Financial Analysis Exam Preparation Guide
Course Introduction
Financial Analysis is a comprehensive course that explores the methods and tools used to evaluate a company's financial health and performance. The course covers key topics such as interpreting financial statements, ratio analysis, cash flow analysis, profitability, liquidity and solvency assessment, and the use of financial metrics in decision-making.
Students learn how to apply analytical techniques to assess business performance, identify trends, forecast future financial conditions, and support strategic business decisions. Real-world case studies and hands-on exercises provide practical experience in analyzing financial data and presenting actionable insights for both internal and external stakeholders.
Recommended Textbook Fundamentals of Corporate Finance 9th Asia Global Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation?
Answer: The existence and viability of a sole proprietor is dependent upon one individual. Should that individual die, the entity would cease to exist. Likewise, should the owner lose interest in the business or become ill, the business might also cease to exist. With a corporation, the company ownership could be sold in any one of those situations such that the business entity would continue to exist.
Q2) Which one of the following is an agency cost?
A)accepting an investment opportunity that will add value to the firm
B)increasing the quarterly dividend
C)investing in a new project that creates firm value
D)hiring outside accountants to audit the company's financial statements
E)closing a division of the firm that is operating at a loss
Answer: D
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) What is the net capital spending for 2012?
A)$117
B)$239
C)$257
D)$338
E)$421
Answer: B
Q2) Which one of the following statements related to an income statement is correct?
A)Interest expense increases the amount of tax due.
B)Depreciation does not affect taxes since it is a non-cash expense.
C)Net income is distributed to dividends and paid-in surplus.
D)Taxes reduce both net income and operating cash flow.
E)Interest expense is included in operating cash flow.
Answer: D
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2, and a current ratio of 2.9. What is the cost of goods sold?
A)$980,000
B)$1,060,000
C)$1,200,000
D)$1,400,000
E)$1,560,000
Answer: D
Q2) Dixie Supply has total assets with a current book value of $368,900 and a current replacement cost of $486,200. The market value of these assets is $464,800. What is the value of Tobin's Q?
A).86
B).92
C).96
D)1.01
E)1.06
Answer: C
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) The internal growth rate of a firm is best described as the:
A)minimum growth rate achievable assuming a 100 percent retention ratio.
B)minimum growth rate achievable if the firm maintains a constant equity multiplier.
C)maximum growth rate achievable excluding external financing of any kind.
D)maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
E)maximum growth rate achievable with unlimited debt financing.
Q2) You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process?
A)fixed assets
B)current expenses
C)sales forecast
D)projected net income
E)external financing need
Q3) Smith & Daughters is getting ready to compile pro forma statements for the next few years. How can the managers establish a reasonable range of growth rates that they should consider during this planning process?
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Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) According to the Rule of 72, you can do which one of the following?
A)double your money in five years at 7.2 percent interest
B)double your money in 7.2 years at 8 percent interest
C)double your money in 8 years at 9 percent interest
D)triple your money in 7.2 years at 5 percent interest
E)triple your money at 10 percent interest in 7.2 years
Q2) You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today. Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.
Q3) This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?
A)$2,940.09
B)$3,651.82
C)$4,008.17
D)$4,219.68
E)$4,711.08
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Page 7
Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) You are buying a previously owned car today at a price of $3,500. You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent. What is the amount of each loan payment?
A)$101.02
B)$112.23
C)$118.47
D)$121.60
E)$124.40
Q2) Which one of the following statements related to annuities and perpetuities is correct?
A)An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.
B)A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.
C)Most loans are a form of a perpetuity.
D)The present value of a perpetuity cannot be computed, but the future value can.
E)Perpetuities are finite but annuities are not.
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8
Chapter 7: Interest Rates and Bond Valuation
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Q1) A Treasury bond is quoted as 99: 11 asked and 99: 09 bid. What is the bid-ask spread in dollars on a $5,000 face value bond?
A)$0.03
B)$0.63
C)$1.00
D)$3.13
E)$6.25
Q2) Municipal bonds:
A)are totally risk-free.
B)generally have higher coupon rates than corporate bonds.
C)pay interest that is federally tax-free.
D)are rarely callable.
E)are free of default-risk.
Q3) A sinking fund is managed by a trustee for which one of the following purposes?
A)paying interest payments
B)early bond redemption
C)converting bonds into equity securities
D)paying preferred dividends
E)reducing coupon rates
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Chapter 8: Stock Valuation
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Sample Questions
Q1) A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called?
