Financial Analysis Review
Questions
Course Introduction
Financial Analysis is a comprehensive course that introduces students to the fundamental concepts and techniques used to evaluate the financial health and performance of organizations. Through the systematic study of financial statements, ratio analysis, cash flow analysis, and trend evaluation, students will learn how to interpret and assess critical financial data for informed decision-making. The course emphasizes practical application by integrating real-world scenarios, case studies, and analytical frameworks commonly employed by financial analysts, investors, and managers. By the end of the course, participants will develop strong diagnostic skills essential for identifying strengths, weaknesses, risks, and opportunities within a companys financial structure.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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28 Chapters
2091 Verified Questions
2091 Flashcards
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) The two most important disciplines on which financial management relies are
A) accounting and production
B) accounting and marketing
C) economics and marketing
D) accounting and economics
Answer: D
Q2) Shareholder wealth is measured by the ____ of the shareholders' common stock holdings.
A) Book value
B) Market value
C) Historic value
D) Compound value
Answer: B
Q3) Explain the chain of command in a corporation.
Answer: The stockholders, who own a pro-rata share of the company, elect the board of directors. The board makes broad decisions affecting the direction of the company, leaving the day-to-day decisions to the corporate officers, who are elected by the board. Corporate officers are: the chairman of the board, the chief executive officer, the chief operating officer, chief financial officer, president, vice-president(s), treasurer and secretary.
Page 3
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Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) If an investor purchased 100 shares of Biggee stock for $30 per share, 6 months ago, and then sold the stock today for $33 per share, what was the investor's holding period return if a total of $1 per share in dividends was received over the 6 month period?
A) 10%
B) 27.1%
C) 17.1%
D) 13.3%
Answer: D
Q2) The difference between the bid price and the ask price on a security is the:
A) spread
B) value
C) asset factor
D) commission
Answer: A
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) If a firm's current ratio is 1.5,
A) its current liabilities exceed its current assets
B) it is possible for its quick ratio to be 2.0
C) it is possible for its quick ratio to be 1.0
D) its current assets equal its current liabilities
Answer: C
Q2) The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations than is the times interest earned ratio.
A) acid test
B) debt
C) fixed charge coverage
D) debt to equity
Answer: C
Q3) The best accounting-based measure of a firm's profitability is
A) gross profit margin
B) net profit margin
C) return on fixed assets
D) return on total assets
Answer: D
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Page 5
Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) In developing a firm's financial plan, the firm develops a strategic plan and an operational plan. What is the difference between a strategic plan and an operational plan?
Q2) In preparing a statement of cash flows, the ____ method involves adjusting net income to reconcile it to net cash flows from operating activities.
A) direct
B) indirect
C) accrual
D) none of the above
Q3) In the percent-of-sales forecasting method, which of the following is (are) assumed to increase proportionately with sales?
A) cash
B) accounts receivable
C) accounts payable
D) all of the above
Q4) Financial planning models have two classifications. What are they and how do they differ from each other?
Q5) Explain the cash flow generation process:
Q6) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Explain the concept of interest and compare it to rate of interest.
Q2) If a 16 year old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of 9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20 - 65) at 9%.
A) $442,014
B) $386,616
C) $1,767,995
D) $9,146
Q3) If your parents put $2,000 a year into an IRA account for you in each of your last 4 teenage years (age 16,17,18, and 19), how much would the IRA account have in it at your retirement 45 years later if the account earned 12% each year? (Assume end-of-year payments.)
A) $1,569,758
B) $ 68,613
C) $3,457,169
D) $1,148,958
Q4) Compare the difference between compound interest and simple interest.
Q5) What is the net present value rule?
Q6) Explain a perpetuity and list some investment vehicles that can be perpetuities.
Page 7
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Sample Questions
Q1) Equipment trust certificates are used mainly by
A) equipment manufacturers
B) oil drilling companies
C) state governments
D) trucking companies
Q2) What is the yield-to-maturity of a Viacom bond which is selling for $948.75 with 6 years to maturity and a 7% coupon?
