Financial Analysis
Exam Practice Tests
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the essential tools and methodologies used to evaluate and interpret financial data within an organization. The course covers key concepts such as financial statement analysis, ratio analysis, trend analysis, and cash flow assessment. Students will learn how to assess company performance, make informed investment decisions, and understand the financial health of businesses through real-world case studies and practical applications. Emphasis is placed on both qualitative and quantitative techniques, enabling students to develop critical thinking and analytical skills crucial for careers in finance, accounting, and management.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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3308 Verified Questions
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Chapter 1: Foundations
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Sample Questions
Q1) Double taxation of earnings is the primary financial disadvantage of the corporate form of business organization.
A)True
B)False
Answer: True
Q2) A company can raise money to purchase assets by:
A) borrowing money.
B) issuing stock.
C) using money earned.
D) Both a & b
E) All of the above
Answer: E
Q3) In firms of moderate size or larger, the finance department is typically relieved of the "watchdog" responsibility of monitoring the efficient use of money by other departments.
A)True
B)False
Answer: False
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) During the last year Alpha Co had Net Income of $150, paid $20 in dividends, and sold new stock for $40. Beginning equity for the year was $700. Ending Equity was:
A) $830.
B) $840.
C) $850.
D) $870.
Answer: D
Q2) Which of the following is not a common tax base?
A) Income
B) Wealth
C) Marital status
D) Consumption
Answer: C
Q3) Wealth Taxes are levied by cities and counties on the value of real estate. They are also called ad valorem taxes.
A)True
B)False
Answer: True
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) Depreciation is considered in which area of the Statement of Cash Flows?
A) Operating activities
B) Investing activities
C) Financing activities
D) Income activities
Answer: A
Q2) The simple rules that drive the statement of cash flow are: \(\begin{array}{lll}
\text { Cash uses } & = & \text { Asset increases, liability increases } \\ \text { Cash sources } & = & \text { Asset decreases, liability decreases } \end{array}\)
A)True
B)False Answer: False
Q3) The current ratio concept suggests that it is a measure of the cash required to fund all debt coming due within 12 months with consideration of all of the firm's existing economic resources.
A)True
B)False Answer: True
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Chapter 4: Financial Planning
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Sample Questions
Q1) The sustainable growth rate is a theoretical statement of a firm's ability to grow without changing its financial ratios.
A)True
B)False
Q2) Cash budgeting involves creating a detailed schedule of cash receipts and disbursements.
A)True
B)False
Q3) Holding all other variables constant, which of the following will increase the sustainable growth rate? An increase in ____.
A) dividend payout ratio
B) return on sales
C) total asset turnover
D) Both b & c
E) All of the above
Q4) The business planning spectrum is a graphic depiction of how the types of plans vary in time horizon and detail.
A)True
B)False
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Financial markets include:
A) capital markets.
B) money markets.
C) primary markets.
D) secondary markets.
E) All of the above
Q2) Federal government bonds have no risk premium because they carry no risk of any kind.
A)True
B)False
Q3) ____ are traded in capital markets.
A) Only stocks
B) Only bonds
C) Long-term bonds and stocks
D) Only short-term bonds
Q4) A red herring is:
A) very volatile and risky.
B) an unapproved prospectus.
C) discloses information approved by the SEC.
D) is given to an investor when a security is sold for the first time.
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Chapter 6: Time Value of Money
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Sample Questions
Q1) Find the present value of a perpetuity of $1,500 per year, given a 20% opportunity cost.
A) $800
B) $3,000
C) $300
D) $6,000
E) $7,500
Q2) The present value of the cash flows that come from an investment is the minimum price an investor should be willing to pay for the investment.
A)True
B)False
Q3) Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning of the year payments that will fully amortize the cost of the car. How much are the payments if the interest rate is 12 percent?
A) $6,810.99
B) $7,766.99
C) $6,423.74
D) $6,081.25
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) A minimum TIE is an example of a restrictive covenant.
A)True
B)False
Q2) When a call protection provision is written into the bond indenture, the issuing company is prevented from calling the bond throughout the bond's life.
A)True
B)False
Q3) Which is not a bond covenant?
A) Making periodic deposits into a sinking fund
B) Retiring a portion of the bond issue periodically
C) Specifying a minimum level of taxation
D) Specifying a minimum level for the times interest earned ratio
Q4) Which of the following events tend to make it less likely that a company will call a bond?
