Financial Analysis
Study Guide Questions
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the essential tools and techniques needed to evaluate the financial health and performance of organizations. Through the study of financial statements, ratio analysis, trend analysis, and cash flow assessment, students learn to interpret data and make informed decisions for investing, lending, and management purposes. The course emphasizes both theoretical frameworks and practical applications, allowing learners to critically analyze real-world cases, assess corporate strategies, and communicate their findings effectively in a professional environment.
Recommended Textbook
Fundamentals of Corporate Finance 9th Canadian Edition by Richard A Brealey
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Page 2
Chapter 1: Goals and Governance of the Firm
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Sample Questions
Q1) Financial analysts are involved in monitoring the risk associated with investment projects and financing decisions.
A)True
B)False
Answer: True
Q2) The Dodd-Frank financial reform law in 2010 granted shareholders a binding vote on executive compensation.
A)True
B)False
Answer: False
Q3) An IOU ("I owe you")from your brother-in-law is a financial asset.
A)True
B)False
Answer: True
Q4) Making good investment and financing decisions is the chief task of the financial manager.
A)True
B)False Answer: True
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Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks:
A) can shift loan risk to their deposit customers.
B) are motivated by the potential for profit.
C) do not have any income tax liability.
D) have information to evaluate creditworthiness.
Answer: D
Q2) Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk.
A)True
B)False
Answer: True
Q3) Which one of the following is least liquid?
A) Foreign currency
B) U.S. Treasury bonds
C) Real estate
D) Bank deposit
Answer: C
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Chapter 3: Accounting and Finance
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Sample Questions
Q1) Which of the following could account for a firm that has a negative net income,yet has a positive amount of cash provided by operations?
A) The net loss was greater than the amount of depreciation expense.
B) Inventory increased significantly more than accounts payable.
C) Accounts receivable decreased by significantly more than accounts payable.
D) The cash balance increased significantly.
Answer: C
Q2) Net working capital is a measure of a company's:
A) goodwill.
B) short-term liabilities.
C) estimated cash reservoir.
D) shareholders' equity.
Answer: C
Q3) A reduction in accounts receivable uses cash,reducing the firm's net cash balance.
A)True
B)False
Answer: False
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Chapter 4: Measuring Corporate Performance
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Sample Questions
Q1) Market value added is the same as economic value added.
A)True
B)False
Q2) Increasing leverage will always act to increase a firm's ROE.
A)True
B)False
Q3) A deficiency of the standard measures of liquidity is that the measures:
A) ignore a firm's reserve borrowing capacity.
B) fail to include accounts receivable as an asset.
C) give inventories equal weighting in the quick ratio.
D) do not include the current portions of long-term debt.
Q4) Last year's asset turnover ratio was 2.0.Sales have increased by 25% and total assets have increased by 10% since that time.What is the current asset turnover ratio?
A) 1.82
B) 2.05
C) 2.15
D) 2.27
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Nominal dollars refer to their purchasing power.
A)True
B)False
Q2) What will be the monthly payment on a $75,000 30-year home mortgage at 1% interest per month?
A) $771.46
B) $775.90
C) $1,028.61
D) $1,034.53
Q3) What is the APR on a loan that charges interest at the rate of 1.4% per month?
A) 10.20%
B) 14.00%
C) 16.80%
D) 18.16%
Q4) It is important to discount both real and nominal cash flows at the real interest rate. A)True
B)False
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) An investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%.The investor sold the bond prior to maturity and realized a total return of 7.1%.Which of these most likely occurred while the investor owned the bond?
A) The bond's current yield increased above the bond's coupon rate.
B) The inflation rate increased.
C) Market interest rates declined.
D) Market interest rates increased.
Q2) If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90,how much will it be worth 1 year from now if interest rates are constant?
A) $904.90
B) $925.39
C) $947.93
D) $1,000.00
Q3) Which one of the following bond values will change when interest rates change?