A) 7.01%
B) 8.11%
C) 8.38%
D) 7.38%
Q3) The following is a bond quotation from The Wall Street Journal: IBM 10¼ 27 9.8 18 104 ½ -½
If the bond has a face (par) value of $1000, what was the market price?
A) $1025
B) $1045
C) $950
D) $980
Q4) List the restrictions that an indenture places on the borrower of long-term debt.
Page 8
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) What are some of the costs associated with new security offerings?
Q2) What is the rate of return to an investor in the stock of Bajo, Inc. if the current dividend of $0.80 is not expected to change in the foreseeable future? The current price of Bajo is $13.25.
A) 6.04%
B) 8.0%
C) 24.15%
D) 11.06%
Q3) Quantum, Inc. has 5.4 million shares outstanding and the firm's charter provides for cumulative voting. The company has a twelve-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed to ensure the election of one director?
A) 450,001
B) 415,386
C) 431,251
D) 425,421
Q4) What are the disadvantages of owning minority interest in a closely held corporation and how can this be overcome?
Q5) List the various rights of common stockholders.
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firm's beta?
A) 1.00
B) 1.14
C) 1.05
D) 1.16
MVS = $40(10,000,000) = $400,000,000
MVM = $60(2,000,000) = $120,000,000
Q2) Users of the CAPM should be aware of some of the problems in its practical application. These problems include which of the following?
A) estimating expected future market returns
B) determining the most appropriate measure of the risk- free rate
C) determining an asset's future beta
D) all of the above are problems in application of the CAPM
Q3) List the various risk elements that are considered when determining the risk premium.
Q4) Explain marketability risk and marketability premium.
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) List the steps that a firm uses in the capital budgeting process:
Q2) The value of resources used in an investment project should be measured in terms of their
A) acquisition cost
B) historical cost
C) opportunity cost
D) depreciated cost
Q3) Which of the following is not a major step in the capital budgeting process?
A) generating investment project proposals
B) estimating cash flows
C) analyzing the effect of a project on the firm's financial ratios
D) performing a project post-audit and review
Q4) A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that
A) few firms prepared formal cash flow estimates
B) the majority produced detailed cash flow projections
C) a majority estimated cash flows for a range of estimates
D) about 50 percent made comparisons between actual and projected cash flows.
Q5) What are the principles that should be applied when estimating cash flows for capital budgeting purposes?
11
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year. Should Sigma purchase this digger if its cost of capital is 12 percent?
A) Yes, NPV = $3,176
B) Yes, NPV = $5,084
C) Yes, NPV = $16,605
D) Yes, NPV= $19,084
Q2) The payback method is at best a crude measure of the risk of a project because it fails to consider the ____ of a project's returns.
A) liquidity
B) variability
C) timing
D) magnitude
Q3) Multiple internal rates of return can occur when there is (are):
A) large abandonment costs at the end of a project's life
B) a major shutdown and rebuilding of a facility sometime during its life
C) more than one sign change in the pattern of cash flows over a project's life.
D) all of the above are correct
Page 12
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) All of the following techniques are used to measure total project risk EXCEPT:
A) simulation analysis
B) profitability index
C) certainty equivalent approach
D) risk adjusted discount rate
Q2) Many firms combine net present value and payback when analyzing project risk. Which of the following statements is/are correct?
I. Both payback and net present value consider the frequency of cash flows.
II. Both payback and net present can be adjusted for risk.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) The net present value/payback approach is a useful approach when
A) screening projects characterized by rapid technological advances
B) cash flow estimates are known with certainty
C) the more risky cash flows occur during the startup period
D) None of the above
Q4) What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?
13
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Chapter 12: The Cost of Capital
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Sample
Questions
Q1) Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over the years have averaged (arithmetically) ____ percentage points ____ than the returns on Treasury bills.
A) 6 to 8, higher
B) 1 to 2, lower
C) 3 to 4, higher
D) 8 to 9, higher
Q2) What would be the weighted average cost of capital for Limp Linguini Noodle Makers, Inc. under the following conditions:
*The capital structure is 40% debt and 60% equity
*The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket.
