Financial Analysis
Exam Materials
Course Introduction
Financial Analysis is a comprehensive course that equips students with the skills necessary to interpret, evaluate, and utilize financial statements and data for effective decision-making in business organizations. The course covers key concepts such as ratio analysis, trend analysis, cash flow analysis, and the assessment of financial health and performance. Students learn to apply analytical tools and frameworks to real-world scenarios, enabling them to assess profitability, liquidity, solvency, and operational efficiency. By the end of the course, students are able to make informed financial recommendations and contribute to strategic planning within a business context.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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16 Chapters
1206 Verified Questions
1206 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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99 Verified Questions
99 Flashcards
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Sample Questions
Q1) Cultural differences do not impact the multinational corporations as they expand into different geographic regions.
A)True
B)False
Answer: False
Q2) Identify a true statement about a limited liability company (LLC).
A)A limited liability company can be taxed as a corporation only.
B)One of the owners of a limited liability company must be designated as a general partner with unlimited personal financial liability.
C)A limited liability company can have no more than 100 stockholders.
D)Only one of the owners of a limited liability company can participate in the management of the business.
E)A limited liability company can have more than one type of stock (ownership interest) outstanding.
Answer: E
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Chapter 2: Analysis of Financial Statements
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110 Flashcards
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Sample Questions
Q1) Assuming that other things are constant, the price earnings (P/E) ratio:
A)is higher for firms with high growth prospects and lower for riskier firms.
B)is lower for firms with high growth prospects and higher for riskier firms.
C)is not affected by the growth prospects of a firm.
D)is equal to the market price of the share of a firm.
E)is equal to the earnings per share of a firm.
Answer: A
Q2) The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. Crimpson's current ratio is:
A)2.5 times.
B)1.56 times.
C)1.325 times.
D)0.565 times.
E)1.855 times.
Answer: C
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Page 4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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75 Flashcards
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Sample Questions
Q1) As compared to U.S banks, foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue. Therefore, foreign banks often engage in numerous aspects of multilayer financial deals.
A)True
B)False
Answer: True
Q2) Dual listing of a stock leads to a decrease in the marketability of the stock.
A)True
B)False
Answer: False
Q3) Credit unions, mutual funds, and thrift institutions are all examples of _____.
A)financial intermediaries
B)investment banks
C)regulatory bodies
D)underwriters
E)over-the-counter markets
Answer: A
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Page 5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Frank purchased his house 16 years ago by taking out a 25-year mortgage for $150,000. The mortgage has a fixed interest rate of 5 percent compounded monthly. If he wants to pay off his mortgage today, how much money does he need? He made his most recent mortgage payment earlier today. (Round your intermediate calculation and your answer to two decimal places.)
A)$65,459.98
B)$70,856.65
C)$76,136.95
D)$80,425.21
E)$85,024.66
Q2) Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What is the value of the investment today?
A)$36,667.76
B)$38,250.26
C)$40,527.37
D)$44,260.91
E)$46,458.63
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Which of the following factors will lead to an increase in interest rates?
A)Deflation
B)Federal deficit
C)Contraction
D)Recession
E)Trade surplus
Q2) The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.
A)True
B)False
Q3) If the Federal Reserve loosens the money supply to control growth in the economy,
A)inflation will decrease
B)interest rates will decrease
C)sale of Treasury securities will increase
D)credit supply will decrease
E)economic activity will decrease
Q4) Inflation leads to an increase in the purchasing power of investors.
A)True
B)False
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Chapter 6: Bonds Debt Characteristics and Valuation
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142 Flashcards
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Sample Questions
Q1) The conversion ratio is:
A)the number of new lower coupon rate bonds that the bondholder receives when old bonds are converted into the newer bonds.
B)the ratio of the face value of the bond to its market value.
C)the number of shares of stock that the bondholder receives upon conversion of a bond.
D)the ratio of the bond's old face value to its new face value.
E)the number of bonds in the company's new project received upon expansion.
Q2) As junk bonds are high-risk instruments, the returns on such bonds are not very high.
A)True
B)False
Q3) The average rate of return earned on a callable bond if it is held until the first call date is the:
A)yield to call.
B)yield to market.
C)yield to principal price.
D)yield to issue price.
E)yield to maturity.
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) What action would the management take if it wants to gain more ownership control of the firm?
A)Issue more growth stocks
B)Issue more common stock to the public
C)Repay portions of its loans
D)Repurchase shares of common stock
E)Pay cumulative dividends to preferred stocks
Q2) The preferred dividend is generally stated as a percentage of the preferred stock's
A)market value per share
B)earnings per share
C)call premium per share
D)per share par value
E)sinking fund
Q3) A common stock's par value is always equal to the market value of the stock on the last day of the fiscal year in which the stock is issued.
A)True
B)False
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9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Short-term investments have higher maturity risks than long-term investments.
A)True
B)False
Q2) The beta of Stock A is 2.1. The risk-free rate is 6 percent, and the market return is 13 percent. The expected rate of return of Stock A is 15.5 percent. Based on the above information, which of the following statements is true?
A)An investor should buy Stock A because its expected rate of return is less than the required rate of return.
B)An investor should buy Stock A because its expected rate of return is greater than the required rate of return.
C)An investor should not buy Stock A because its expected rate of return is greater than the required rate of return.
D)An investor should not buy Stock A because its expected rate of return is less than the required rate of return.
E)An investor should be indifferent towards buying or selling the stock.
