Financial Analysis
Exam Bank
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the essential tools and techniques for evaluating the financial health and performance of businesses. Covering fundamental concepts such as financial statement analysis, ratio analysis, cash flow analysis, and trend assessment, the course emphasizes practical skills in interpreting balance sheets, income statements, and cash flow statements. Students will learn to assess profitability, liquidity, solvency, and operational efficiency, and will be introduced to forecasting and valuation methods. Through real-world case studies and analytical exercises, participants develop the ability to make informed financial decisions and provide strategic recommendations for organizations.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) If a firm's goal is to maximize its earnings per share,this is the best way to maximize the price of the common stock and thus shareholders' wealth.
A)True
B)False
Answer: False
Q2) The disadvantages associated with a proprietorship are similar to those under a partnership.One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets.As a result,partnerships do not have difficulty raising large amounts of capital.
A)True
B)False Answer: False
Q3) If an individual investor buys or sells a currently outstanding stock through a broker,this is a primary market transaction.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Statements, cash Flow, and Taxes
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Sample Questions
Q1) Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding,and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?
A) $27.50
B) $28.88
C) $30.32
D) $31.83
E) $33.43
Answer: A
Q2) Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?
A) The company purchases a new piece of equipment.
B) The company repurchases common stock.
C) The company pays a dividend.
D) The company issues new common stock.
E) The company gives customers more time to pay their bills.
Answer: D
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4
Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Companies Heidee and Leaudy have the same tax rate,sales,total assets,and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and,therefore,a higher interest expense.Which of the following statements is CORRECT?
A) Company Heidee has a lower times interest earned (TIE) ratio.
B) Company Heidee has a lower equity multiplier.
C) Company Heidee has more net income.
D) Company Heidee pays more in taxes.
E) Company Heidee has a lower ROE.
Answer: A
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%
Answer: C
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
B) A time line is not meaningful unless all cash flows occur annually.
C) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
D) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
E) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
Q2) Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.
A)True
B)False
Q3) If a bank compounds savings accounts quarterly,the nominal rate will exceed the effective annual rate.
A)True
B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?
A) If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
B) The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
C) The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
D) If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.
E) If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.
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Chapter 6: Risk and Return
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Sample Questions
Q1) Ann has a portfolio of 20 average stocks,and Tom has a portfolio of 2 average stocks.Assuming the market is in equilibrium,which of the following statements is CORRECT?
A) The required return on Ann's portfolio will be lower than that on Tom's portfolio because Ann's portfolio will have less total risk.
B) Tom's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Ann's portfolio, but the required (and expected) returns will be the same on both portfolios.
C) If the two portfolios have the same beta, their required returns will be the same, but Ann's portfolio will have less market risk than Tom's.
D) The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.
E) Ann's portfolio will have less diversifiable risk and also less market risk than Tom's portfolio.
Q2) A stock with a beta equal to -1.0 has zero systematic (or market)risk.
A)True B)False
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Page 8
Chapter 7: Valuation of Stocks and Corporations
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Sample Questions
Q1) The preemptive right gives current stockholders the right to purchase,on a pro rata basis,any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.
A)True
B)False
Q2) Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?
A) Stock B must have a higher dividend yield than Stock A.
B) Stock A must have a higher dividend yield than Stock B.
C) If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.
D) Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.
E) If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.
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9
Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Call options generally sell at a price less than their exercise value.
B) If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
C) Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E) If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.
Q2) Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.
A)True
B)False
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) The lower the firm's tax rate,the lower will be its after-tax cost of debt and also its WACC,other things held constant.
A)True
B)False
Q2) The cost of equity raised by retaining earnings can be less than,equal to,or greater than the cost of external equity raised by selling new issues of common stock,depending on tax rates,flotation costs,the attitude of investors,and other factors.
A)True
B)False
Q3) The cost of capital used in capital budgeting should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.
A)True
B)False
Q4) The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) Projects with "normal" cash flows can have two or more real IRRs.
B) Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is "nonnormal."
C) The "multiple IRR problem" can arise if a project's cash flows are "normal."
D) Projects with "nonnormal" cash flows are almost never encountered in the real world. E) Projects with "normal" cash flows can have only one real IRR.
Q3) The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.
A)True B)False
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) You have just landed an internship in the CFO's office of Hawkesworth Inc.Your first task is to estimate the Year 1 cash flow for a project with the following data.What is the Year 1 cash flow? Srles reyenues               \(\$ 13,000\)
Depreciation                \(\$44,000\)
Other aperating casts        \(\$6,000\)
Tax rate                     \(350 \%\)
A) $5,950
B) $6,099
C) $6,251
D) $6,407
E) $6,568
Q2) 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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Page 13
Chapter 12: Corporate Valuation and Financial Planning
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Sample Questions
Q1) Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year,so its FA/Sales ratio was 50%.However,its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity,with sales held constant at $450 million,how much cash (in millions)would it have generated?
A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16
Q2) A firm will use spontaneous funds to the extent possible; however,due to credit terms,contracts with workers,and tax laws there is little flexibility in their usage.
A)True
B)False
Q3) A firm's AFN must come from external sources.Typical sources include short-term bank loans,long-term bonds,preferred stock,and common stock.
A)True
B)False
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Chapter 13: Agency Conflicts and Corporate Governance
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Sample Questions
Q1) 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
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) 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.
Q4) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Which of the following statements is correct?