*The firm's beta is 1.7
*The risk-free rate is 7% and the market risk premium is 6%
A) 15.12%
B) 18.7%
C) 17.2%
D) 12%
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Page 14
Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) The amount of permanent short-term debt, long-term debt, preferred stock, and common stock used to finance a firm defines the firm's
A) financial structure
B) capital structure
C) target capital structure
D) optimal financial structure
Q2) RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt. The firm's cost of equity is 14 percent and its cost of debt is 9 percent. If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40 percent, what is the market value of RoTek? Assume all net income is paid out as dividends.
A) $698,571
B) $814,286
C) $818,571
D) $55,800
Q3) There are many factors that influence a firm's business risk. List them.
Q4) List the factors that determine the specific capital structure for a multinational firm.
Q5) How do signaling effects impact the firm's capital structure decision?
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Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales. If management knows that Alpine's DOL is 1.5, what is its DFL?
A) 3.09
B) 2.06
C) 3.55
D) 1.67
Q2) To balance the operating and financial risks that are so variable for a multinational company, Nestle allows its foreign operating subsidiaries ____ operational flexibility and follows a ____ financing strategy.
A) decentralized, centralized
B) centralized, centralized
C) centralized, decentralized
D) decentralized, decentralized
Q3) A firm is said to be ____ if it is unable to meet its current obligations.
A) cash insolvent
B) bankrupt
C) free cash challenged
D) technically insolvent
Q4) What are the effects of leverage on shareholder wealth and the cost of capital?
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Chapter 15: Dividend Policy
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Sample Questions
Q1) The theoretical post-stock dividend price is equal to the pre-stock dividend price
A) multiplied by 1 minus the percentage stock dividend rate
B) multiplied by 1 plus the percentage stock dividend rate
C) divided by 1 minus the percentage stock dividend rate
D) divided by 1 plus the percentage stock dividend rate
Q2) A firm that employs a constant payout ratio dividend policy pays ____.
A) a constant (fixed) dollar dividend
B) out a certain percentage of each year's earnings
C) a constant quarterly dividend
D) low payout ratios if the company has low growth rates
Q3) Under dividend reinvestment plans, shareholders can automatically
A) reduce their taxable income
B) increase their cash inflows
C) use dividends to purchase additional shares
D) transfer from retained earnings accounts to equity accounts.
Q4) Why do firms feel that liquidity is desirable even though it may mean that the firm does not utilize the investment capability of cash? What other means does a firm use to take advantage of investment opportunities since cash must be kept on hand?
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Chapter 16: Working Capital Policy and Short-term Financing
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Sample Questions
Q1) With the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are financed with
A) long-term debt
B) short-term debt
C) equity funds
D) a and c
Q2) What is financial forecasting?
Q3) Factoring accounts receivable is done:
A) on a default basis
B) on a consignment basis
C) on an interest only basis
D) on a non-recourse basis
Q4) Runners Ink, Inc. had sales last year of $700,000 and 35 percent of its sales are for cash, with the remainder buying on terms of net 30 days. If the receivables conversion period is actually 38 days, what is Runners Ink's accounts receivable?
A) $72,877
B) $25,507
C) $47,370
D) none of the above
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) ____, which are similar to other checks except they are not payable on demand, are used primarily to provide for centralized control over payments authorized in field offices.
A) Preauthorized checks
B) Drafts
C) Mail depository transfer checks
D) Electronic depository transfer checks
Q2) The costs of a lockbox collection system include
A) foregone returns on the required compensating balances
B) service fees charged by the bank
C) increased bad-debt expenses
D) foregone returns on the required compensating balances and service fees charged by the bank
Q3) Drafts are:
A) payable on demand
B) legally paid on the third business day
C) requires the firm to keep large balances in its disbursement accounts
D) more expensive than checks
Q4) When and why is it best to use lockboxes? Explain when should alternative methods be used.
