Financial Analysis
Exam Solutions
Course Introduction
Financial Analysis is a comprehensive course that introduces students to the fundamental techniques and principles used to evaluate the financial health, performance, and value of organizations. The course covers topics such as interpreting financial statements, ratio analysis, cash flow analysis, and trend identification, while exploring the use of these tools in decision-making for both internal and external stakeholders. Emphasis is placed on real-world application by analyzing case studies and actual company data, allowing students to assess profitability, liquidity, solvency, and operational efficiency. By the end of the course, students will be equipped with critical analytical skills to make informed financial decisions and recommendations in various business contexts.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) The management's primary goal is stockholder wealth maximization, which, translates into _____.
A)maximizing the value of the firm as measured by the price of its common stock
B)maximizing the earnings per share of the stockholders
C)maximizing the dividends received by stockholders
D)maximizing the net income earned by the company
E)maximizing the managerial compensation (incentives)
Answer: A
Q2) If a limited liability company (LLC) is taxed like a partnership, _____.
A)income passes through to the owners
B)income is taxed twice
C)the owners have unlimited tax liability
D)the shareholders pay taxes on dividends they receive after the company pays taxes on the money that is distributed
E)dividends are taxed at the capital gain rate
Answer: A
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3
Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following was originally created to develop and approve a set of common International Financial Reporting Standards (IFRS)?
A)International Accounting Standards Board (IASB)
B)Securities and Exchange Commission (SEC)
C)Generally Accepted Accounting Principles (GAAP)
D)International Federation of Accountants
E)International Accounting Standards Committee
Answer: A
Q2) Ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm.
A)True
B)False
Answer: True
Q3) The information contained in the annual report is used by investors to form expectations about future earnings and dividends.
A)True
B)False
Answer: True
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) Which of the following terms refers to the process of converting a not-for-profit stock exchange owned by its members to a for-profit organization with publicly-traded stocks that are owned by outside shareholders?
A)Privatization
B)Diversification
C)Demutualization
D)Consolidation
E)Flotation
Answer: C
Q2) Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____.
A)financial intermediation
B)negotiated deal
C)competitive bid
D)shelf registration
E)dual listing
Answer: C
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Chapter 4: Time Value of Money
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Sample Questions
Q1) The present value of an uneven cash flow can be determined by using the annuity equations.
A)True
B)False
Q2) If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account?
A)23.02 years
B)18.50 years
C)20.52 years
D)16.89 years
E)25.65 years
Q3) The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.
A)continuously
B)daily
C)monthly
D)semi-annually
E)annually
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Chapter 5: The Cost of Money Interest Rates
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Q1) The yield on a one-year Treasury bond is 5 percent, and the yield on a two-year Treasury bond is 6 percent. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?
A)The maturity risk premium is negative.
B)Interest rates are expected to fall over the next two years by 3 percent.
C)The market expects one-year interest rate during the second year to be 7 percent.
D)The default risk premium is highest for Year 2.
E)The liquidity risk premium is highest for Year 1.
Q2) The value of an asset is the future value of the cash flows that the asset is expected to generate during its life.
A)True
B)False
Q3) Bonds with higher liquidity must offer higher interest rates in the market, because such investments can be easily converted into cash on short notice at or near the amounts originally invested.
A)True
B)False
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Chapter 6: Bonds Debt Characteristics and Valuation
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Sample Questions
Q1) Which of the following ratings by Moody's is given to the bonds of companies that have the best credit risk?
A)Caa
B)Aaa
C)B
D)Ba
E)A
Q2) The greater a bond's default risk, the greater the:
A)maturity value of the bond.
B)chance the firm will exercise the call provision on the bond.
C)interest rate stability of the bond in the long run.
D)investment in the bond by risk-averse investors.
E)default risk premium (DRP) associated with the bond.
Q3) The percentage rate of return that investors earn on a bond consists of a(n):
A)interest yield plus a capital gains yield.
B)interest yield plus the maturity value of the bond.
C)expected interest yield plus the principal value of the bond.
D)expected capital gains yield plus the future value of coupon payments.
E)market interest rate plus the coupon interest rate.
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) Stocks that produce returns that are based primarily on dividends are traditionally called _____.
A)preemptive stocks
B)income stocks
C)growth stocks
D)founders' stocks
E)classified stocks
Q2) Which of the following is true about the payment of dividends by a firm?
A)Dividends are paid only to the bondholders of the firm.
B)Common stockholders have priority over preferred stockholders with regard to dividend payments.
C)Preferred stocks pay accumulated dividends only once i.e. at the time of maturity.
D)Growth stocks pay little or no dividends; rather, the firms retain most of their earnings each year to reinvest in assets.
E)Common stockholders generally receive a fixed amount of dividend every year.
Q3) A typical common stock issue has a maturity period of 10 years.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Q1) Short-term investments have higher maturity risks than long-term investments.
A)True
B)False
Q2) The risk-free rate of return is 5 percent, and the market return is 8 percent. The betas of Stocks A, B, C, D, and E are 0.75, 0.50, 0.25, 1.50, and 1.25, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 6.5 percent, 7 percent, 11 percent, and 7 percent, respectively. Suppose an investor holds all of these stocks in a single portfolio. Based on the information given here, if the investor wants to sell one of the stocks so that only four stocks remain in the portfolio, which stock should be sold?
A)Stock A
B)Stock B
C)Stock C
D)Stock D
E)Stock E
Q3) Other things held constant, a risk-averse investor requires a higher return to invest in securities with higher risks, which means they will pay lower prices for such investments.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Q1) If a capital budgeting project is purchased, a firm's value, and thus its stockholders' wealth, will change by the amount of the project's _____.
