Financial Analysis
Exam Questions
Course Introduction
Financial Analysis is a comprehensive course that equips students with the tools and techniques needed to evaluate the financial health and performance of businesses. The course covers fundamental concepts such as financial statement analysis, ratio analysis, cash flow assessment, and trend analysis. Students learn how to interpret balance sheets, income statements, and cash flow statements to make informed decisions about profitability, liquidity, and solvency. By integrating case studies and real-world scenarios, the course fosters analytical skills necessary for careers in finance, investment, accounting, and business management.
Recommended Textbook
Fundamentals of Corporate Finance 2nd Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) What is the term for the applicable price that I will pay,if I have to buy a stock?
Answer: The buyer of a stock pays the ask price when he buys the stock.
Q2) What is the major advantage corporations have over other business entities?
A)It is easier for a corporation to raise capital than other forms of businesses.
B)A corporation is treated as a separate legal entity for tax and legal purposes.
C)A corporation's shares can be freely traded among its shareholders.
D)All of the above are advantages that a corporation has over other business forms.
Answer: D
Q3) Which of the following types of firms do not have limited liability?
A)sole proprietorships
B)limited partnerships
C)corporations
D)none of the above
Answer: A
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3
Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) In the United States,publicly traded companies can choose whether or not they wish to release periodic financial statements.
A)True
B)False
Answer: False
Q2) In general,a successful firm will have a market-to-book ratio that is substantially greater than 1.
A)True
B)False
Answer: True
Q3) Which of the following is the LEAST likely explanation for a firm's high ROE?
A)The firm is growing.
B)The firm is able to find investment opportunities that are very profitable.
C)The firm has very efficient use of its assets.
D)The firm enjoys high sales margins.
Answer: A
Q4) How does a firm select the date for preparation of its balance sheet?
Answer: The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.
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Chapter 3: Time Value of Money: An Introduction
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Sample Questions
Q1) Why should interest rates be generally positive?
Answer: An investor should be compensated for foregoing current consumption and,everything else remaining the same,a positive interest rate serves to compensate the investor.
Q2) You own 1000 shares of Newstar Financial stock,currently trading for $57 per share.You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock,currently trading at $63 per share.What is the value of this trade,if you choose to make it?
A)-$540
B)-$480
C)-$300
D)$280
Answer: C
Q3) The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets,they will trade for the same price in each market.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Sample Questions
Q1) Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years.He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year.What is the present value of this investment if the interest rate is 4%?
A)-$1410.67
B)-$112.23
C)$1248.56
D)$2643.73
Q2) A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the future value (FV)of this perpetuity,given that the interest rate is 4%?
A)$1410
B)$20,582
C)$21,370
D)There is no solution to this problem.
Q3) The future value (FV)at retirement (age 65)of your savings is closest to:
A)$497,530
B)$928,895
C)$1,263,236
D)$108,000
Page 6
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Chapter 5: Interest Rates
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Sample Questions
Q1) Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at an APR of 4.25% ,how much would you save in total interest expense?
A)$176,846
B)$75,848
C)$151,696
D)$100,998
Q2) In 2007,interest rates were about 4.5% and inflation was about 2.8%.What was the real interest rate in 2007?
A)1.58%
B)1.61%
C)1.62%
D)1.65%
Q3) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.
A)True
B)False
Q4) How are interest and return of principal handled in an amortizing loan payment?
Page 7
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Chapter 6: Bonds
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Sample Questions
Q1) A company issues a ten-year bond at par with a coupon rate of 6% paid semi-annually.The YTM at the beginning of the third year of the bond (8 years left to maturity)is 7.8%.What is the new price of the bond?
A)$894.35
B)$569.65
C)$722.06
D)$1,000.00
Q2) Which of the following bonds is trading at par?
A)a bond with a $2000 face value trading at $1987
B)a bond with a $1000 face value trading at $999
C)a bond with a $1000 face value trading at $1000
D)a bond with a $2000 face value trading at $2012
Q3) The current zero-coupon yield curve for risk-free bonds is shown above.What is the price per $100 face value of a four-year,zero-coupon,risk-free bond?
A)$85.64
B)$87.99
C)$92.15
D)$96.67
Q4) Under what situation can a zero-coupon bond be selling at a premium?
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Kirkevue Industries pays out all its earnings as dividends and has a share price of $24.In order to expand,Kirkevue announces it will cut its dividend payments from $2.00 to $1.80 per share and reinvest the retained funds.What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?
A)0.83%
B)15.33%
C)18.23%
D)17.97%
Q2) Which of the following statements is FALSE?
