Financial Analysis Practice Questions
Course Introduction
Financial Analysis provides students with the fundamental tools and techniques needed to assess the financial health and performance of businesses. The course covers the interpretation of financial statements, ratio analysis, cash flow evaluation, and the use of financial data in decision-making. Emphasis is placed on understanding the implications of financial metrics, applying analytical frameworks to real-world scenarios, and developing critical thinking skills necessary for effective financial planning and investment decisions. Students will learn how to identify strengths, weaknesses, opportunities, and risks within an organizations financial context.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) The secondary market characteristically has had stable prices over the past 20 years.
A)True
B)False
Answer: False
Q2) Increased productivity due to technology has
A) increased corporations' reliance on debt for capital expansion needs.
B) created larger asset values on the firm's historical balance sheet.
C) made it cheaper (in terms of interest costs) for firms to borrow money.
D) helped to keep corporate costs in check.
Answer: D
Q3) In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States.
A)True
B)False
Answer: True
Q4) Real Capital is composed of long-term plant and equipment.
A)True
B)False Answer: True
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Chapter 2: Review of Accounting
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Sample Questions
Q1) An increase in a liability account represents a source of funds on the cash flow statement.
A)True
B)False
Answer: True
Q2) Which of the following is not a primary source of capital to the firm?
A) Assets
B) Common stock
C) Preferred stock
D) Bonds
Answer: A
Q3) Cash flow is equal to earnings before taxes minus depreciation.
A)True
B)False
Answer: False
Q4) Book value per share is of greater concern to the financial manager than market value per share.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Asset utilization ratios measure the returns on various assets such as return on total assets.
A)True
B)False
Answer: False
Q2) Financial ratios are used to weigh and evaluate the operational performance of the firm.
A)True
B)False
Answer: True
Q3) If Turnpoint Inc. has net income of $400,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000, what is their ROE?
A) Between 13-14%
B) Between 10-11%
C) Between 14-15%
D) None of these
Answer: A
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) A higher growth rate in sales will often require more external funds.
A)True
B)False
Q2) Sales projections and the ability to accurately predict the future have a large impact on cash flow targets.
A)True
B)False
Q3) BHS Inc. determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales and spontaneous liabilities are 40% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A) $3,600
B) $5,200
C) $4,000
D) BHS is in balance and no new funds are needed.
Q4) The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.
A) fixed costs
B) variable costs
C) marginal costs
D) semi-variable costs
Q2) Management should tailor the use of leverage to meet its own risk-taking desires.
A)True
B)False
Q3) Loretta & Nieces fixed costs are $425,000, including $25,000 of depreciation expense. The price of each unit sold is $120, and the variable cost per unit is $60. How many units must the firm sell to reach the cash break-even point?
A) less than 7,333 units
B) 7,333 units
C) More than 7,333 units
D) not enough information has been provided to determine the cash break-even point
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) During an economic "boom" period, a shortage of low-cost financing alternatives exists.
A)True
B)False
Q2) Working capital management primarily involved long-term planning.
A)True
B)False
Q3) Firms with predictable cash-flow patterns should assume relatively low levels of risk.
A)True
B)False
Q4) The term structure of interest rates is influenced by
A) inflation.
B) money supply.
C) Federal Reserve activities.
D) all of these are true
Q5) Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) How would electronic funds transfer affect the use of "float"?
A) Increase its use somewhat
B) Decrease its use somewhat
C) Virtually eliminate its use
D) Have no effect on its use
Q2) Eurodollar certificate of deposits
A) are not marketable investments.
B) are used by banks to loan out funds to anyone seeking dollars.
C) pay interest rates usually lower than the rates on U.S. treasury bills.
D) are European currencies deposited into international U.S. branch banks.
Q3) The economic order quantity helps a firm determine the most efficient order size to place.
A)True
B)False
Q4) The most subjective and also significant segment of the 5 C's of credit for giving final approval is
A) capacity.