A)modified internal rate of return (MIRR)
B)discounted payback period (DPB)
C)nondiscounted cash inflows
D)cash inflows discounted at the project's internal rate of return (IRR)
E)net present value (NPV)
Q2) A project should be accepted if _____.
A)its traditional payback period is greater than the expected number of years to recover the original investment
B)its internal rate of return (IRR) exceeds the firm's required rate of return
C)it yields multiple internal rates of return
D)in addition to cash inflows, the project generates multiple cash outflows during its life
E)the sum of its raw (undiscounted) cash inflows is greater than the sum of the present value of its cash outflows.
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Chapter 10: Project Cash Flows and Risk
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Q1) 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
Q2) Which of the following statements about the opportunity cost associated with a capital budgeting project is correct?
A)A project's opportunity cost is a cash outlay that the firm has already paid; therefore, it should not be included in a capital budgeting analysis.
B)The terms sunk cost and opportunity cost generally are used interchangeably.
C)A project's opportunity cost is the return (cash flow) that will not be earned (generated) if funds are invested in a particular capital budgeting project.
D)A project's opportunity cost is not a relevant cash flow, therefore it should not be included in the capital budgeting analysis.
E)A project's opportunity cost reflects the change in a firm's net cash flow that is attributable to purchasing the project.
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Chapter 11: The Cost of Capital
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Q1) Which of the following statements is correct about using the capital asset pricing model (CAPM) to determine a firm's component costs of capital?
A)The capital asset pricing model (CAPM) gives a better estimate than the discounted cash flow (DCF) approach of a firm's cost of retained earnings.
B)The capital asset pricing model (CAPM) approach is typically used to estimate the flotation costs associated with issuing new common equity.
C)The beta coefficient used in the capital asset pricing model (CAPM) is equal to the growth rate used in the discounted cash flow (DCF) method.
D)The capital asset pricing model (CAPM) and the discounted cash flow (DCF) approach provide the same estimate for the firm's cost of retained earnings, rs.
E)The capital asset pricing model (CAPM) assumes investors are well diversified, whereas the discounted cash flow (DCF) approach assumes the firm grows at a constant growth rate.
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Chapter 12: Capital Structure
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Sample Questions
Q1) Which of the following statements concerning a firm's times-interest earned (TIE) ratio is correct?
A)Generally the lower its TIE ratio, the higher the probability that the firm will default on its debt.
B)The TIE ratio is calculated by dividing net income by interest charges.
C)The TIE ratio increases if the debt/assets ratio increases, and vice versa.
D)The TIE ratio is always greater than 1.
E)The TIE ratio shows the effects of both operating leverage and financial leverage.
Q2) Everything else equal, in which of the following situations will a firm's degree of operating leverage (DOL) increase? Assume the firm currently generates a positive net operating income.
A)Sales increase substantially.
B)The firm issues preferred stock.
C)Fixed costs are decreased.
D)The firm takes advantage of quantity discounts for the first time.
E)The firm's sales move closer to its operating breakeven point.
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) A major disadvantage of stock repurchases is that the company:
A)spends most of its excess cash to repurchase the stock.
B)cannot change its capital structure through such an action.
C)becomes more vulnerable to takeovers after the stock repurchase. D)might pay too much for stock that is repurchased.
E)makes it difficult for employees to exercise their stock options.
Q2) The primary factor that influences the dividend policies of companies around the world is the level of protection that exists for the rights of minority stockholders.
A)True
B)False
Q3) LTD, Inc. plans to initiate a 5-for-1 stock split. LTD's stock currently sells for $180 per share. What will be the per share price of the stock immediately following the split?
A)$36.00
B)$900.00
C)$72.00
D)$27.78
E)$12.96
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Page 15
Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) ______ is a type of unsecured promissory note issued by large, financially strong firms.
A)Trade credit
B)Commercial paper
C)A mortgage
D)Preferred equity
E)An accrual arrangement
Q2) The following information relates to Dane Corporation:
Inventory conversion period 55.8 days Days sales outstanding
23.9 days Days payables outstanding
Which of the following is the cash conversion cycle of the company?
A)-0.6 days
B)112.2 days
C)79.7 days
D)64.4 days
E)47.2 days
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) If a firm discovers that the days sales outstanding (DSO) of its credit customers is increasing, management should consider tightening the firm's credit policy.
A)True
B)False
Q2) The Danser Corporation expects to generate sales equal to $30,000 in January, $33,000 in February, and $38,000 in March. Twenty (20) percent of all sales are for cash, 50 percent are credit sales that are paid in the month following the sale, and 30 percent are credit sales that are paid two months following the sale. What are Danser's total cash collections in March?
A)$35,800
B)$40,400
C)$33,667
D)$33,100
E)$33,900
Q3) A firm should change its credit policy if the net present value (NPV) of the proposed credit policy is both positive and less than the NPV of its existing credit policy.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) ______ are assets that must be purchased in large, discrete units.
A)Fixed assets
B)Lumpy assets
C)Spontaneously generated assets
D)Excess capacity assets
E)Long-term assets
Q2) Deviations of actual sales from projected sales should be evaluated to determine how to improve future forecasts and the predictability of future operations, and therefore to ensure that the goals of the firm are being pursued appropriately.
A)True
B)False
Q3) To produce sales of $4,500,000, Azure Inc. uses only 80 percent of its plant capacity. Therefore, Azure can increase its sales to _____ without having to increase its plant and equipment.
A)$22,500,000
B)$3,600,000
C)$5,625,000
D)$5,400,000
E)$8,100,000
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