Financial Analysis
Practice Exam
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the skills and techniques necessary to evaluate the financial health and performance of businesses. The course covers the principles of analyzing financial statements, including balance sheets, income statements, and cash flow statements. Students will learn to calculate and interpret key financial ratios, assess profitability, liquidity, solvency, and operational efficiency, and use these insights for informed decision-making. Real-world case studies, scenario analysis, and forecasting methods are integrated into the curriculum, enabling students to apply theoretical knowledge in practical contexts relevant to corporate finance, investment, and strategic planning.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) Irrational exuberance is when companies have stock that is undervalued.
A)True
B)False Answer: False
Q2) New issues are sold in the secondary market.
A)True
B)False
Answer: False
Q3) Timing is not a particularly important consideration in financial decisions.
A)True
B)False
Answer: False
Q4) 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
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Total assets of a firm are paid for with liabilities and stockholders' equity.
A)True
B)False
Answer: True
Q2) Gerry Co. has a gross profit of $1,200,000 and depreciation expense of $400,000. Selling and administrative expense is $250,000. Given that the tax rate is 21 percent, compute the cash flow from operations for Gerry Co.
A) $834,500
B) $550,000
C) $330,000
D) None of the options
Answer: A
Q3) Liquidity means that the items that can convert to cash show up as cash on the balance sheet.
A)True
B)False
Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) LIFO and FIFO are two ways that companies following the generally accepted accounting principles value their inventory. One method may be preferred over the other during inflationary time periods, which results in different profits, even though both methods are legal to use.
A)True
B)False
Answer: True
Q2) During inflation, replacement cost accounting will
A) increase the value of assets.
B) lower the debt-to-asset ratio.
C) reduce incomes.
D) All of the options
Answer: D
Q3) Industries most sensitive to inflation-induced profits are:
A) cyclical products like lumber, copper, and rubber
B) food products
C) industries which inventory is a significant percentage of sales and profits.
D) all of the above.
Answer: A
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be cumulative amount of loan at the end of January?
A) $4,500
B) $10,000
C) $12,000
D) $0
Q2) The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
Q3) In using a systems approach to financial planning, it is necessary to develop a A) pro forma income statement.
B) cash budget.
C) production plan.
D) All of the options are true.
Q4) The balance sheet represents declining changes in the corporation over time.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) "Operating leverage" is the use of fixed costs to magnify returns at high levels of operation.
A)True
B)False
Q2) Operating income is not the same thing as earnings before interest and taxes (EBIT).
A)True
B)False
Q3) Which of the following is true about the concept of leverage?
A) At the break-even point, operating leverage is equal to zero.
B) Combined leverage measures the impact of operating and financial leverage on EBIT.
C) Financial leverage measures the impact of fixed costs on earnings.
D) None of the options are true.
Q4) Contribution margin represents the amount of sales left over after fixed costs are paid.
A)True B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Supply chain management has little impact on financial performance and is primarily a marketing and management concept.
A)True
B)False
Q2) Normally, permanent current assets should be financed by
A) long-term funds.
B) short-term funds.
C) borrowed funds.
D) internally generated funds.
Q3) As the economy moves through a business cycle, which of the following "term structure of interest rates" theories dominates the shape of the yield curve.
A) The expectations hypothesis.
B) The market segmentation theory.
C) The liquidity premium theory.
D) None of these theories dominate the shape of the yield curve.
Q4) Generally, a downward sloping yield curve indicates a forthcoming economic boom.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample
Questions
Q1) Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is Waldron Inc.'s expected return on investment?
A) 30%
B) 25%
C) 5%
D) 0.8%
Q2) For most firms, the primary motive for holding cash is the transaction motive.
A)True
B)False
Q3) Which of the following securities typically trades on a discount basis?
A) Treasury notes
B) Treasury bills
C) Money market funds
D) Certificates of deposit
Q4) Lower ordering costs would tend to increase a firm's economic order quantity.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his approximate effective rate of interest?