A) One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
B) Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
C) If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
D) Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.
E) Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.
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Page 16
Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) A new company to produce state-of-the-art car stereo systems is being considered by Jagger Enterprises.The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000.What sales volume would be required in order to break even,i.e.,to have an EBIT of zero for the stereo business?
A) 86,640
B) 91,200
C) 96,000
D) 100,800
E) 105,840
Q2) Based on the information below for Benson Corporation,what is the optimal capital structure?
A) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
B) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
C) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
D) Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
E) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
Q3) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Sample Questions
Q1) Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)
A) 20.11%
B) 21.17%
C) 22.28% D) 23.45% E) 24.63%
Q2) If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
A)True
B)False
Q3) Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
A)True
B)False
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Page 18
Chapter 17: Multinational Financial Management
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Q1) If 1.64 Canadian dollars can purchase one U.S.dollar,how many U.S.dollars can you purchase for one Canadian dollar?
A) 0.37
B) 0.61
C) 1.00
D) 1.64
E) 3.28
Q2) Due to advanced communications technology and the standardization of general procedures,working capital management for multinational firms is no more complex than it is for large domestic firms.
A)True
B)False
Q3) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
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Q1) Which of the following statements is most CORRECT?
A) The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity.
B) The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.
C) If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.
D) Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings.
E) If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt.
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. \(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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21
Chapter 19: Lease Financing
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Q1) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
A)True
B)False
Q2) In a synthetic lease a special purpose entity (SPE)is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
Q3) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
Q4) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles
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Q1) A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.
A)True
B)False
Q2) Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
A)True
B)False
Q3) A convertible debenture can never sell for more than its conversion value or less than its bond value.
A)True
B)False
Q4) 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
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Chapter 21: Dynamic Capital Structures
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Q1) 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
Q2) A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is the value of your firm's tax shield,i.e.,how much value does the use of debt add?
A) $92,571
B) $102,857
C) $113,143
D) $124,457
E) $136,903
Q3) The MM model is the same as the Miller model,but with zero corporate taxes.
A)True
B)False
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Page 24
Chapter 22: Mergers and Corporate Control
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Q1) Juicers Inc.is thinking of acquiring Fast Fruit Company.Juicers expects Fast Fruit's NOPAT to be $9 million the first year,with no net new investment in operating capital and no interest expense.For the second year,Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million.Also,in the second year only,Fast Fruit will need $10 million of net new investment in operating capital.Fast Fruit's marginal tax rate is 40%.After the second year,the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%.Juicers has determined that Fast Fruit's cost of equity is 17.5%,and Fast Fruit currently has no debt outstanding.Assume that all cash flows occur at the end of the year,Juicers must pay $45 million to acquire Fast Fruit.What it the NPV of the proposed acquisition? Note that you must first calculate the value to Juicers of Fast Fruit's equity.
A) $45.0 million
B) $68.2 million
C) $86.5 million
D) $113.2 million
E) $133.0 million
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Chapter 23: Enterprise Risk Management
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Q1) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07.If annual interest rates go up by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,and round to the nearest whole dollar.)
A)-$78.00
B) -$82.00
C) -$86.00
D) -$90.00
E) -$95.00
Q3) The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.
A)True
B)False
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
Q2) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
Q3) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q4) Bankruptcy plays no role in settling labor disputes and product liability suits.Such issues are outside the bounds of bankruptcy law and are covered by other statutes. A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.
A)True
B)False
Q2) 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
Q3) You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks.The portfolio beta is equal to 1.12.You have decided to sell a coal mining stock (b = 1.00)at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00).What is the new beta of the portfolio?
A) 1.1139
B) 1.1700
C) 1.2311
D) 1.2927
E) 1.3573
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Chapter 26: Real Options
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Q1) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q2) 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.
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Chapter 27: Providing and Obtaining Credit
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Sample Questions
Q1) The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q2) The percentage aging schedule of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.
A)True
B)False
Q3) Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,with interest prepaid (a discounted loan).Also,assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value.What effective annual interest rate are you being charged?
A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%
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Page 30
Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Q1) During times of inflation,which of these inventory accounting methods is best for cash flow?
A) LIFO, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
B) Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
C) Weighted average, because it smoothes the reported cost of goods sold over time.
D) It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
E) FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.
Q2) If a company increases its safety stock,then its average inventory will go up.
A)True
B)False
Q3) If a company increases its safety stock,then its EOQ will go up.
A)True
B)False
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Page 31
Chapter 29: Pension Plan Management
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Q1) Kumar Consulting operates several stock investment portfolios that are used by firms for investment of pension plan assets.Last year,one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15.The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent.What was the portfolio's alpha?
A) -0.75%
B)-0.15%
C) 0%
D) 0.15%
E) 0.75%
Q2) From a pure cost standpoint,a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
Q3) 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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32
Chapter 30: Financial Management in Not For Profit
Businesses
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Q1) Which of the following statements about municipal bond financing is most correct?
A) Whereas the vast majority of Treasury and corporate bonds are held by institutions, no municipal bonds are held by individual investors.
B) The primary attraction of municipal bonds to individual investors is their high before-tax yields.
C) Municipal bonds usually pay higher coupon rates than corporate bonds with similar ratings.
D) Municipal bonds are risk-free.
E) In contrast to corporate bonds, municipal bond issues are not required to be registered with the Securities and Exchange Commission.
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
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