A) A reduction in forecast inflation rates.
B) The company's bonds are downgraded by Moody's rating service.
C) A significant lawsuit is filed against the company.
D) Answers a. and b. are correct.
E) Answers b. and c. are correct.
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Preferred stock is designed to attract investors who want less risk and assured voting rights.
A)True
B)False
Q2) Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today?
A) $21.00
B) $18.70
C) $20.00
D) None of the above
Q3) The return on a share of stock consists of two principal yields:
A) the capital gains yield and the capital appreciation yield.
B) the dividend yield and the capital gains yield.
C) the capital gains yield and the earnings per share.
D) All of the above
Q4) Securities analysis is the art and science of selecting investments.
A)True
B)False
Q5) Are growth rate models such oversimplifications of reality that they're useless?
Page 10
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Chapter 9: Risk and Return
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Sample Questions
Q1) Long-run average returns on equity investments:
A) are much higher than those on debt.
B) are the same as the average returns on debt.
C) are the same as the average returns on debt plus any dividends.
D) are lower than those on debt.
Q2) Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of 0.8.
A) 10.8%
B) 4.8%
C) 48.0%
D) 16.8%
Q3) If a stock return is expected to be the same as the expected return on the market, the stock's CAPM beta is ____.
A) 0.0
B) 0.5
C) 1.0
D) undefined
Q4) What is the market risk premium?
Q5) How can a stock have different risk characteristics in and out of a portfolio?
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) If a project's present value payback period equals the length of the project, then
A) the NPV is greater than zero
B) the NPV is zero
C) the PI less than 1.0
D) the payback period is equal to the length of the project
Q2) 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
Q3) The relationship between NPV and IRR is such that:
A) both approaches always provide the same ranking of alternative investment projects.
B) the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0.
C) if the NPV of a project is negative, the IRR must be greater than the cost of capital.
D) None of the above
Q4) When can IRR and NPV give different results? Explain how this can happen.
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Page 12
Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) Sunk costs are monies that have already been spent at the time of the capital project analysis and cannot influence the future regardless of the decisions about the project.
A)True
B)False
Q2) When estimating cash flows for capital budgeting projects:
A) interest expenses incurred to finance the project are included.
B) interest expense is considered in the cash flow estimates only if the financing is principally from debt.
C) interest expense is never included in the cash flow estimates.
D) None of the above
Q3) Holding all other variables constant, an increase in the cost of equipment at the beginning of the project would affect which of the following?
A) Initial Outlay
B) Incremental cash flows
C) Opportunity costs
D) Both a & b
Q4) Define opportunity costs and explain their role in capital budgeting.
Q5) Define sunk costs and explain their role in capital budgeting.
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) A worst case scenario analysis evaluates the potential cash flows for a project that represent the worst possible outcome for the project.
A)True
B)False
Q2) Next year, a cash flow is expected to be $1,000.00 (40% probability) or $2,000.00 (60% probability). The following year, the same cash flow possibilities exist in the same manner as the previous year. What is the probability of the cash flow in the second year being $2,000.00?
A) 36%
B) 60%
C) 24%
D) 16%
Q3) Scenario/sensitivity analysis is a procedure that can be used in the capital budgeting process to indicate how sensitive the ____ is to changes in a particular variable.
A) probability
B) return distribution
C) net present value
D) standard deviation
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Chapter 13: Cost of Capital
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Sample Questions
Q1) If a firm is losing money, the after-tax cost of debt is:
A) equal to k<sub>d</sub>(1 - T).
B) found by trial and error.
C) equal to the pretax cost of debt.
D) None of the above
Q2) All of the following represent adjustments to the cost of capital components except:
A) the tax effect on debt.
B) the tax effect on equity.
C) floatation costs when issuing preferred stock.
D) floatation costs when issuing common stock.
E) All of the above could represent adjustments to the cost of capital components.
Q3) The procedure to determine the after-tax cost of debt requires that the semi-annual coupon rate be multiplied by one minus the corporate marginal tax rate and then multiplied by two.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Financial leverage may benefit shareholders when the:
A) return on capital employed is greater than the after tax cost of debt.
B) return on equity is greater than the cost of debt.