A) 9.3%
B) 6.7%
C) 11.7%
D) 1.7%
Q2) Which of the following is NOT evident during a credit crunch?
A) The Fed tightens the money supply.
B) There are higher business requirements for funds.
C) A decrease in interest rates occurs.
D) Massive withdrawals from savings deposits occur.
Q3) It is easier for small firms to obtain financing through bank loans than through the commercial paper market.
A)True
B)False
Q4) General Motors Acceptance Corporation (GMAC) is one of the biggest issuers of asset-backed securities.
A)True B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The interest factor for the present value of a single sum is equal to (1 + i)/i.
A)True
B)False
Q2) Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son's education 10 years from now. He calculates that he will need $21,598 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal? Choose the closest answer.
A) 10%
B) 8%
C) 4%
D) 1%
Q3) If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a "future value of $1" table.
A)True
B)False
Q4) The formula PV = FV(1 + n)<sup>i</sup> will determine the present value of $1.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) A common stock that pays a constant dividend can be valued as if it were
A) a corporate bond.
B) a stock paying a growing dividend.
C) preferred stock.
D) a discount bond.
Q2) The value of a common stock is based on its A) past performance.
B) historic dividends.
C) current earnings.
D) value of future benefits to the holder.
Q3) The "risk premium" is primarily concerned with business risk, financial risk, and inflation risk.
A)True B)False
Q4) An increase in inflation will cause a bond's required return to rise. A)True B)False
Q5) Firms with an expectation for great potential tend to trade at low P/E ratios. A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth.
A)True
B)False
Q2) For a firm paying 5% for new debt, the higher the firm's tax rate
A) the higher the after-tax cost of debt.
B) the lower the after-tax cost of debt.
C) the after-tax cost is unchanged.
D) Not enough information to judge.
Q3) Expected cash dividends are $3.00, the dividend yield is 4%, flotation costs are 4% of price, and the growth rate is 3%. Compute the approximate cost of new common stock.
A) 7.00%
B) 7.2%
C) 6.9%
D) 4.2%
Q4) The out-of-pocket cost of common stock is a good approximation of the cost of common stock equity.
A)True B)False
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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) Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 25% combined tax bracket. What are the after-tax cash flows for the project?
A) A positive $17,500
B) A positive $19,000
C) A loss of $21,000
D) A positive $28,000
Q3) The modified internal rate of return (MIRR) is used to
A) help bridge the reinvestment assumption difference between NPV and IRR.
B) calculate a new discount rate using future value of the cash inflows and the original value of the investment.
C) give a more conservative outlook.
D) all of the answers are true.
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) A firm might be willing to accept high risk in a given investment if the portfolio effect (for the whole firm) is beneficial.
A)True
B)False
Q2) Which investment has the least amount of risk?
A) Standard deviation = $450, expected return = $4,500
B) Standard deviation = $600, expected return = $400
C) Standard deviation = $500, expected return = $800
D) Standard deviation = $400, expected return = $5,000
Q3) As the time horizon becomes shorter, more uncertainty enters the forecast. A)True
B)False
Q4) A "what if" simulation using a computer helps to
A) reduce the risk associated with a particular investment.
B) determine the effects of changes in certain variables.
C) increase the accuracy of the inputs.
D) make data entry more complicated.
Q5) The highest possible value for positive correlation is +1.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) One of the advantages of the BATS exchange is that it simply matches orders in a very fast pace.
A)True
B)False
Q2) The purpose of secondary trading is to
A) provide liquidity and competition between investments.
B) provide a market to issue securities not handled in primary trading.
C) provide jobs for brokers and dealers.
D) provide lower commissions than on the organized exchanges.
Q3) Commission rates for stock transactions are fixed as a result of the Securities Act Amendments of 1975.
A)True
B)False
Q4) Upon entering the capital markets, an investor might invest in common stocks, preferred stock, negotiable certificates of deposit, and convertible securities.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) One purpose of an underwriting syndicate is to distribute securities to the public. A)True
B)False
Q2) In order to avoid long-term dilution, a corporation should determine whether the necessary additional earnings from the issue are realistic relative to their historic A) profit margin.