A) The expected cash flows
B) The present value
C) The coupon payment
D) The maturity value
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) The growth of mature companies is primarily funded by:
A) issuing new shares of stock.
B) issuing new debt securities.
C) reinvesting company earnings.
D) increasing accounts payable.
Q2) A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now after the next dividend has been paid?
A) $82.20
B) $86.20
C) $87.20
D) $91.20
Q3) Market efficiency implies that security prices impound new information quickly. A)True
B)False
Q4) The value of common stock will likely decrease if:
A) the investment horizon decreases.
B) the growth rate of dividends increases.
C) the discount rate increases.
D) dividends are discounted back to the present.
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) When using a profitability index to select projects,a high value is preferred over a low value.
A)True
B)False
Q2) The profitability index selects projects based on the:
A) highest net discounted value at time zero.
B) highest internal rate of return.
C) largest dollar investment per rate of return.
D) largest return per dollar invested.
Q3) Given a particular set of project cash flows,which one of the following statements must be correct?
A) There can be only one NPV for the project.
B) There can be only one IRR for the project.
C) There can be more than one IRR for the project.
D) There can be up to two profitability indexes for any project.
Q4) If a project has multiple IRRs,the lowest one is incorrect.
A)True
B)False
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Sample Questions
Q1) When calculating cash flow from operations,one should:
A) subtract depreciation since it represents the cost of replacing worn-out equipment.
B) deduct the depreciation tax shield from after-tax profit.
C) use after-tax profit and ignore depreciation.
D) add depreciation to after-tax profit.
Q2) Assuming an asset has been fully depreciated according to its MACRS class life,which one of the following statements is correct?
A) Its market value is zero.
B) Its book value is zero.
C) Its book value is the current market value.
D) It has neither a book value nor a market value.
Q3) Which one of the following is not accurate in depicting the cash flows from operations for an all-equity firm?
A) (revenues cash expenses)(1 tax rate) + (depreciation × tax rate)
B) (revenues expenses taxes)
C) (net profit + depreciation)
D) (revenues cash expenses taxes)
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Page 11
Chapter 10: Project Analysis
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Sample Questions
Q1) Which one of the following descriptions is representative of scenario analysis?
A) One variable at a time is allowed to change.
B) It isolates the unknowns that belong in the model.
C) Different combinations of variables are analyzed.
D) It represents the "top-down" approach.
Q2) A firm with $800,000 of fixed costs including $200,000 of depreciation is expected to produce $225,000 in profits.What is its DOL?
A) 3.56
B) 3.67
C) 4.56
D) 4.67
Q3) The branches on a decision tree
A) illustrate possible combinations of fixed and variable costs.
B) are a convenient way to illustrate the results of a sensitivity analysis.
C) show possible project break-even points.
D) show possible management decisions and possible uncertain consequences.
Q4) A project that breaks even in accounting terms will surely have a negative NPV.
A)True
B)False
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Sample Questions
Q1) A project's expected return is 15%,which represents a 35% return in a boom and a 5% return in a stagnant economy.What is the probability of a boom if these are the only two economic states?
A) 18.33%
B) 25.00%
C) 33.33%
D) 50.00%
Q2) Companies that are exposed to the business cycle:
A) tend to have high market risk.
B) tend to have low market risk.
C) have negligible specific risk.
D) are safe investments.
Q3) What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?
A) 2.50%
B) 0.39%
C) 0.04%
D) 2.56%
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Chapter 12: Risk,Return,and Capital Budgeting
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Sample Questions
Q1) An investor expects a return of 18% on his portfolio with a beta of 1.25.If the expected market risk premium increases from 8% to 10%,what return should he now expect on the portfolio?
A) 20.0%
B) 20.5%
C) 22.5%
D) 26.0%
Q2) The basic tenet of the CAPM is that a stock's expected risk premium should be:
A) greater than the expected market return.