C) return on investments is less than the cost of capital.
D) None of the above
Q2) Financial risk, which makes a firm's ROE and EPS more volatile, exists only if the firm has some debt financing (leverage).
A)True
B)False
Q3) The use of fixed cost sources of funds, such as debt and preferred stock, affect a firm's:
A) financial risk.
B) degree of operating leverage.
C) market power.
D) business risk.
Q4) The breakeven point on a breakeven diagram is:
A) the point where the fixed cost line and the revenue line intersect.
B) the point where the total cost line and the revenue line intersect.
C) the point where the total cost line intersects the horizontal axis.
D) the point where the total cost line intersects the vertical axis.
Page 16
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Chapter 15: Dividends
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Sample Questions
Q1) What entity within the firm has the discretion to issue dividends?
A) Board of directors
B) CEO
C) CFO
D) Vice President of Finance
Q2) A firm with an aggressive expansion policy would seek investors who favor income generated by the cash stream of dividends rather than investors who favor income through capital appreciation.
A)True
B)False
Q3) Retained earnings should be used to provide equity financing if stockholders have preference for capital gains.
A)True
B)False
Q4) Transaction costs tend to make tailoring a _____impractical.
A) dividend stream
B) business cash flow
C) series of investment returns
D) stock trade
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Chapter 16: The Management of Working Capital Multiple
Choice Questions
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Sample Questions
Q1) The term "net working capital" means:
A) the firm's gross working capital minus spontaneous financing.
B) the firm's cash, accounts receivable, and inventory minus short-term payables and accruals.
C) the firm's current assets minus its current liabilities.
D) All of the above
Q2) Which of the following is not an inventory carrying cost?
A) The cost of storage
B) The cost of borrowing to acquire inventory
C) The costs of spoilage, shrinkage, and breakage
D) The cost of customer complaints about unavailable product
Q3) Loans to purchase inventory are considered self-liquidating because ____.
A) these types of loans have little risk
B) these loans are paid according to a set schedule
C) these loans are paid as soon as the inventory is sold
D) these loans have claims against the firm in general and not to a specific asset
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18
Chapter 17: The Management of Working Capital
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Sample Questions
Q1) Explain the idea of spontaneous financing and explain why, in spite of it, we still have to fund working capital from outside sources.
Q2) A firm's cash includes currency, coins, demand deposit accounts in banks, and may include marketable securities.
A)True
B)False
Q3) A lockbox system that accelerates cash collections also decreases a firm's receivables.
A)True
B)False
Q4) "Leaning on the trade" is an expression associated with a customer's insistence that vendors extend more liberal credit terms.
A)True B)False
Q5) Discuss the idea of stretching payables clearly indicating the pros and cons of the idea.
Q6) The administrative reason for holding cash is to pay for emergency needs. A)True
B)False
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) In discounting the forecasted future cash flows of a target company for valuation purposes, which discount rate should be used?
A) WACC of the acquiring company
B) Cost of equity of the acquiring company
C) Cost of debt of the target company
D) Cost of equity of the target company
E) WACC of the target company
Q2) Anti-trust legislation:
A) is enforced by the Justice Department as well as the Federal Trade Commission.
B) no longer applies to business combinations.
C) does not apply to conglomerate mergers.
D) a and c
E) None of the above
Q3) A junk bond is:
A) a low risk bond that pays high yields.
B) a high-risk bond that pays low yields.
C) a high-risk bond that pays high yields.
D) a low risk bond that pays low yields.
Q4) Contrast the merger negotiations in a friendly merger and a hostile merger.
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Chapter 19: International Finance
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Sample Questions
Q1) A trend over the last six decades has been a significant increase in the level of foreign stocks and bonds included in the investment portfolios of American citizens.
A)True
B)False
Q2) The theory of comparative advantage is a powerful argument for protectionism.
A)True
B)False
Q3) A portfolio investment is:
A) building businesses in another country.
B) direct investment in another economy.
C) buying the securities of foreign companies.
D) Indirect investment in an international business.
Q4) Which of the following is included in the calculation of the balance of trade?
A) Payments between governments
B) Investing activities
C) Purchases of goods and services
D) All of the above are included.
E) None of the above is included.
Q5) Describe the difference between fixed and floating exchange rate systems.
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