A)A common approximation is to assume that in the long run,dividends will grow at a constant rate.
B)The dividend each year is the firm's earnings per share (EPS)multiplied by its dividend payout rate.
C)There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends.
D)During periods of high growth,it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.
Q3) What is a major assumption about growth rate in the dividend-discount model?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) Which of the following is NOT a limitation of the payback period rule?
A)It does not account for the time value of money.
B)It is difficult to calculate.
C)It ignores cash flows after payback.
D)It does not account for changes in the discount rate.
Q2) The profitability index for project B is closest to:
A)23.34
B)12.64
C)0.17
D)0.12
Q3) When different investment rules give conflicting answers,then decisions should be based on the Net Present Value rule,as it is the most reliable and accurate decision rule.
A)True B)False
Q4) Net present value (NPV)is usefully supplemented by internal rate of return (IRR),since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.
A)True B)False
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) A firm is considering investing in a new machine that will cost $600,000 and will be depreciated straight-line over five years.If the firm's marginal tax rate is 39%,what is the annual depreciation tax shield of purchasing the machine?
A)$120,000
B)$46,800
C)$$07,692
D)$234,000
Q2) Which of the following statements is FALSE?
A)We begin the capital budgeting process by determining the incremental earnings of a project.
B)The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pretax income.
C)Investments in plant,property,and equipment are directly listed as expense when calculating earnings.
D)The opportunity cost of using a resource is the value it could have provided in its best alternative use.
Q3) What are sunk costs?
Q4) What is the major difference between scenario analysis and sensitivity analysis?
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Chapter 10: Stock Valuation: A Second Look
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Sample Questions
Q1) Which of the following tendencies of individual investors is called the disposition effect?
A)The tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals.
B)The tendency to buy stocks that have been in the news,advertised more,have very high trading volume,or recently had extreme (high or low)returns.
C)The tendency to put too much weight on their own experience rather than considering historical evidence.
D)The tendency to hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase.
Q2) What additional adjustments are required to find the share price,in case we are using the discounted cash flow model?
Q3) Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.
A)True
B)False
Q4) Which is the best valuation technique when using comparables?
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Chapter 11: Risk and Return in Capital Markets
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Sample Questions
Q1) Which of the following is NOT a diversifiable risk?
A)the risk that oil prices rise,increasing production costs
B)the risk that the CEO is killed in a plane crash
C)the risk of a key employee being hired away by a competitor
D)the risk of a product liability lawsuit
Q2) What is the expected payoff for Big Cure's Blockbuster drug?
A)$100 million
B)$0
C)$1 billion
D)$500 million
Q3) What is the diversification achieved by an investor if he invests in Exxon Mobil,Dell,and Bank of America?
Q4) What is the expected payoff for Little Cure's ten drugs?
A)$500 million
B)$100 million
C)$1 billion
D)$0
Q5) What care,if any,should be taken when selecting stocks for an investment portfolio?
Q6) What are the two components of realized return from a stock investment?
Page 13
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%.When I hold both stocks in my portfolio and the stocks returns have a correlation of 1,the overall volatility of returns of the portfolio is
A)more than 30%.
B)less than 30%.
C)unchanged at 30%.
D)cannot say for sure
Q2) While we are using historic return to estimate a stock's beta,why can't we use historic data to forecast the expected return for the stock?
Q3) If two stocks are perfectly negatively correlated,a portfolio with equal weighting in each stock will always have a volatility (standard deviation)of 0.
A)True
B)False
Q4) The security market line is a graph of the expected return of a stock as a function of systematic risk (beta).
A)True
B)False
Q5) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Sample Questions
Q1) A firm is considering investing in a new project with an upfront cost of $400 million.The project will generate an incremental free cash flow of $50 million in the first year and this cashflow is expected to grow at an annual rate of 4% forever.If the firm's WACC is 13%,what is the value of this project?
A)$155.6 million
B)$555.6 million
C)$577.8 million
D)$177.8 million
Q2) The book value of equity of a firm is $100 million and the market value of equity is $200 million.The face value of debt of the firm is $50 million and the market value of debt is $60 million.What is the market value of assets of the firm?
A)$150 million
B)$160 million
C)$260 million
D)$250 million
Q3) Should a firm with high retained earnings have a lower cost of equity?
Q4) Among the two models Constant Dividend Growth Model (CDGM)and Capital Asset Pricing Model (CAPM),which is a better method for computation of the cost of equity?
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Page 15
Chapter 14: Raising Equity Capital
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Sample Questions
Q1) Which of the following statements is FALSE?
A)The preferred stock issued by young companies typically does not pay regular cash dividends.