A)democratic
B)cumulative
C)straight
D)deferred
E)proxy
Q2) Electronics, Inc. common stock returned a nifty 22.68 percent rate of return last year. The dividend amount was $0.25 a share which equated to a dividend yield of 0.84 percent. What was the rate of price appreciation for the year?
A)21.84 percent
B)22.38 percent
C)22.60 percent
D)22.87 percent
E)23.52 percent
Q3) What are the primary differences and similarities between NASDAQ and the NYSE?
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Which one of the following is the best example of two mutually exclusive projects?
A)building a retail store that is attached to a wholesale outlet
B)producing both plastic forks and spoons on the same assembly line at the same time
C)using an empty warehouse to store both raw materials and finished goods
D)promoting two products during the same television commercial
E)waiting until a machine finishes molding Product A before being able to mold Product
B
Q2) A project that provides annual cash flows of $12,600 for 12 years costs $67,150 today. At what rate would you be indifferent between accepting the project and rejecting it?
A)15.28 percent
B)15.40 percent
C)15.51 percent
D)15.62 percent
E)15.74 percent
Q3) Explain the differences and similarities between net present value (NPV) and the profitability index.
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Chapter 10: Making Capital Investment Decisions
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Q1) Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the amount of the aftertax salvage value of the equipment?
A)$17,150
B)$31,850
C)$118,800
D)$237,600
E)$343,000
Q2) The bid price is:
A)an aftertax price.
B)the aftertax contribution margin.
C)the highest price you should charge if you want the project.
D)the only price you can bid if the project is to be profitable.
E)the minimum price you should charge if you want to financially breakeven.
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Page 12
Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it sells given annual sales of 212,000 cups. The sales price is $1.49 per cup while the variable cost per cup is $0.63. How many cups of coffee must it sell to break-even on a cash basis?
A)83,814
B)96,470
C)123,910
D)167,630
E)212,000
Q2) Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?
A)leverage
B)risk
C)break-even
D)sensitivity
E)cash flow
Q3) What is forecasting risk and why is it important to the analysis of capital expenditure projects?
What methods can be used to reduce this risk?
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Page 13
Chapter 12: Some Lessons From Capital Market History
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Q1) Which one of the following best defines the variance of an investment's annual returns over a number of years?
A)The average squared difference between the arithmetic and the geometric average annual returns.
B)The squared summation of the differences between the actual returns and the average geometric return.
C)The average difference between the annual returns and the average return for the period.
D)The difference between the arithmetic average and the geometric average return for the period.
E)The average squared difference between the actual returns and the arithmetic average return.
Q2) According to Jeremy Siegel, the real return on stocks over the long-term has averaged about:
A)6.8 percent
B)8.7 percent
C)10.4 percent
D)12.3 percent
E)14.8 percent
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Chapter 13: Return, Risk, and the Security Market Line
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Q1) The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent. The stock's beta is 1.62. What is the risk-free rate of return?
A)3.22 percent
B)3.59 percent
C)3.63 percent
D)3.79 percent
E)4.18 percent
Q2) Which one of the following is an example of unsystematic risk?
A)income taxes are increased across the board
B)a national sales tax is adopted
C)inflation decreases at the national level
D)an increased feeling of prosperity is felt around the globe
E)consumer spending on entertainment decreased nationally
Q3) Explain how the slope of the security market line is determined and why every stock that is correctly priced, according to CAPM, will lie on this line.
Q4) Explain the difference between systematic and unsystematic risk. Also explain why one of these types of risks is rewarded with a risk premium while the other type is not.
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Chapter 14: Cost of Capital
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Sample Questions
Q1) The aftertax cost of debt:
A)varies inversely to changes in market interest rates.
B)will generally exceed the cost of equity if the relevant tax rate is zero.
C)will generally equal the cost of preferred if the tax rate is zero.
D)is unaffected by changes in the market rate of interest.
E)has a greater effect on a firm's cost of capital when the debt-equity ratio increases.
Q2) Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 7.5 percent. What is the firm's WACC given a tax rate of 34 percent?
A)9.87 percent
B)10.43 percent
C)10.77 percent
D)13.38 percent
E)15.17 percent
Q3) What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized?
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting?
A)best efforts
B)shelf
C)direct rights
D)private placement
E)firm commitment
Q2) What is an issue of securities that is offered for sale to the general public on a direct cash basis called?
