Financial Analysis
Practice Exam
Course Introduction
Financial Analysis is a comprehensive course that introduces students to the key concepts and techniques used to evaluate the financial performance and health of businesses. The course covers the interpretation of financial statements, ratio and trend analysis, cash flow assessment, and forecasting. Students learn to analyze profitability, liquidity, solvency, and operational efficiency, enabling them to make informed business decisions. Through practical exercises and real-world case studies, students develop critical skills in examining financial data, identifying strengths and weaknesses, and applying analytical tools to support strategic planning and investment decisions. The course is designed for those seeking a strong foundation in financial evaluation for careers in accounting, finance, or management.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which one of the following statements is correct concerning the organizational structure of a corporation?
A)The vice president of finance reports to the chairman of the board.
B)The chief executive officer reports to the board of directors.
C)The controller reports to the president.
D)The treasurer reports to the chief executive officer.
E)The chief operations officer reports to the vice president of production.
Answer: B
Q2) The articles of incorporation:
A)establish the rights of the shareholders.
B)are rules which apply only to limited liability companies.
C)address only those issues related to a corporation's managers and directors.
D)establish the compensation to be granted to senior managers.
E)include only the name,purpose,and intended life of the corporation.
Answer: A
Q3) What should be the primary goal of a financial manager of a corporation? Why?
Answer: The primary goal of financial management is to maximize the current market value of the outstanding stock.This goal focuses on enhancing the returns to current stockholders who are the owners of the firm.
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Page 3
Chapter 2: Financial Statements and Cash Flow
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Q1) _____ refers to the difference between a firm's current assets and its current liabilities.
A)Operating cash flow
B)Capital spending
C)Net working capital
D)Cash flow from assets
E)Cash flow to creditors
Answer: C
Q2) _____ refers to the changes in net capital assets.
A)Cash flow from assets
B)Net working capital
C)Cash flow from investing
D)Operating cash flow
E)Cash flow to creditors
Answer: C
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Page 4
Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) The Top Shop has net income of $240 and total equity of $2,000.The debt-equity ratio is 1 and the plowback ratio is 40 percent.What is the internal growth rate?
A)2.46%
B)3.00%
C)4.92%
D)5.88%
E)6.00%
Answer: A
Q2) Rosario's has sales of $114,500,total debt of $46,300,total equity of $68,400,and a profit margin of 5 percent.What is the return on assets?
A)5.21%
B)4.99%
C)7.39%
D)8.37%
E)19.97%
Answer: B
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Page 5
Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Which type(s)of loan can be repaid with annuity payments?
A)Pure discount loan
B)Both pure discount and interest-only loans
C)Amortized loan
D)Both interest-only and amortized loans
E)Interest-only loan
Q2) Annuities with payments occurring at the end of each time period are called _____,whereas annuities with payments occurring at the beginning of each time period are called _____.
A)ordinary annuities;early annuities
B)ordinary annuities;annuities due
C)annuities due;ordinary annuities
D)straight annuities;deferred annuities
E)deferred annuities;straight annuities
Q3) What is the effective annual rate of 16.5 percent,compounded continuously?
A)16.96 B)17.43%
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Chapter 5: Interest Rates and Bond Valuation
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Q1) Identify at least five factors that affect the yield on a corporate bond.For each factor identified,explain how the factor affects the prices of bonds with varying maturities.
Q2) Which of the following items are generally included in a bond indenture?
I.Sinking fund requirements
II.Security description
III.Bid and asked prices
IV.Total amount of bonds issued
A)I and II only
B)II and IV only
C)II,III,and IV only
D)I,II,and IV only
E)I,II,III,and IV
Q3) Which one of the following statements concerning bonds is correct?
A)Bondholders are generally granted voting rights.
B)Zero coupon bonds are sold at par.
C)The repayment of bond principal is tax-deductible.
D)A "bellwether" bond is the yield on the shortest outstanding Treasury security.
E)Both corporate and Treasury bonds are quoted as a percentage of par.