B)The preferred stock issued by young companies usually gives the owner an option to convert it to common stock on some future date,so it is often called callable preferred stock.
C)If the company runs into financial difficulties,the preferred stockholders have a senior claim on the assets of the firm relative to any common stockholders.
D)Preferred stock issued by mature companies such as banks usually has a preferential dividend and seniority in any liquidation and sometimes special voting rights.
Q2) Which of the following statements is FALSE?
A)SEO rights offers have lower costs than cash offers.
B)The decision to raise financing externally usually implies that a firm plans to pursue an investment opportunity.
C)Although not as costly as IPOs,seasoned offerings are still expensive.
D)Researchers have found that,on average,the market greets the news of an SEO with a price increase.
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Page 16
Chapter 15: Debt Financing
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Sample Questions
Q1) When a callable bond sells at a discount,the bond's coupon rate is ________ than market yields and the yield to worst is the yield to ________.
A)higher,call
B)lower,maturity
C)lower,call
D)high,maturity
Q2) A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bond issue on each coupon payment date.What payment must they make on the tenth and final coupon payment?
A)$40 million
B)$52 million
C)$56 million
D)$68 million
Q3) What are notes?
Q4) If a bond covenant is not met,then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.
A)True
B)False
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Chapter 16: Capital Structure
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Sample Questions
Q1) Equity in a firm with no debt is called unlevered equity.
A)True
B)False
Q2) What is the capital structure of a firm?
Q3) What are indirect costs of financial distress?
Q4) The A in the equation above represents
A)the value of the firm's debt.
B)the market value of the firm's assets.
C)the value of the firm's equity.
D)the value of the firm's unlevered equity.
Q5) The optimal capital structure depends on ________ such as taxes,distress costs and agency costs.
A)capital market factors
B)market imperfections
C)firm specific risks
D)systematic risks
Q6) Even if two firms operate in the same industry,they may prefer different choices of debt-equity ratios.
A)True
B)False
Page 18
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Chapter 17: Payout Policy
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Q1) What is the effect on the stock price when a firm repurchases its shares?
Q2) Historical evidence shows that over the last few decades a larger proportion of firms have used ________ for payouts.
A)repurchases
B)dividends
C)stock reverse splits
D)stock splits
Q3) A firm can repurchase shares through a(n)________ in which it offers to buy shares at a prespecified price during a short time period-generally within 20 days.
A)tender offer
B)open market share repurchase
C)targeted repurchase
D)Dutch auction share repurchase
Q4) What are the different ways a firm can repurchase shares?
Q5) What is the general trend of share repurchase as a percentage of total payout over the last few decades?
Q6) What are the characteristics of special dividend?
Q7) What are the ways in which a firm can retain its free cash flow?
Q8) What are the ways in which a firm can pay out its free cash flow?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Sample Questions
Q1) Compute the after-tax interest expense for a firm with Interest on Excess Cash = $5000,Interest on Debt = $8000,and a tax rate of 30%.
A)$2100
B)$2200
C)$2500
D)$2700
Q2) The goal of the financial manager is to maximize the value of the shareholder's stake in the firm.
A)True
B)False
Q3) The sustainable growth rate assumes that the firm will raise no new debt financing.
A)True
B)False
Q4) Long term financial planning helps a financial manager in budgeting but has little to do with understanding how the business operates.
A)True
B)False
Q5) What is common starting point for forecasting?
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Chapter 19: Working Capital Management
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Sample Questions
Q1) Which of the following is NOT a benefit of holding inventory?
A)minimizes the risk that the firm will not be able to obtain an input it needs for production
B)seasonality of demand,meaning that customer purchases often do not match the most efficient production cycle,leading to a buildup of inventory in off-peak periods
C)minimizes order cost from placing multiple orders throughout the year
D)minimizes risks involved in spoilage and obsolescence
Q2) Which of the following statements is FALSE?
A)Similar to the situation with its accounts receivable,a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time.
B)Some firms ignore the payment due period and pay later,in a practice referred to as pushing the accounts payable.
C)Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (COD)or cash before delivery (CBD).
D)If the accounts payable outstanding is 40 days and the terms are 2/10 net 30,the firm can conclude that it generally pays late and may be risking supplier difficulties.
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Chapter 20: Short-Term Financial Planning
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Sample Questions
Q1) Cash flow forecasts are conducted in order to determine whether a firm has a cash flow surplus or deficit and whether such a surplus or deficit is temporary or permanent.
A)True
B)False
Q2) What is temporary working capital?
Q3) Which of the following companies has the smallest need for short-term financial planning?
A)A company that produces Christmas decorations.