B) times interest earned.
C) total asset turnover.
D) return on assets.
Q3) The investment banker's function involves all of the following EXCEPT
A) Taking a portion of the risk in the distribution of an issue.
B) Always ensuring a company that a given amount of equity can be sold so that long-range financial planning can be made accurately.
C) Making a market by buying and selling a security to ensure a liquid market.
D) Contracting to buy securities from the corporation and resell them to other security dealers and the public.
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) What discount rate is used in the net present value of the refunding decision?
A) The before-tax cost of the new debt
B) The after-tax cost of new debt
C) The weighted average cost of capital
D) The after-tax cost of total firm capital
Q2) Zero-coupon bonds are sold at a deep discount primarily because investors are not interested in owning them.
A)True
B)False
Q3) The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.
A)True
B)False
Q4) Which of the following bonds offers the most security to the bondholder?
A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bonds
D) Income bonds
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Under majority voting, any group of stockholders owning over 50 percent of the common stock may elect all of the directors.
A)True
B)False
Q2) The increasing sophistication of individual investors has decreased the role of institutional investors in the stock market.
A)True
B)False
Q3) The Nash Corp. is considering four investments. Which provides the highest after-tax return for Nash Corp. if it is in the 21% federal tax bracket? Assume the tax rate on dividends is 15%.
A) Treasury bonds at 4%
B) Corporate bonds at 7.5%
C) Municipal bonds at 7.25%
D) Preferred stock at 7.5%
Q4) The after-tax cost of debt is usually cheaper than issuing preferred stock to the corporation, all things being equal.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The Internal Revenue Service generally places a higher tax rate on long-term capital gains than it does upon ordinary or "qualified" dividends.
A)True
B)False
Q2) The marginal principle of retained earnings means that each potential project to be financed by retained earnings must
A) provide a higher rate of return than the stockholders can on their after-tax dividend income.
B) yield a return equal to or greater than the marginal cost of capital.
C) provide enough return to pay the corporation's marginal tax rate.
D) provide enough return to pay future dividends.
Q3) According to the "marginal principle of retained earnings," dividends are
A) the active variable.
B) the passive variable.
C) not usually paid.
D) a certain fixed percentage of earnings.
Q4) Stock splits are usually utilized to place stock in a lower-price trading range.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) A convertible bond carries an element of downside risk if its "floor value" were to exceed the price of the company's stock.
A)True
B)False
Q2) When the market price of a common stock rises above the conversion price, the convertible bond should always be converted immediately before it drops.
A)True
B)False
Q3) If a $1,000 par value convertible bond has a conversion ratio of 1 bond to 70 shares, the bond conversion price is $14.29.
A)True
B)False
Q4) Warrants are similar to convertible debt in that they give the warrant holder the right to acquire common stock.
A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Leveraged takeovers occur to firms that have an unusually large cash to total assets position.
A)True
B)False
Q2) Which of the following is NOT a method of avoiding a takeover?
A) Increasing the firm's cash level
B) Moving corporate offices to advantageous states
C) Staggering the election of boards of directors
D) Buying back shares
Q3) A "takeover tender offer" lets a company attempt to acquire a target firm against its will.
A)True
B)False
Q4) An example of horizontal integration is if Macy's and JC Penney were to merge.
A)True
B)False
Q5) Horizontal integration is usually prohibited or severely restricted by government antitrust regulations.
A)True
B)False
22
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Chapter 21: International Financial Management
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Sample Questions
Q1) In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank.
A)True
B)False
Q2) An exporter is able to satisfy foreign demand for a product while avoiding long-term investment in that foreign country, although this method is considered riskier than all other alternatives.
A)True
B)False
Q3) Translation exposure occurs because of changes in foreign exchange rates. A)True
B)False
Q4) A forward exchange rate can be used to help establish the value of a currency at a future point in time.
A)True B)False
Q5) One benefit in joining the "Eurozone" was to have easy access to borrowing. A)True B)False
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