B) proportionate to the market return.
C) proportionate to the stock's beta.
D) greater than the risk-free rate of return.
Q3) If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0,then the:
A) stock is currently underpriced.
B) market risk premium is increasing.
C) stock has a significant amount of specific risk.
D) stock has a beta exceeding 1.0.
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Sample Questions
Q1) Other things equal,which of the following will decrease the WACC of a firm that has both debt and equity in its capital structure?
A) An increase in the stock's beta
B) An increase in the expected market return
C) An increase in the tax rate
D) An increase in the yield on preferred stock
Q2) If a firm has twice as much equity as debt in its capital structure,then the firm is financed with:
A) 75.0% debt.
B) 66.7% equity.
C) 40.0% debt.
D) 33.3% equity.
Q3) Assuming a project has the same risk and financing as the firm,it will have a positive NPV if its rate of return is greater than the firm's WACC.
A)True
B)False
Q4) Capital structure refers to a firm's mix of long-term debt and equity financing. A)True B)False
Page 15
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Chapter 14: Introduction to Corporate Financing and Governance
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Sample Questions
Q1) When a firm issues 50,000 shares with a par value of $5 and a market price of $22 per share,additional paid in capital will:
A) decrease by $250,000.
B) increase by $250,000.
C) increase by $850,000.
D) increase by $1,100,000.
Q2) Dividends represent an important component of a firm's net book value.
A)True
B)False
Q3) Assume a corporation has cumulative voting and there are two directors up for election.What is the maximum number of votes a shareholder who owns 100 shares can cast for Candidate Jones if there are a total of 5 candidates?
A) 20
B) 40
C) 100
D) 200
Q4) Privately placed debt must be held until maturity and can never be resold.
A)True
B)False
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Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Sample Questions
Q1) An investor can earn 20% on underpriced IPOs,but will lose 10% on overpriced IPOs.If he is awarded $2,000 worth of shares in an overpriced IPO,how much of the underpriced issue must he be awarded in order to gain $500 total?
A) $1,500
B) $2,500
C) $3,500
D) $10,000
Q2) What would you expect to be the market price of stock after a sold-out rights issue,if each existing shareholder purchases one new share at $60 for each three that he or she currently holds,and the current share price is $100?
A) $75
B) $80
C) $85
D) $90
Q3) A private placement avoids which one of the following costs?
A) Depression in the stock price
B) Administration costs
C) Registration with the SEC
D) Legal costs
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Page 17
Chapter 16: Debt Policy
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Sample Questions
Q1) MM's proposition II states that the required return on equity increases as the firm's debt-equity ratio increases.
A)True
B)False
Q2) Which one of these is a disadvantage to tax-paying individual investors?
A) Receiving interest income rather than dividends
B) Receiving capital gains rather than dividends
C) Receiving capital gains rather than interest income
D) Receiving dividends rather than interest income
Q3) When a firm pays tax,MM's Proposition I no longer holds,and the capital structure of the firm can be important due to the:
A) lower tax rates on dividends than on debt.
B) higher tax rates on retained earnings than on debt.
C) interest tax shield.
D) higher operating income from lower dividends.
Q4) Financial risk is the risk to shareholders that results from debt financing.
A)True
B)False
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Chapter 17: Payout Policy
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Q1) In a three-for-two stock split,each investor would receive one additional share for each two shares already held.
A)True
B)False
Q2) According to the MM dividend irrelevance proposition,since investors do not need dividends to convert their shares to cash,they will not pay higher prices for firms with higher dividend payouts.
A)True
B)False
Q3) Which party receives the greatest tax benefit from receiving dividends rather than capital gains?
A) Individual investors
B) Corporations
C) Financial institutions
D) Foundations
Q4) Investors often interpret a stock split announcement as a signal of management's confidence in the future.
A)True
B)False
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Chapter 18: Long-Term Financial Planning
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Sample Questions
Q1) Which one of the following will reduce the internal growth rate,other things equal?