B)A toy manufacturer.
C)A company that makes condiments such as ketchup.
D)A company that provides catering services for weddings.
Q4) The temporary working capital needs for Hasbeen Toys in quarter 3 is closest to:
A)$845 million
B)$0 million
C)$770 million
D)$ 340 million
Q5) What is permanent working capital?
Q6) What are loan origination fees and what effect does it have on the loan?
Q7) What are compensating balance and what effect does it have on the loan?
Page 22
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Chapter 21: Option Applications and Corporate Finance
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Sample Questions
Q1) What are American options?
Q2) For a(n)________ put option,the higher the stock price,the lower the value of the option
A)American
B)European
C)Asian
D)A & B
Q3) Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.
A)True
B)False
Q4) Suppose that a stock sells at a price of $40 on the expiration date.Compute the payoff to the seller of a call option if the option strike price is $50.
A)-$20
B)-$10
C)0
D)-$30
Q5) When is an option out-the-money?
Q6) When is an option at-the-money?
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Chapter 22: Mergers and Acquisitions
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Q1) Consider a case in which existing shareholders do not have to invest time and effort,but still participate in the gains from a takeover,while the bidder who puts in the time and effort is forced to give up substantial profits.This situation is called:
A)the free rider problem.
B)a toehold.
C)a leveraged buyout.
D)a freezeout merger.
Q2) When a hostile takeover appears to be inevitable,a target company will sometimes look for another,friendlier company to acquire it called a A)poison pill.
B)classified board.
C)golden parachute.
D)white knight.
Q3) What is a white knight?
Q4) Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre and post merger.
Q5) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
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Chapter 23: International Corporate Finance
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Q1) The spot exchange rate for the British pound is 0.65 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?
A)0.646
B)0.652
C)0.662
D)0.674
Q2) The supply and demand for a currency is driven by A)firms trading goods.
B)investors trading securities.
C)actions of central banks.
D)all of the above
Q3) What is floating rate?
Q4) Using the covered interest parity condition,the calculated one-year forward rate F<sub>1 </sub>is closest to:
A)$1.8568/£
B)$1.8764/£
C)$1.9161/£
D)$1.8961/£
Page 25
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Chapter 24: Leasing
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Q1) Which of the following discount rates should be used for the lease versus borrow decision?
A)The risk-free rate of interest.
B)The company's cost of borrowing.
C)The company's after-tax cost of borrowing.
D)The company's weighted average cost of capital.
Q2) If Luther acquires the new fleet of delivery trucks using an operating lease,Luther's Debt to Equity ratio will be closest to:
A)2.0
B)1.5
C)0.80
D)0.66
Q3) Suppose that instead of leasing the bulldozer,the company is considering purchasing a bulldozer outright by borrowing the purchase price using a four-year annuity loan.The monthly loan payments for a four year loan to purchase the Bulldozer are closest to:
A)$2,115
B)$1,825
C)$1,870
D)$1,750
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Chapter 25: Insurance and Risk Management
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Q1) An S&L owns mortgages hat have a current market value of $325 million.The duration of this
Portfolio of mortgages is 15.9 years.The S&L finances its mortgages by issuing CDs and the current value of these liabilities is $275 million.The duration of these liabilities is 4.6 years.What is the initial duration of the equity for the S&L?
A)103.25 years
B)78.05 years
C)25.30 years
D)53.00 years
Q2) Which of the following statements is false?
A)Corporations use interest rate swaps routinely to alter their exposure to interest rate fluctuations.
B)The value of a swap,while initially zero,will fluctuate over time as interest rates change.
C)An interest rate that adjusts to current market conditions is called a floating rate.
D)When interest rates rise,the swap's value will rise for the party receiving the fixed rate;conversely,it will fall for the party paying the fixed rate.
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Chapter 26: Corporate Governance
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Q1) Which of the following statements is false?
A)Recently,shareholders have started organizing "no" votes.That is,when they are dissatisfied with a board,they simply refuse to vote to approve the slate of nominees for the board.
B)One early study of proxy contests found that the announcement of a contest increased firm stock price by 8% on average,even if the challenge was eventually unsuccessful and the incumbents won reelection.
C)Shareholders' only real role in governance is in electing the directors of the company.
D)Perhaps the most extreme form of direct action that disgruntled shareholders can take is to hold a proxy contest and introduce a rival slate of directors for election to the board.
Q2) Directors who are not as directly connected to the firm but who have existing or potential business relationships with the firm are called
A)Gray Directors.
B)Independent Directors.
C)Advising Directors.
D)Inside Directors.
Q3) What is the difference between Inside,gray,and outside directors?
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