B) collateral.
C) character.
D) conditions.
Page 9
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Bank loans to business firms
A) are usually short-term in nature.
B) are preferred by the banker to be self-liquidating.
C) may require compensating balances.
D) all of these.
Q2) The reasons why a company may choose to pledge accounts receivable are all of the following except:
A) lower interest rate
B) borrowing capacity fluctuates with A/R
C) provides another source of financing for companies with lower credit ratings
D) all of these are reasons for pledging accounts receivable
Q3) The sale of asset-backed securities can sometimes enable the issuing firm to acquire lower-cost funds than it normally would receive from a bank loan or bond offering.
A)True
B)False
Q4) What is the effective rate of interest if the loan is a discounted loan with a 10 percent compensating balance?
Q5) Quarterly payments.
Q6) Monthly payments.
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?
A) Present value of an annuity
B) Present value of a single amount
C) Future value of an annuity
D) None of these
Q2) When the inflation rate is zero, the present value of $1 is identical to the future value of $1.
A)True B)False
Q3) In determining the future value of a single amount, one measures
A) the future value of periodic payments at a given interest rate.
B) the present value of an amount discounted at a given interest rate.
C) the future value of an amount allowed to grow at a given interest rate.
D) the present value of periodic payments at a given interest rate.
Q4) The time value of money concept becomes less critical as the prime rate increases.
A)True B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Which is a characteristic of the price of preferred stock?
A) Since preferred stock dividends are fixed, they are tax deductible.
B) Because preferred stock has no maturity, the price analysis is similar to that of debt.
C) Preferred stock is valued as a perpetuity.
D) None of these.
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 longer the time to maturity:
A) the greater the price increase from an increase in interest rates.
B) the less the price increase from an increase in interest rates.
C) the greater the price increase from a decrease in interest rates.
D) the less the price decrease from a decrease in interest rates.
Q4) Risk premiums are higher for riskier securities, but the risk premium cannot be higher than the required return.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Market values rather than book values should be used for determining the optimal capital structure, though in practice, book value is commonly used.
A)True
B)False
Q2) Which is not true about debt financing and the weighted average cost of capital?
A) Debt is usually the cheapest source of financing.
B) As the level of debt increases beyond the optimum capital structure, the cost of capital increases.
C) No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital.
D) None of these.
Q3) All of the following are important considerations for minimizing the cost of capital except:
A) future inflation rates
B) industry debt ratios
C) future economic conditions
D) current coupon rates of outstanding debt
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow:
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) The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for 3 years. The project's cost is $55,000. If the asset is part of the 3-year MACRS category (33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1?
A) $16,800
B) $15,100
C) $22,671
D) $16,667
Q4) A tax loss on the sale of a depreciable asset used in business or trade may be written off against income.
A)True
B)False
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Page 14
Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Simulation models allow the analyst to test possible changes in the variables used in the model.
A)True
B)False
Q2) Combining assets with highly correlated returns will greatly reduce portfolio risk.
A)True
B)False
Q3) A basic assumption in financial theory is that most investors and managers are risk seekers.
A)True
B)False
Q4) The expected value is a weighted average of the outcomes multiplied by their probabilities.
A)True
B)False
Q5) The coefficient of correlation represents the standard deviation divided by the expected value.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The net supplier of funds is the U.S. Treasury and other agencies of the government.
A)True
B)False
Q2) Federal National Mortgage Association buys mortgage loans from local lenders, bundles them together, and resells them as securities.
A)True
B)False
Q3) Fannie Mae, Freddie Mac, and Sallie Mae are private stockholder-owned corporations whose stocks are traded on the NYSE.
A)True
B)False
Q4) Foreign investors have preferred to invest in the United States due to all but one of the following reasons:
A) less stringent regulation of securities markets.
B) political stability of the U.S. government.
C) the U.S. dollar is the world's international currency.
D) all of these are reasons that foreign investors prefer to invest in the United States.
