Financial Analysis and Planning Study Guide Questions
Course Introduction
Financial Analysis and Planning introduces students to the essential concepts and techniques used to evaluate and manage the financial health and strategy of businesses. The course covers topics such as financial statement analysis, ratio analysis, cash flow assessment, forecasting, budgeting, and the use of financial metrics for decision-making. Students will develop the ability to interpret financial data, assess organizational performance, plan for future growth, and make informed recommendations based on quantitative analysis. Emphasis is placed on the integration of analytical tools with strategic financial planning to support effective business management and value creation.
Recommended Textbook
Corporate Finance The Core 3rd Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest?
Answer: 1.The threat of a hostile takeover
2.Shareholder initiatives
3.Performance based compensation
Q2) Which of the following organization forms accounts for the most revenue?
A) "S" corporation
B) Limited partnership
C) "C" corporation
D) Limited liability company
Answer: C
Q3) Which of the following statements is most correct?
A) An advantage to incorporation is that it allows for less regulation of the business.
B) An advantage of a corporation is that it is subject to double taxation.
C) Unlike a partnership, a disadvantage of a corporation is that has limited liability.
D) Corporations face more regulations when compared to partnerships.
Answer: D
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Suppose Novak Company experienced a reduction in its ROE over the last year.This fall could be attributed to:
A) an increase in net profit margin.
B) a decrease in asset turnover.
C) an increase in leverage.
D) a decrease in Equity.
Answer: B
Q2) Calculate Luther's return of equity (ROE),return of assets (ROA),and price-to-earnings ratio (P/E)for the year ending December 31,2008.
Answer: ROE = NI/shareholder equity = 10.2/63.6 = .160 or 16.0%
ROA = NI/total assets
Here total assets are not given,but we know that Total Assets = Total Liabilities + Shareholder Equity,so ROA = 10.2/386.7 = .026 or 2.6%
P/E = price/EPS or Market Cap/NI = (8.0 × $15)/$10.2 = 11.8
Q3) If on December 31,2008 Luther has 8 million shares outstanding trading at $15 per share,then what is Luther's market-to-book ratio?
Answer: market-to-book = market value of equity/book value of equity market-to-book = 8 million × $15/$63.6 = 1.89
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Assuming you currently have 10,000 Bbls of WTI crude,the added benefits to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
A) $730,600
B) $770,000
C) $40,800
D) $43,308
Answer: D
Q2) Which of the following statements regarding value additivity is FALSE?
A) The value of a portfolio is equal to the sum of the values of its parts.
B) The price or value of the entire firm is equal to the sum of the values of all projects and investments within the firm.
C) To maximize the value of the entire firm, managers should make decisions that maximize NPV.
D) Value additivity does not have important consequences for the value of the entire firm, only on portfolios of firms.
Answer: D
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
Page 5
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) Draw a timeline detailing the cash flows from investment "A."
Q2) You are saving for retirement.To live comfortably,you decide that you will need $2.5 million dollars by the time you are 65.If today is your 30th birthday,and you decide,starting today,and on every birthday up to and including your 65th birthday,that you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each and every year on your birthday is closest to:
A) $71,430
B) $27,680
C) $26,100
D) $26,260
Q3) Suppose that you are considering an investment that will pay you $4000 per year for the next five years.The appropriate rate of interest is 5%.You want to know the present value of the cash flows from this investment.To solve this problem in Microsoft Excel,you would use which of the following excel formulas?
A) =PV(.05,5,4000,0,0)
B) =PV(.05,5,4000,0,1)
C) =PV(5,.05,4000,0)
D) =PV(5,5,4000,0)
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Page 6
Chapter 5: Interest Rates
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Q1) If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%,then the inflation rate is closest to:
A) 5.70%
B) 6.20%
C) 6.55%
D) 12.25%
Q2) Which of the following statements is FALSE?
A) The plot of the relationship between the investment risk and the interest rate is call the yield curve.
B) Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.
C) The nominal interest rate does not represent the increase in purchasing power that will result from investing
D) A risk-free cash flow received in two years should be discounted at the two-year interest rate.
Q3) Assuming that you have made all of the first 24 payments on time,then how much interest have you paid over the first two years of your loan?
Q4) Should you purchase the delivery truck or lease it? Why?
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Page 7
Chapter 6: Valuing Bonds
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Q1) Which of the following statements is FALSE?
A) Bond prices converge to the bond's face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields.