A)best efforts underwriting
B)firm commitment underwriting
C)general cash offer
D)rights offer
E)herring offer
Q3) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make. Explain why.
Q4) Explain both a rights offering and the basic characteristics of a right.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Galaxy would have 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.79 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. What is the breakeven EBIT?
A)$287,878.78
B)$298,333.33
C)$351,111.11
D)$333,333.33
E)$341,414.14
Q2) Down Bedding has an unlevered cost of capital of 13 percent, a cost of debt of 7.8 percent, and a tax rate of 32 percent. What is the target debt-equity ratio if the targeted cost of equity is 15.51 percent?
A).63
B).68
C).71
D).76
E).84
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Chapter 17: Dividends and Dividend Policy
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Sample Questions
Q1) On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On August 1, you sold 200 shares of this stock for $28 a share. You sold an additional 100 shares on August 17 at a price of $25 a share. The company declared a $0.95 per share dividend on August 4 to holders of record as of Wednesday, August 15. This dividend is payable on September 1. How much dividend income will you receive on September 1 as a result of your ownership of Wagoneer stock?
A)$0
B)$190
C)$285
D)$360
E)$475
Q2) Alfonzo's Italian House has 25,000 shares of stock outstanding with a par value of $1 per share and a market price of $36 a share. The firm just announced a 5-for-3 stock split. What will the market price per share be after the split?
A)$21.60
B)$24.20
C)$36.00
D)$54.00
E)$60.00
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Page 19
Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Which of the following statements are correct?
I. An increase in the accounts payable period shortens the cash cycle.
II. The cash cycle is equal to the operating cycle minus the inventory period.
III. A negative cash cycle is preferable to a positive cash cycle.
IV. The cash cycle plus the accounts receivable period is equal to the operating cycle.
A)I only
B)III and IV only
C)I and III only
D)I and IV only
E)I, II, and III only
Q2) Your firm has an inventory turnover rate of 14, a payables turnover rate of 8, and a receivables turnover rate of 19. How long is your firm's operating cycle?
A)45.06 days
B)45.28 days
C)45.63 days
D)53.13 days
E)53.78 days
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Chapter 19: Cash and Liquidity Management
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Q1) Which one of the following statements is correct?
A)Funds received via automated clearinghouse transfers are available that day.
B)A depository transfer check is the most costly means of transferring funds into a cash concentration account.
C)The means selected to transfer funds into a concentration account depends primarily upon the size of the transfers.
D)Concentration accounts are used to transfer funds to lockbox locations as needed.
E)The most expedient means of transferring funds into a concentration account is a wire transfer.
Q2) Explain what a zero-balance account is, how it is used, and how it affects cash management.
Q3) The cash found in a cash drawer that a check-out clerk uses to make change is an example of which of the following motives for holding cash?
A)speculative
B)daily float
C)compensating balance
D)precautionary
E)transaction
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Chapter 20: Credit and Inventory Management
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Q1) Inventory needs under a derived-demand inventory system are:
A)primarily dependent upon the competitive demands placed on a firm's suppliers.
B)based on the anticipated demand for the finished product.
C)based on minimizing the cost of restocking inventory.
D)held constant over time.
E)determined by a kanban system.
Q2) Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the date of service. This 30-day period is referred to as the:
A)payables period.
B)cash cycle.
C)transactions period.
D)credit period.
E)disbursement period.
Q3) A firm's total investment in receivables depends primarily on the firm's:
A)total sales and cash discount period.
B)cash to credit sales ratio.
C)bad debt ratio.
D)average collection period and amount of credit sales.
E)amount of credit sales and cash discount percentage.
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Page 22
Chapter 21: International Corporate Finance
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Q1) Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?
A)international risk
B)diversifiable risk
C)purchasing power risk
D)exchange rate risk
E)political risk
Q2) Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5803S$/US$. You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it arrives in 120 days. You can sell the motherboards for $148 each. What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?
A)$913,564
B)$1,008,121
C)$1,216,407
D)$1,435,999
E)$1,502,400
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Bill feels that he possesses a good dose of "street smarts". Thus, he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project. This type of behavior is referred to as:
A)overconfidence.
B)endowment effect.
C)money illusion.
D)affect heuristic.
E)sentiment-based risk.