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Chapter 6: Stock Valuation
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Sample Questions
Q1) Tall Tree Timber has net income of $167,000 for the year with 60,000 shares of stock outstanding.Big Trees is a similar firm with similar growth opportunities and it has 75,000 shares of stock outstanding with a market price of $32.20 a share and earnings per share of $1.60.What is the estimated value of Tall Tree Timber?
A)$1,603,210
B)$3,360,875
C)$6,440,000
D)$2,087,500
E)$4,008,325
Q2) Shares of a common stock offer an expected total return of 12 percent.What is the dividend yield if the dividend increases by 3 percent annually?
A)15.00%
B)3.00%
C)9.00%
D)8.74%
E)15.36%
Q3) Identify three factors that are likely to affect the value of a firm's PE ratio and explain the relative value that each factor must assume to produce a higher PE.
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8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) An investment is acceptable if its average accounting return (AAR):
A)exceeds the target AAR.
B)is less than the target AAR.
C)exceeds the firm's return on equity (ROE).
D)is less than the firm's return on assets (ROA).
E)is equal to zero.
Q2) A project requires an initial investment of $21,600 and will produce cash inflows of $4,900,$14,200,and $8,700 over the next three years,respectively.What is the project's NPV at a required return of 14 percent?
A)-$287.22
B)-$503.06
C)$6,200.00
D)$21,096.94
E)$42,696.94
Q3) If the net present value of a project is positive (non-zero),then the project's:
A)PI will be less than 1.
B)internal rate of return will exceed its required rate of return.
C)costs exceed its benefits.
D)discounted payback period will exceed the life of the project.
E)payback period must equal the life of the project.
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) A project will produce operating cash flows of $42,000 a year for four years.During the life of the project,inventory will be lowered by $12,000,accounts receivable will increase by $15,000,and accounts payable will increase by $10,000.The project requires $120,000 of new equipment that will be depreciated straight-line to a zero book value over four years.At the end of the project,net working capital will return to its normal level and the equipment will be sold for $25,000,after taxes.What is the net present value given a required return of 14 percent?
A)$13,483.48
B)$18,117.05
C)$20,033.36
D)$12,037.86
E)$14,322.49
Q2) Which one of these statements related to depreciation is correct for a firm with taxable income of $121,600 and aftertax income of $74,200?
A)Depreciation increases the net book value of the firm's assets.
B)Depreciation in a non-cash expense that increases the firm's cash flows.
C)Depreciation lowers the firm's net income but does not affect its cash flows.
D)Depreciation has no effect on either the firm's net income or its cash flows.
E)Depreciation decreases both the firm's net income and its cash flows.
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10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) To determine the lowest net present value that is likely to occur given a range of values for all of the relevant variables,a firm should conduct which type of analysis?
A)Sensitivity
B)Scenario
C)Present value break-even
D)Financial break-even
E)Cash flow break-even
Q2) Which method best attempts to model all of the uncertainties of the real world?
A)Scenario analysis
B)Financial break-even analysis
C)Accounting break-even analysis
D)Sensitivity analysis
E)Monte Carlo simulation
Q3) If the option to abandon is ignored,the:
A)initial cash flow of a project may be overstated.
B)net present value of a project may be understated.
C)net present value of a project will be stated at a time other than Time 0.
D)net present value of a project will be overstated.
E)initial cash flow of a project will be understated.
Page 11
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Chapter 10: Risk and Return Lessons From Market History
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Q1) For our historical comparison purposes,how are large-company stocks defined?
A)Stocks of the lowest 20 percent of the firms listed on the NYSE based on market capitalization
B)Stocks with average annual returns that exceed the average annual return of the U.S.Treasury bill
C)Any firm that has been listed on the NYSE for 40 years or more
D)Stocks of firms included in the S&P 500 composite index
E)Stocks of firms that employ over 5,000 employees
Q2) The return earned in an average year over a multi-year period is called the _____ average return.
A)arithmetic
B)standard
C)variant
D)geometric
E)real
Q3) How does the payment of a dividend affect the total return on a stock?