Q3) Economic risk is an unsystematic risk that can be diversified by the investors.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) Suppose a firm is evaluating a capital budgeting project using the internal rate of return (IRR) technique. If the firm's required rate of return increases, the project's IRR will decrease.
A)True
B)False
Q2) Suppose a firm uses both the net present value (NPV) technique and the internal rate of return (IRR) technique to evaluate two mutually exclusive capital budgeting projects. If a ranking conflict exists between NPV and IRR, which of the following criteria should be used to make the final investment decision?
A)The project with the higher IRR should be purchased.
B)The project with an internal rate of return (IRR) equal to the firm's expected rate of return should be purchased.
C)The project with the higher net present value (NPV) should be purchased.
D)The project with the payback period equal to the expected years required to recover the original investment should be purchased.
E)The project with the discounted payback period that is greater than its traditional payback period should be purchased.
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Page 11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:
A)depreciation represents a tax-deductible cash expense.
B)the firm incurs a cash payment equal to the depreciation expense each year.
C)depreciation has an impact on the taxes paid by the firm, which is a cash flow.
D)depreciation is a sunk cost.
E)depreciation is a fixed cash payment that the firm receives each year.
Q2) According to the capital asset pricing model (CAPM), a capital budgeting project that has a beta equal to zero should be evaluated using a required rate of return equal to the risk-free rate.
A)True
B)False
Q3) A major problem with Monte Carlo simulation analysis is that while the analysis provides insights into the riskiness of a project, it does not lead to a clear-cut accept/reject decision.
A)True
B)False
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) The cost of issuing preferred stock must be adjusted for taxes because preferred stock dividend payments represent a tax-deductible expense for the firm.
A)True B)False
Q2) Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company must pay flotation cost equal to 20 percent when it issues new common stock. What is Bouchard's cost of issuing new common stock?
A)11.00%
B)12.25%
C)12.63%
D)11.30%
E)11.56%
Q3) A firm's cost of external equity capital (cost of issuing new stock) is equal to the rate of return that stockholders demand (require) to invest in the firm's outstanding common stock.
A)True B)False
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Chapter 12: Capital Structure
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Sample Questions
Q1) The degree of leverage concept is designed to show how changes in sales affect earnings before interest and taxes (EBIT) and earnings per share (EPS). If a 10 percent increase in sales causes EPS to increase from $1.00 to $1.50 and if the firm uses no debt, then what is its degree of operating leverage?
A)0.5×
B)1.5×
C)2.0×
D)5.0×
E)7.5×
Q2) At the time Modigliani and Miller (MM) developed their capital structure theory, the assumptions that they made were realistic.
A)True
B)False
Q3) The optimal capital structure is the capital structure that strikes a balance between risk and return such that the firm's stock price is maximized.
A)True
B)False
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) According to the information content hypothesis that has been proposed to explain how dividend policies affect stock prices, if a firm increases its dividend, but at a rate that is lower than investors expect, the price of its stock probably would decrease.
A)True
B)False
Q2) Abel Inc. applies the low regular dividend plus extras policy when determining how much of its income will be paid out as dividends each year. Abel's policy states that the minimum dividend that will be paid each year is $1.00 per share. But, when net income is greater than $80 million, the total dividend will be increased by 40 percent of the amount that exceeds $60 million. The firm currently has 10 million shares of stock outstanding. What will be the dividend per share if Abel earns $100 million?
A)$2.60
B)$1.80
C)$1.00
D)$5.00
E)$3.00
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) Tivo Corporation purchases its raw materials on credit with terms of 3/10, net 30. What is the annual percentage rate (APR) of non-free trade credit if Tivo does not take the discount and pays on Day 30. In your computations, assume there are 360 days in a year.
A)54.00%
B)27.84%
C)37.11%
D)55.67%
E)111.34%
Q2) MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your computations, assume there are 360 days in a year.
A)42.41%
B)67.85%
C)0.00%
D)30.84%
E)113.09%
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Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) Outsourcing is an inventory control procedure where a red line is drawn around the inside of an inventory-stocked bin to indicate the level of inventory at which an order for new raw materials should be initiated.
A)True
B)False
Q2) Which of the following statements concerning marketable securities is correct?
A)Marketable securities are extremely liquid investments.
B)Marketable securities generally are long-term investments.
C)Marketable securities provide higher yields than the firm's other investments.
D)The primary purpose for holding marketable securities is to support long-term operations.
E)Marketable securities are held by a firm that normally has cash deficiencies.
Q3) Governments often impose _____ to restrict the quantities of foreign products that multinational firms can bring into their countries.
A)stockout rules
B)negative tariffs
C)quotas
D)custom exclusions
E)expropriation restrictions
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) Which of the following statements about the financial planning process is correct?
A)The additional funds needed (AFN) is estimated by summing the expected changes in assets and liabilities that fluctuate with sales and then subtracting the expected operating income.
B)The projected balance sheet method requires only the balance sheet to determine a firm's expected financial needs.
C)The decision as to how a firm should raise additional funds needed (AFN) to meet its financial goals depends on the ability of the firm to handle additional debt, conditions in financial markets, and restrictions imposed by existing debt agreements.
D)The projected balance sheet method of forecasting financial needs does not consider dividends paid to shareholders because these are after tax payments from retained earnings.
E)Financial forecasts generally do not consider forecasts of the economic prospects for the nation and the industry because these are factors that are beyond the control of the firm.
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