Financial Analysis
Final Test Solutions
Course Introduction
Financial Analysis is a course designed to equip students with the essential skills for interpreting and evaluating financial data to make informed business decisions. The course covers key concepts such as financial statement analysis, ratio analysis, trend analysis, and cash flow assessment, enabling students to assess a firm's financial performance and health. Through case studies and practical applications, students learn to use tools and techniques for analyzing profitability, liquidity, solvency, and market indicators. By the end of the course, students will be able to critically analyze financial statements, draw meaningful conclusions, and provide recommendations for strategic decision-making.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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21 Chapters
2363 Verified Questions
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Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market.
A)True
B)False
Answer: False
Q2) Regarding risk levels, financial managers should
A) pursue higher-risk projects because they increase value.
B) avoid higher-risk projects because they destroy value.
C) focus primarily on market fluctuations.
D) evaluate investors' desire for risk.
Answer: D
Q3) A corporate restructuring can result in
A) changes in the capital structure.
B) selling of low-profit margin divisions.
C) the board of directors exercising control of the company's major decisions.
D) All of the options are true.
Answer: D
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) The corporate tax rate change of 2018 means that corporations are no longer responsible to pay state and foreign taxes.
A)True
B)False
Answer: False
Q2) Which of the following factors do not influence the firm's P/E ratio?
A) Past earnings
B) Shares outstanding
C) Volatility in business performance
D) All of the options influence the firm's P/E ratio.
Answer: D
Q3) Reinvested funds into retained earnings theoretically belong to
A) bond holders.
B) common stockholders.
C) employees.
D) All of the options
Answer: B
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Page 4
Chapter 3: Financial Analysis
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) The DuPont system of analysis emphasizes that profit generated by assets can be derived by a combination of profit levels and how fast an asset can turnover.
A)True
B)False
Answer: True
Q2) If a firm has both a fixed interest expense and fixed lease payments,
A) times interest earned ratio will be smaller than fixed charge coverage ratio.
B) times interest earned ratio will be greater than fixed charge coverage ratio.
C) times interest earned ratio will be the same as fixed charge coverage ratio.
D) fixed charge coverage ratio cannot be computed.
Answer: B
Q3) Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one-time events, and can distort annual results from normal operations.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) If projected net cash outflow for November is ($10,000) and the beginning cash balance is $4,000, which is the minimum cash balance required by the bank, what amount of loan would be needed for November?
A) $14,000
B) $5,000
C) $10,000
D) $22,000
Q2) The percent-of-sales method provides the most accurate and detailed method of forecasting necessary funds.
A)True
B)False
Q3) The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding or excess funds to be invested.
A)True
B)False
Q4) Companies generally prefer to maintain some minimum cash balance.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?
A) Firm A has a lower break-even point than Firm B, but Firm A's profit grows faster after the breakeven.
B) Firm A has a higher break-even point than Firm B, but Firm A's profit grows slower after the breakeven.
C) Firm B has a lower break-even point than Firm A, but Firm A's profit grows faster after the breakeven.
D) Firm B has a lower break-even point than Firm A, and profit grows the same rate for both companies after the break-even point
Q2) Linear break-even analysis and operating leverage are only valid within a relevant range of unit production.
A)True
B)False
Q3) Operating leverage works best when product volume is increasing. A)True B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Expected value analysis requires taking the difference between the actual projected outcome and the historic outcome times its probability and then summing these totals.
A)True
B)False
Q2) When actual sales are greater than forecasted sales
A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) All of the options are true.
Q3) As a general rule, the interest rate on short-term funds is higher than on long-term funds.
A)True
B)False
Q4) If a firm uses level production with seasonal sales and sales decline further than expected,
A) inventory will increase.
B) inventory will decrease.
C) accounts receivables will increase.
D) inventory and accounts receivables will increase.
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Lower ordering costs would tend to increase a firm's economic order quantity.
A)True
B)False
Q2) A cash discount typically lowers the average collection period of a firm.
