixed and floating exchange rate systems.
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