Q2) Over the past six months, you have watched as your parent's retirement savings have declined in value by 45 percent due to a severe financial market downturn. As a result, you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account. Which behavior characteristic have you developed as a result of the market downturn?
A)myopic loss aversion
B)get-evenitis
C)self-attribution bias
D)mental accounting
E)regret aversion
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Chapter 23: Risk Management: An Introduction to Financial Engineering
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Q1) Which one of the following statements is correct in relation to a firm's short-run financial risk?
A)Short-run financial risk results from permanent changes in prices due to new technology.
B)A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk.
C)Each segment of a business should be responsible for hedging its own short-run financial risk.
D)Short-run financial risk is defined as temporary price changes which result directly from natural disasters, such as tornadoes, droughts, and floods.
E)Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk.
Q2) Explain why a swap is effectively a series of forward contracts.
Q3) What are the primary motives for a hedger and a speculator in the derivatives market?
If a wheat farmer sells wheat futures, is that hedging or speculating? Explain.
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Page 25
Chapter 24: Options and Corporate Finance
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Q1) Which one of the following statements related to warrants is correct?
A)Warrants are generally issued as an attachment to publicly-issued bonds.
B)Warrants are excluded from trading on an organized exchange.
C)Warrants are structured as long-term put options.
D)Warrants are issued by individual investors.
E)Warrants are generally added as an incentive to a private debt issue.
Q2) Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy those shares. This purchase is commonly referred to as:
A)striking the asset.
B)expiring the option.
C)exercising the option.
D)putting the collar.
E)the collar option.
Q3) Employee stock options:
A)usually have a positive intrinsic value when issued.
B)must be backdated at least six months to comply with Sarbanes-Oxley.
C)are generally "underwater" when issued.
D)are frequently repriced if the options are in-the-money.
E)are generally issued with a zero intrinsic value.
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Page 26
Chapter 25: Option Valuation
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Q1) A stock is currently selling for $55 a share. The risk-free rate is 4 percent and the standard deviation is 18 percent. What is the value of d<sub>1</sub> of a 9-month call option with a strike price of $57.50?
A)-0.01506
B)-0.01477
C)-0.00574
D)0.00042
E)0.00181
Q2) A firm has assets of $21.8 million and a 3-year, zero-coupon, risky bonds with a total face value of $8.5 million. The bonds have a total current market value of $8.1 million. How can the shareholders of this firm change these risky bonds into risk-free bonds?
A)purchase a call option with a 1-year life and a $8.1 million face value
B)purchase a call option with a 5-year life and a $8.5 million face value
C)purchase a put option with a 1-year life and a $21.8 million face value
D)purchase a put option with a 3-year life and a $8.1 million face value
E)purchase a put option with a 3-year life and an $8.5 million face value
Q3) Explain how an increase in T-bill rates will affect the value of an American call and an American put.
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Chapter 26: Mergers and Acquisitions
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Q1) Firm A is acquiring Firm B for $75,000 in cash. Firm A has 4,500 shares of stock outstanding at a market value of $27 a share. Firm B has 2,500 shares of stock outstanding at a market price of $29 a share. Neither firm has any debt. The incremental value of the acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition?
A)$25.98
B)$26.45
C)$26.93
D)$27.00
E)$27.33
Q2) The value of a target firm to the acquiring firm is equal to:
A)the value of the target firm as a separate entity plus the incremental value derived from the acquisition.
B)the purchase cost of the target firm.
C)the value of the merged firm minus the value of the target firm as a separate entity.
D)the purchase cost plus the incremental value derived from the acquisition.
E)the incremental value derived from the acquisition.
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Page 28
Chapter 27: Leasing
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Sample Questions
Q1) Interstate Services needs some equipment costing $61,000. The equipment has a 4-year life after which it will be worthless. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $16,600 a year. The firm can borrow money at 7.5 percent and has a 36 percent tax rate. What is the incremental annual cash flow for year 2 if the company decides to lease the equipment rather than purchase it?
A)-$18,897
B)-$19,286
C)-$19,389
D)-$19,407
E)-$20,383
Q2) If a firm does not expect to owe taxes for a few years and needs some equipment, the firm should:
A)lease the equipment and retain the tax benefits.
B)lease the equipment with the lessor retaining the tax ownership of the asset.
C)borrow the money to buy the asset and then depreciate it using MACRS depreciation.
D)buy the equipment with cash and depreciate it using MACRS.
E)buy the equipment and depreciate it straight-line over the life of the asset.
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