Q4) Suppose an investor made this statement: "I will be perfectly happy with my investments if I can just earn a three percent real rate of return each year." Based on this statement,what can you determine about this investor?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Sample Questions
Q1) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q2) The systematic risk of the market is assigned a:
A)beta of 1.
B)beta of 0.
C)standard deviation of 1.
D)standard deviation of 0.
E)variance of 1.
Q3) The standard deviation of a portfolio will tend to increase when:
A)the portfolio concentration in a single cyclical industry increases.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
C)a risky asset in the portfolio is replaced with U.S.Treasury bills.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.
Q4) If an optimal portfolio of risky assets can be identified,why should investors mix that portfolio with risk-free securities?
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) International Products is a conglomerate with operations worldwide.The firm uses its firm-wide WACC as the discount rate for all of its products.In five words or less,identify the key flaw in this procedure.
Q2) The Flying Dove has 1,200 bonds outstanding with a $1,000 par value,a 7 percent coupon,12 years to maturity,semiannual interest payments,and a market price equal to 102 percent of par.The firm also has 47,000 shares of common stock outstanding at a price per share of $38 and a beta of 1.3.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 34 percent.What is the firm's WACC? (When computing WACC,round your cost of debt to 4 decimal places when expressed as a decimal value. )
A)9.58%
B)10.51%
C)9.82%
D)9.37%
E)10.38%
Q3) Explain the logic that underpins the statement: "The discount rate of a project should be the expected return on a financial asset of comparable risk."
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14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.
A)stable
B)weak
C)semistrong
D)strong
E)open
Q2) Which one of these terms is used to describe a market where investors draw conclusions from insufficient data?
A)Representativeness
B)Synergy
C)Conservatism
D)Arbitrage
E)Independent deviations from rationality
Q3) The efficient market hypothesis supports which one of these statements?
A)Market prices do not reflect the underlying value of securities.
B)Managers can profitably speculate in foreign currency.
C)Financial managers can time stock and bond sales.
D)Managers cannot boost stock prices through creative accounting.
E)Market prices are uncaused.
Page 15
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Chapter 14: Capital Structure: Basic Concepts
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Q1) Financial analysts value items in terms of their:
A)useful life.
B)tax benefits.
C)original cost.
D)depreciated value.
E)market value.
Q2) In an EPS-EBI graphical relationship,the debt line and the no debt line intersect.Which of these are true at the intersection point?
I.The advantages of debt outweigh the disadvantages of debt.
II.The aftertax earnings of both capital structures are equal.
III.The earnings per share for both capital structures are equal.
IV.There is no advantage or disadvantage to debt.
A)I and III only
B)II and IV only
C)III and IV only
D)I,II,and III only
E)II,III,and IV only
Q3) Explain homemade leverage and why it matters.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Q1) How might business risk affect the capital structure of a firm?
Q2) Firms on the brink of bankruptcy often work with their creditors to avoid a bankruptcy filing.Identify three options that a firm's creditors can offer a distressed firm to help that firm avoid filing for bankruptcy protection.Explain why creditors may be willing to provide these options.
Q3) Conflicts of interest between stockholders and bondholders are known as:
A)trustee costs.
B)financial distress costs.
C)dealer costs.
D)agency costs.
E)underwriting costs.
Q4) In a world with corporate taxes,MM theory implies that that all firms should:
A)maintain a constant value.
B)decrease in value as the leverage of the firm increases.
C)choose an all-debt capital structure.
D)select the capital structure that maximizes the firm's WACC.
E)select the capital structure that equates the marginal cost of debt with the marginal benefits.
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Chapter 16: Dividends and Other Payouts
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Q1) A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a(n):
A)extra cash dividend.
B)special dividend.
C)regular cash dividend.
D)liquidating dividend.
E)share repurchase.
Q2) Edie's has 14,500 shares of stock outstanding with a par value of $1 per share and a market value of $7.22 a share.The company just announced a 1-for-3 reverse stock split.What will be the value of the common stock account after the split?