A)True
B)False
Q3) In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government agencies
A) are significantly riskier than Treasury securities.
B) are much less liquid than Treasury securities.
C) yield slightly more than Treasury securities.
D) usually require the payment of higher commissions than Treasury securities.
Q4) The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit.
A)True
B)False
Q5) Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Kenneth's Arrows and Bows borrows $15,000 for one year at an 8% annual interest rate. What is the effective rate of interest if the loan is discounted?
A) Less than 8.5%
B) More than 8.5% but less than 9.5%
C) More than 9.5% but less than 10.5%
D) More than 10.5%
Q2) On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.
A)True
B)False
Q3) If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from A) declining interest rates.
B) rising interest rates.
C) inflation.
D) changes in hedging activities.
Q4) Compensating balances represent unfair hidden costs of borrowing.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 10 equal annual payments. What are John's annual payment amounts?
A) $15,000
B) $20,380
C) $15,445
D) $11,453
Q2) The concept of time value of money is important to financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 today worth more than $1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) All of these options are true.
Q3) When the inflation rate is zero, the present value of $1 is identical to the future value of $1.
A)True
B)False
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Page 11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) A 10-year bond, with a par value equaling $1,000, pays 7% annually. If similar bonds are currently yielding 6% annually, what is the market value of the bond? Use semiannual analysis. Use time value of money tables in Appendix B and Appendix D.
A) $700.00
B) $927.50
C) $1,074.70
D) $1,520.70
Q2) Doug has been approached by his broker to purchase a $1,000 bond for $795. He believes the bond should yield 8%. The bond pays a 5% annual coupon rate and has 10 years left until maturity. What should Doug's analysis of the bond indicate to him? Use annual analysis. Use time value of money tables in Appendix B and Appendix D.
A) The bond is undervalued; he should purchase it.
B) The bond is undervalued; he should not purchase it.
C) The bond is overvalued; he should purchase it.
D) The bond is overvalued; he should not purchase it.
Q3) As time to maturity increases, bond price sensitivity decreases.
A)True
B)False
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12
Chapter 11: Cost of Capital
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Sample Questions
Q1) The capital asset pricing model (CAPM) relates the risk-return tradeoffs of individual assets to market returns.
A)True
B)False
Q2) The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing.
A)True
B)False
Q3) Taking on additional debt will reduce the cost of equity.
A)True
B)False
Q4) Within the capital asset pricing model
A) the risk-free rate is usually higher than the return in the market.
B) the higher the beta, the lower the required rate of return.
C) beta measures the volatility of an individual stock relative to a stock market index.
D) dividends are considered in the calculations.
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) There are several disadvantages to the payback method, among them:
A) Payback ignores the interest that is earned during the period of time the project is in place.
B) Payback emphasizes receiving money back as fast as possible for reinvestment.
C) Payback is basic to use and understand.
D) Payback can be used in conjunction with time-adjusted methods of evaluation.
Q2) The selection of a mutually exclusive project means that all other projects with a positive net present value may also be selected.
A)True
B)False
Q3) You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?
A) 4%
B) 6%
C) 8%
D) 10%
Q4) Capital budgeting decisions involve a minimum time horizon of five years.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Expected value is defined as DP where the outcomes are D and probabilities are P.
A)True
B)False
Q2) An example of negative correlation may exist between the
A) forest products and housing industries.
B) jewelry and discount furniture industries.
C) steel and aluminum industries.
D) oil and auto industries.
Q3) A correlation coefficient of ________ provides no risk reduction.
A) 0
B) 1
C) +1
D) +0.5
Q4) The cost of capital is assumed to contain no risk for the firm.
A)True
B)False
Q5) The investor's portfolio should always be on the efficient frontier.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The "strong" form of the efficient market hypothesis states that A) past price data is positively correlated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) none of these options are correct.
Q2) Retained earnings account for the majority of internally generated corporate funds.
A)True
B)False
Q3) Regional exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.
A)True
B)False
Q4) The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) If the retail price of a stock issuance is $17.50 and the issuers' price is $15.50, the total spread is 11.4%.