B) As interest rates and bond yields fall, bond prices will rise.
C) Bonds with higher coupon rates are more sensitive to interest rate changes.
D) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.
Q2) The price (expressed as a percentage of the face value)of a one-year,zero-coupon corporate bond with a AAA rating is closest to:
A) 94.70
B) 95.60
C) 94.16
D) 95.42
Q3) Plot the zero-coupon yield curve (for the first five years).
Q4) What is the relationship between a bond's price and its yield to maturity?
Q5) Compute the yield to maturity for each of the five zero-coupon bonds.
Q6) Explain why the expected return of a corporate bind does not equal its yield to maturity?
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Chapter 7: Investment Decision Rules
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Q1) Assuming that Dewey's cost of capital is 12% EAR,then the NPV of his retainer offer is closest to:
A) -$7,500
B) -$7,400
C) $6,000
D) $7,400
Q2) Which of the following statements is FALSE?
A) The profitability index measures the value created in terms of NPV per unit of resource consumed.
B) The profitability index is the ratio of value created to resources consumed.
C) The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.
D) The profitability index measures the "bang for your buck."
Q3) The NPV for Boulderado's snowboard project is closest to:
A) $228,900
B) $46,900
C) $51,600
D) $23,800
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) Which of the following statements is FALSE?
A) Many projects use a resource that the company already owns.
B) When evaluating a capital budgeting decision, we generally include interest expense.
C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.
D) As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.
Q2) The incremental unlevered net income Shepard Industries in year two is closest to:
A) $355
B) $415
C) $600
D) $510
Q3) Construct a simple income statement showing the incremental EBIT and the incremental unlevered net income for all three years of the Sisyphean Companies project.
Q4) What is the NPV of the Epiphany's project?
Q5) How does scenario analysis differ from sensitivity analysis?
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Page 10
Chapter 9: Valuing Stocks
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Q1) Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:
A) $25.00
B) $40.00
C) $15.40
D) $11.10
Q2) Which of the following statements is false regarding profitable and unprofitable growth?
A) If a firm wants to increase its share price, it must cut its dividend and invest more.
B) If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend.
C) A firm can increase its growth rate by retaining more of its earnings.
D) Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.
Q3) What are the implications of the efficient market hypothesis for corporate managers?
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Page 11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) The standard deviation of the returns on Stock A from 2000 to 2009 is closest to:
A) 33.2%
B) 16.4%
C) 31.5%
D) 11.0%
Q2) The expected overall payoff to Bank A is:
A) $5,000,000
B) $6,000,000
C) $94,000,000
D) $95,000,000
Q3) Which of the following types of risk doesn't belong?
A) Market risk
B) Unique risk
C) Idiosyncratic risk
D) Unsystematic risk
Q4) Suppose that you want to use the 10 year historical average return on Stock B to forecast the expected future return on Stock B.Calculate the 95% confidence interval for your estimate of the expect return.
Q5) Which pharmaceutical company faces less risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Which of the following statements is FALSE?
A) Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier.
B) To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented.
C) We say a portfolio is short those stocks that have negative portfolio weights.
D) Adding new investment opportunities allows for greater diversification and improves the efficient frontier.
Q2) Which of the following statements is FALSE?
A) Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities.
B) In the real world investors have different information and expectations regarding securities.
C) The SML is still valid when interest rates differ.
D) When borrowing and lending occur at different rates there are different tangent portfolios identified.
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Page 13
Chapter 12: Estimating the Cost of Capital
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Q1) Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The corresponding risk-free rate is 3% and the market risk premium is 6%.Assuming a normal economy,the expected return on Rearden Metal's debt is closest to:
A) 0.6%
B) 1.6%
C) 4.6%
D) 6.0%
Q2) The equity cost of capital for "Miney" is closest to:
A) 6.30%
B) 7.50%
C) 9.30%
D) 9.75%
Q3) Your estimate of the asset beta for Nielson Motors is closest to:
A) 0.59
B) 0.66
C) 0.71
D) 1.75
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Various trading strategies appear to offer non-zero alphas when we examine real world data.If indeed these alphas are positive,it could be explained by any of the following EXCEPT:
A) Investors are systematically ignoring positive-NPV investment opportunities.
B) The market portfolio is inefficient, but the market portfolio proxy used to calculate the alphas is efficient.
C) A stock's beta with the market portfolio does not adequately measure a stock's systematic risk.
D) The positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture.