A)$4,833
B)$18,850
C)$43,500
D)$11,154
E)$14,500
Q3) It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy.Explain the logic behind this conclusion.Next,describe three real-world factors that may cause one dividend policy to be preferable to another.
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Page 18
Chapter 17: Options and Corporate Finance
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Q1) Consider a firm viewed in terms of put options.Given this view,which one of these statements is correct?
A)Stockholders sold a put on the firm to the bondholders.
B)Bondholders own the firm.
C)Bondholders and stockholders co-own the firm in equal shares.
D)Bondholders wrote a put on the firm to the stockholders.
E)The stockholders' position is equal to the value of the firm plus the value of the put.
Q2) British Imports has a stock price of $18.70 a share.The $20 put is priced at $1.65.The intrinsic value of the put is ____ and the time value is _____.
A)$0;$1.65
B)$1.65;$0
C)$1.30;$.35
D)$.35;$1.30
E)$2.95;-$1.65
Q3) What would you expect to occur if a call were to sell for less than its intrinsic value? Ignore taxes and transaction costs.
Q4) What is a protective put and what does it protect?
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Chapter 18: Short-Term Finance and Planning
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Q1) Assume you are the new financial officer of a manufacturing firm.What should you consider when deciding which type of financing policy- restrictive,flexible,or compromise - you should pursue?
Q2) Assume Fido's Pets has a flexible short-term financing policy and no unusual or one-time expenditures are expected.The firm's sales vary by as much as 15 percent from one season to another.During the year,or part of the year,the firm will:
I.invest in some short-term marketable securities.
II.encounter a cash-out.
III.have sufficient funding for all of its total assets.
IV.require some short-term financing.
A)I and IV only
B)II and IV only
C)II and III only
D)I and III only
E)I,II,and IV only
Q3) Is it possible to have a negative cash cycle? If not,why not? If so,how can this occur?
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Page 20
Chapter 19: Raising Capital
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Q1) Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.
Q2) The Corner Market is offering 60,000 shares of stock to the public in a general cash offer.The offer price is $32 a share and the underwriter's spread is 7.5 percent.The administrative costs are estimated at $310,000.How much will Hilltop Market net from this stock offering assuming the issue is completely sold?
A)$1,370,800
B)$1,346,000
C)$1,466,000
D)$1,610,000
E)$1,800,000
Q3) The Golden Nickel just arranged a 2-year direct business loan.Which one of the following terms matches this loan arrangement?
A)Seasoned offer
B)Rights offer
C)Private placement
D)Shelf loan
E)Term loan
Q4) Why might an eligible firm choose a Rule 415 registration of securities?
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Chapter 20: International Corporate Finance
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Q1) Which of the following statements are correct?
I.The usage of forward rates can help reduce the short-run exposure to exchange rate risk.
II.Accounting translation gains are recorded on the income statement as other income.
III.The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations.
IV.Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.
A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)I and II only
Q2) Do you feel the various forms of parity will be more or less likely to exist in the markets five years from now? Explain the logic behind your "more" or "less" answer.
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22
Chapter 21: Mergers and Acquisitions Web Only
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Q1) The Glass Works has a market value of $311,000.Creative Pottery has 25,000 shares of stock outstanding at a price per share of $40.Creative Pottery is acquiring The Glass Works in exchange for 8,000 shares of Creative Pottery stock.The merger is expected to create $25,000 of synergy.What will be value received by The Glass Works shareholders?
A)$320,000
B)$324,608
C)$323,879
D)$319,600
E)$325,701
Q2) Explain a golden parachute and justify why a firm's shareholders may be willing to agree to such an arrangement.
Q3) Which one of these should be the primary appeal of unused debt capacity to a bidder firm?
A)Ability to borrow additional funds to increase management bonuses
B)Source of funding for negative net present value projects
C)Increased funding for the payment of unsustainable dividends
D)Tax savings resulting from increased interest expense on additional debt
E)Debt funding for a golden parachute
Q4) Explain the pros and cons of a cash acquisition over a stock acquisition.
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