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.
A)True
B)False
Q2) The issuing company desires to have as little underpricing as possible.
A)True
B)False
Q3) Large well-established investment bankers often distribute new issues on a best-efforts basis.
A)True
B)False
Q4) The investment banker's function involves all of the following except A) take a portion of the risk in the distribution of an issue.
B) always insure a company a given amount of equity can be sold so that long-range financial planning can be made accurately.
C) make a market by buying and selling a security to insure a liquid market.
D) contract 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) Which of the following is not a form of yield on a bond?
A) coupon rate (nominal yield)
B) current yield
C) dividend yield
D) yield to maturity
Q2) Which of the following does not represent a tax implication in the bond refunding decision?
A) Call premium
B) Cost savings in lower interest rates
C) Underwriting costs of new issue
D) All of these have tax implications.
Q3) Bonds may be recalled only if there is a specific call provision in the bond.
A)True
B)False
Q4) When interest rates rise, bond refunding becomes quite popular.
A)True
B)False
Q5) If you expect interest rates to go up, you should buy a long-term bond now.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 30% would receive an after-tax preferred yield of:
A) 10.2%
B) 7.7%
C) 8.1%
D) 9.3%
Q2) The floating rate feature on preferred stock causes more volatility in its price. A)True
B)False
Q3) Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) Which of the following is not true about the life cycle growth and dividend policy?
A) In the maturity stage, a firm usually pays moderate to high dividends.
B) In the development stage, a firm usually pays stock dividends and some low cash dividends.
C) In the expansion stage, a firm pays low to Intermediate cash dividends and occasionally may have stock splits.
D) In the growth stage, a firm pays stock dividends.
Q2) Dividend reinvestment plans provide the stockholder an opportunity to buy additional shares of stock with the cash dividend paid by the company.
A)True
B)False
Q3) A firm may repurchase stock in the market because
A) it will increase the stockholder's wealth.
B) the firm has inadequate capital budgeting alternatives.
C) it provides positive informational content.
D) all of these
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20
Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Convertible bonds offer minimal risk of loss to the investor due to their floor value.
A)True
B)False
Q2) Conversion price is usually set _______ the prevailing market price of the common stock at the time the bond issue is sold.
A) at
B) below
C) above
D) one half
Q3) A warrant which does not expire until several years in the future which provides its owner the opportunity to buy a stock. If the stock price rises, the warrant will probably sell for
A) less than its intrinsic value.
B) exactly its intrinsic value.
C) more than its intrinsic value.
D) less than or equal to its intrinsic value.
Q4) Warrants are considered only in the computation of diluted earnings per share.
A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Vertical integration is usually prohibited or severely restricted by government antitrust regulations.
A)True
B)False
Q2) The Prad Corporation is considering a merger with the Stone Company which has 500,000 outstanding shares selling for $30. An investment banker has advised that to succeed in its merger Prad Corp. would have to offer $45 per share for Stone's stock. Prad Corp. stock is selling for $25. How many shares of Prad Corp. stock would have to be exchanged to acquire all of Stone's stock?
A) 266,667
B) 600,000
C) 900,000
D) none of these
Q3) A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a
A) consolidation.
B) holding company.
C) conglomerate.
D) merger.
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Page 22
Chapter 21: International Financial Management
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Sample Questions
Q1) The Purchasing Power Parity Theory states that currency exchange rates tend to vary inversely with their respective purchasing powers in order to provide similar purchasing powers.
A)True
B)False
Q2) You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is now 12 pesos to the dollar. How many dollars will you receive?
A) $3025.00
B) $24.16
C) $264.00
D) Not enough information to tell.
Q3) A firm exposed to exchange rate risk can hedge its risk by
A) using the forward exchange market.
B) borrowing in international money markets.
C) utilizing foreign currency futures markets.
D) all of these.
Q4) The most widely used currency in the Eurobond market is the euro.
A)True
B)False
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