19
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Chapter 18: Management of Accounts Receivable and Inventories
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Sample Questions
Q1) The reorder point is
A) the lead time multiplied by the daily usage plus safety stock
B) the EOQ plus safety stock
C) the lead time multiplied by the annual usage
D) a product of daily usage and the lead time
Q2) Whirlwind Company sells to retail appliance stores on credit terms of net 30. Annual credit sales are $182,500,000 spread evenly throughout the year and its accounts average 20 days overdue. The firm's variable cost ratio is 0.70. Determine Whirlwind's average investment in receivables. (Assume 365 days per year an all calculations.)
A) $17,500,000
B) $25,000,000
C) $15,000,000
D) cannot be determined from the information provided
Q3) Increasing collection expenditures is likely to result in
A) a shorter average collection period
B) reduced bad-debt losses
C) higher accounts receivable balances
D) a shorter average collection period and reduced bad-debt losses
Q4) What are seasonal datings as it applies to credit terms?
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Chapter 19: Lease and Intermediate-term Financing
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Sample Questions
Q1) All of the following are disadvantages of leasing except A) difficulty in making property improvements
B) financial leases are non-cancelable
C) normally higher maintenance charges
D) generally higher cost than ownership
Q2) T. Goho (lessee) wishes to lease a $25,000 car for 5 years. First Union Bank (lessor) has agreed to finance this lease and estimated the car will have a salvage value of $10,000 at the end of the lease. If First Union expects to depreciate the car on a straight-line basis to a salvage value of $0, what monthly lease payments will T. Goho have to make, given that First Union requires a 12% annual rate of return (assume a monthly interest rate of 1%)? Assume a marginal tax rate of 40%, and payments at the beginning of each month.
A) $528
B) $495
C) $317
D) $653
Q3) What are the disadvantages of leasing?
Q4) What are the advantages of leasing?
Q5) Explain a leveraged lease.
Q6) What is a term loan?
Page 21
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Chapter 20: Financing With Derivatives
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Q1) The Bates Company has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $50. The convertibles have a coupon interest rate of 9% and mature 20 years from today. Straight debt of equivalent risk is yielding 12% today. The company's common stock today is selling at $60 a share. Calculate the conversion value of the issue.
A) $1,000
B) $1,200
C) $ 800
D) $300
Q2) List some securities that have option features.
Q3) In general, the market price of a "right" is ____ than the theoretical value and this difference in values ____ as the right's expiration date approaches.
A) less, decreases B) less, increases
C) greater, decreases
D) greater, increases
Q4) Why would a company issue convertible securities instead of straight bonds?
Q5) What is an interest rate swap? Describe how they are used.
Q6) What variables affect the call option valuation?
Page 22
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Chapter 21: Risk Management
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Sample Questions
Q1) In the futures market, losers must pay winners each day. This is called:
A) paying up
B) selling short
C) taking a long position
D) marking to market
Q2) Which of the following is the current price in a futures contract?
A) volatile price
B) spot price
C) short price
D) long price
Q3) Which of the following is the most important reason for firms to use risk management techniques?
A) To make supernormal profits
B) To reduce the chance of catastrophic financial distress
C) To reduce management's liability
D) To control inventory losses
Q4) List several reasons why a firm may choose to employ risk management techniques.
Q5) What is marking-to-market and how is this process guaranteed?
Q6) How does hedging reduce or eliminate business risks?
Q7) List five hedging strategies for risk management
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Chapter 22: International Financial Management
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Sample Questions
Q1) In considering purchasing power parity, the relationship is:
I. not applicable due to tariffs.
II. is applicable in spite of trade barriers.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q2) If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180 day forward rate is trading at a premium of 2.86%, then the 180 day forward rate is:
A) $0.551
B) $0.567
C) $0.575
D) $0.583
Q3) Firms engaged in international transactions incur ____ because of fluctuations in the exchange rates among currencies.
A) credit risk
B) political risk
C) market risk
D) exchange rate risk
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Chapter 23: Corporate Restructuring
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Sample Questions
Q1) In a ____ form of business combination, a parent-subsidiary relationship exists between the acquiring and acquired companies.