A)True
B)False
Q2) Generally, the total cost to issue securities (as a percent of total proceeds)
A) is greater for common stock than for debt and increases as the size of the issue increases.
B) is greater for debt than for common stock and decreases as the size of the issue increases.
C) is greater for debt than for common stock and increases as the size of the issue increases.
D) is greater for common stock than for debt and decreases as the size of the issue increases.
Q3) A company's value based on the assumption that its divisions would be sold individually is called its ________ value.
A) book
B) market
C) break up
D) real
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) The coupon rate is the actual interest that the seller pays, which may not equal the amount that the seller incurs for an expense.
A)True
B)False
Q2) A Eurobond is a
A) bond payable in the investor's currency but sold outside the borrower's country.
B) bond payable in the investor's currency but sold inside the borrower's country.
C) bond payable in the borrower's currency and sold inside the borrower's country.
D) bond payable in the borrower's currency but sold outside the borrower's country.
Q3) If an investor expect interest rates to go up, the investor should buy a long-term bond now.
A)True
B)False
Q4) Par value and face value on a bond generally are the same.
A)True
B)False
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Page 18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) A rights offering may be of limited value to shareholders.
A)True
B)False
Q2) Buggy Whip Manufacturing Company is issuing preferred stock yielding 8%. Selten Corporation is considering buying the stock. Assume that Buggy's tax rate is 0% due to continuing heavy tax losses, and Selten's tax rate is 21%. What is the after-tax preferred yield for Selten? Assume the tax rate on dividends is 15%.
A) 7.22%
B) 5.33%
C) 7.64%
D) 8.00%
Q3) Under normal operating conditions, the board of directors is elected by
A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the options are true.
Q4) Preferred stock generally has a lower after-tax cost than debt to the corporation.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) A firm may repurchase its own stock in the market because A) it will increase the stockholders' wealth.
B) the firm's stock is temporarily depressed.
C) it provides positive informational content.
D) all of these options are correct.
Q2) The "marginal principle of retained earnings" states that corporate investment should provide a return equal to or higher than what a stockholder could earn.
A)True
B)False
Q3) The dividend payout ratio is the dividend divided by the stock price.
A)True
B)False
Q4) Dobson's Auto earned $500,000 last year and had a 20% dividend payout ratio. How much did the firm add to its retained earnings?
A) $325,000
B) $425,000
C) $250,000
D) $400,000
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Generally speaking, convertible bonds reverse the risk-return trade-off that applies to most investments.
A)True
B)False
Q2) A convertible bond is currently selling for $970. It is convertible into 15 shares of common stock that presently sell for $50 per share. The conversion premium is
A) $90.
B) $220.
C) 57 shares.
D) 13 shares.
Q3) Most corporations include call provisions in agreements relating to the issue of warrants.
A)True B)False
Q4) The conversion price divided into the market value of a convertible bond provides the conversion ratio.
A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Synergy effect is said to happen when the merged companies are able to work together and eliminate some of the repeated divisional tasks, proving that the company is better off being merged.
A)True
B)False
Q2) Stockholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.
A)True
B)False
Q3) The "two-step buyout" procedure allows the acquiring firm to pay a lower total price than if a single offer is made.
A)True
B)False
Q4) Which of the following types of mergers decreases competition?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
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Chapter 21: International Financial Management
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Sample Questions
Q1) The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC).
\[\begin{array} { l l }
\text { Spot } & \$ 0.03112 / \mathrm { LC } \\
3 \text {-month forward } & \$ 0.03117 / \mathrm { LC } \\
6 \text {-month forward } & \$ 0.03118 / \mathrm { LC } \end{array}\]
What was the approximate discount or premium on a three-month forward for LC?
A) 0.643% premium
B) 0.013% premium
C) 0.013% discount
D) 0.643% discount
Q2) Which of the following hedging strategies is not used to minimize transaction exposure?
A) The Eurobond market
B) The forward exchange market
C) The money market
D) The currency futures market
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