Q2) A group of portfolios from which we can form an efficient portfolio are called:
A) factor portfolios.
B) semi-efficient portfolios.
C) partially efficient portfolios.
D) characteristic portfolios.
Q3) Explain why the market portfolio proxy may not be efficient.
Q4) What does the existence of a positive alpha investment strategy imply?
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15
Chapter 14: Capital Structure in a Perfect Market
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Q1) Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%.Taggart is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Taggart borrows until they achieved a debt -to-value ratio of 20%,then Taggart's levered cost of equity would be closest to:
A) 8.0%
B) 9.2%
C) 10.0%
D) 11.0%
Q2) Consider the following equation: E + D = U = A The A in this equation represents:
A) the value of the firm's debt.
B) the market value of the firm's assets.
C) the value of the firm's equity.
D) the value of the firm's unlevered equity.
Q3) Suppose you own 10% of the equity of Without.What is another portfolio you could hold that would provide you with the same exact cash flows?
Q4) Based upon the three comparable firms,what asset beta would you recommend using for your firm's new project?
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Chapter 15: Debt and Taxes
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Questions
Q1) KAHR Incorporated will have EBIT this coming year of $45 million.It will also spend $18 million on total capital expenditures and increases in net working capital,and have $9 million in depreciation expenses.KAHR is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.If the interest rate on new KAHR debt is 8%,how much should KAHR borrow today if they want to maximize there interest tax shield?
Q2) Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered all for the year 2004.
Q3) Rosewood's net income is closest to:
A) $450 million
B) $180 million
C) $290 million
D) $95 million
Q4) The Grant Corporation is considering permanently adding $500 million of debt to its capital structure.Grant's corporate tax rate is 35% and investors pay a tax rate of 40% on their interest income and 20% on their income from capital gains and dividends.Calculate the present value of the interest tax shield provided by this new debt.
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Chapter 16: Financial Distress, managerial Incentives, and Information
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Q1) What is the expected payoff to equity holders under JR's new riskier business strategy?
A) $15 million
B) $11 million
C) $20 million
D) $4 million
Q2) Suppose that the managers at Rearden Metal will increase risk to maximize the expected payoff to equity holders.If Rearden has $180 million in debt due in one year,then the expected value of Rearden's assets is closest to:
A) $280 million
B) $295 million
C) $300 million
D) $900 million
Q3) Which of the following is NOT an indirect cost of bankruptcy?
A) Legal fees
B) Delayed liquidation
C) Costs to creditors
D) Loss of customers
Q4) List five general categories of indirect costs associated with bankruptcy.
Page 18
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Chapter 17: Payout Policy
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Q1) The effective dividend tax rate for a pension fund in 2006 is closest to:
A) 20%
B) 0%
C) 25%
D) 15%
Q2) Delta Products has decided to spin-off one of its subsidiaries,Gamma Technologies.Each Delta shareholder will receive 0.125 shares of Gamma for each share of Delta they own.Delta's price is $35.00 cum-dividend and immediately after the spin-off Gamma Technologies was trading for $24.00 per share.In a perfect capital market,what would Delta Product's ex-dividend share price be after this transaction?
Q3) The price per share of Iota if they not to use the $200 million to expand and hold the cash instead is closest to:
A) $16.50
B) $16.80
C) $19.00
D) $13.75
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) If KT expects to maintain a debt to equity ratio for this project of .6 then KT's equity cost of capital,r<sub>E</sub>,for this project is closest to:
A) 5.0%
B) 12%
C) 15.0%
D) 17.0%
Q2) Which of the following statements is FALSE?
A) For capital budgeting purposes, the project's financing is the incremental financing that results if the firm takes on the project.
B) Projects with safer cash flows can support more debt before they increase the risk of financial distress for the firm.
C) If the positive free cash flow from a project will increase the firm's cash holdings, then this growth in cash is equivalent to a reduction in the firm's leverage.
D) The incremental financing of a project corresponds directly to the financing that is directly tied to the project.
Q3) Calculate the present value of the interest tax shield provided by Omicron's new project.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Based upon the average EV/Sales ratio of the comparable firms,Ideko's target economic value is closest to:
A) $191 million
B) $155 million
C) $165 million
D) $157 million
Q2) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Luxottica is closest to:
A) 10.2%
B) 13.5%
C) 9.1%
D) 14.7%
Q3) With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2008 is closest to:
A) $14,525
B) $19,690
C) 22,710
D) $16,970
21
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