A) leveraged buyout
B) holding company
C) consolidation
D) leveraged buyout or consolidation
Q2) An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the company or investor who initiated the unfriendly takeover is:
A) pacman defense
B) boardmail
C) white squire
D) greenmail
Q3) ____ equals the capitalized value of the company's operating earnings minus its liabilities.
A) Market value
B) Equity value
C) Going-concern value
D) Liquidation value
Q4) How does a joint venture differ from a holding company?
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Chapter 24: Continuous Compounding and Discounting
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Q1) What is the effective interest rate on 12% if interest is compounded continuously?
A) 15.11%
B) 16.25%
C) 14.11%
D) 12.75%
Q2) Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.
A) $6,886
B) $3,631
C) $4,616
D) None of the above
Q3) In the continuous compounding equation, "e" is the
A) natural log to the base 10.
B) base number in natural logarithms
C) natural log to the base 1.
D) none of the above are correct
Q4) With continuous compounding, why is the effective rate higher than the nominal rate?
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Sample Questions
Q1) ____ is (are) used when evaluating mutually exclusive investments having unequal lives.
A) Equivalent annual annuities
B) Replacement chains
C) Linear programming
D) a and b only
Q2) The advantage(s) of the equivalent annual annuity method over the replacement chain technique in evaluating mutually exclusive investments having unequal lives include
A) the equivalent annual annuity method is often computationally simpler
B) the equivalent annual annuity method simplifies the handling of the time discrepancies that frequently arise in the replacement chain method
C) the equivalent annual annuity method is theoretically superior
D) a and b only
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
Q4) What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data?
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Chapter 26: Breakeven Analysis
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Sample Questions
Q1) How can a firm have more than one breakeven output point?
Q2) The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart. The finished product sells for $35 with a variable cost per unit of $21. The company has operating costs of $1,050,000. What is the probability of the firm having operating losses if the firm has a standard deviation of 4,000 units and the firm expects to sell 80,000 almanacs? (A normal distribution table - Table V - must accompany this problem)
A) 10.56%
B) 11.12%
C) 14.92%
D) 13.57%
Q3) An example of a noncash outlay is:
A) property
B) marketing costs
C) advertising
D) depreciation
Q4) What are the possible uses for breakeven analysis?
Q5) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
28
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Chapter 27: Bond Refunding Analysis
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Sample Questions
Q1) When a bond is called, the old issue is retired and the bondholder receives:
A) new, lower interest rate bonds
B) new corporate stock
C) a cash payoff
D) treasury stock
Q2) In bond refunding analysis the ____ is believed to be the most appropriate discount rate.
A) after-tax cost of new debt
B) firm's marginal cost of capital
C) weighted average cost of capital
D) both b and c
Q3) Bond refunding occurs when a company redeems a callable issue and
A) sells an equity issue, thereby reducing outstanding debt
B) sells a new issue with a lower coupon rate
C) sells a preferred issue with a low dividend rate
D) none of the above is correct
Q4) Why is the after-tax cost of debt used in bond refunding analysis?
Q5) What is the principal inflow and what is the principal outflow from a bond refunding situation?
Q6) Why would a corporation consider bond refunding?
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Chapter 28: Taxes
Available Study Resources on Quizplus for this Chatper
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Sample Questions
Q1) ____ received by corporations are normally entitled to a 70 percent exclusion from federal income taxes.
A) Capital gains income
B) Dividend income
C) Loss carrybacks and carryforwards
D) none of the above
Q2) Corporate capital gains income is currently taxed at ____ ordinary income.
A) 80 percent of the marginal tax rate on B) the same marginal rate as C) 50 percent of the marginal tax rate on D) none of the above
Q3) The marginal tax rate for a firm with taxable income of $105,000 is
A) 30%
B) 39%
C) 15%
D) 34%
Q4) Explain the difference between average tax rate and marginal tax rate.
Q5) How are dividends received by a corporation treated for tax purposes?
Q6) How does a tax loss affect a corporation as it applies to past and future income?
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