A) A higher plowback ratio
B) A higher debt-to-asset ratio
C) A higher return on equity
D) A higher return on assets
Q2) Financial planning models must include as much detail as possible.
A)True
B)False
Q3) The flexibility of financial plans is evident in the extent that:
A) actual profits will deviate from projected profits.
B) the plans can be adapted when conditions change.
C) use of the plans can be extended.
D) planning output is the same regardless of economic conditions.
Q4) What is the sustainable growth rate for a firm with net income of $2.5 million,cash dividends of $1.5 million,and return on equity of 18%?
A) 3.0%
B) 5.4%
C) 7.2%
D) 10.8%
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Chapter 19: Short-Term Financial Planning
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Sample Questions
Q1) The short-term financial plan sets out a strategy for investing any cash surpluses or financing any deficit.
A)True
B)False
Q2) Managers are alerted to projected cash shortages by means of the:
A) statement of sources and uses of cash.
B) pro forma balance sheet.
C) cash budget.
D) monthly bank statements.
Q3) A reduction in inventory levels would be a source of cash.
A)True
B)False
Q4) Which of these events reduces cash holdings?
A) The firm changes its terms of sale and gives customers less time to pay for their purchases.
B) The firm sells a parcel of land at a profit.
C) The firm pays more promptly for its raw materials.
D) The firm sells a parcel of land at a loss.
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Chapter 20: Working Capital Management
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Sample Questions
Q1) Repos are long-term unsecured loan agreements.
A)True
B)False
Q2) Which one of the following conditions would make a lock-box system potentially more attractive to a firm?
A) Decline in interest rates
B) A 2-day reduction in mail time rather than a 3-day reduction
C) Larger payments
D) Slower processing time
Q3) A break-down of accounts receivable according to the length of time outstanding is known as a(n):
A) amortization schedule.
B) sources of cash flow statement.
C) receivables inventory.
D) aging schedule.
Q4) The economic order quantity:
A) is the order size that minimizes the order costs.
B) is independent of forecast sales.
C) is based on sales, carrying costs, and order costs.
D) increases as cost per order decreases.
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Chapter 21: Mergers,Acquisitions,and Corporate Control
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Sample Questions
Q1) Amendments to the corporate charter that attempt to circumvent mergers are known as poison pills.
A)True
B)False
Q2) One of the reasons why proxy fights are often unsuccessful is that:
A) management is always viewed as performing its job well.
B) management can use corporate resources to defend against the fight.
C) mergers are a cheaper form of changing management.
D) shareholders are unconcerned with corporate management.
Q3) In the case of a merger that is stock financed,the merger cost may change if the:
A) value of the target firm's shares changes after the merger announcement.
B) value of the acquiring firm's shares changes after the merger announcement.
C) long-term interest rates increase.
D) merger is either horizontal or vertical.
Q4) Management buyouts are generally all-equity financed by the new shareholders.
A)True
B)False
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Chapter 22: International Financial Management
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Sample Questions
Q1) Suppose that inflation next year is 8% in Japan and 4% in the United States.If the current spot rate is JPY107 = USD1,what is the expected spot rate at the end of the year?
A) JPY102.72 = USD1
B) JPY103.04 = USD1
C) JPY111.12 = USD1
D) JPY111.82 = USD1
Q2) Suppose the 1-year interest rate in Canada is 4% while it is 3% in the U.S.The indirect spot rate is CAD1.02 = USD1.What is the indirect 1-year forward rate?
A) CAD1.0299 = USD1
B) CAD1.0608 = USD1
C) CAD1.0200 = USD1
D) CAD1.0302 = USD1
Q3) Buckingham plc,a British corporation,owes $1 million due in 2 months.How can Buckingham hedge the exchange risk?
A) Sell pounds in the spot market
B) Buy pounds in the forward market
C) Sell dollars in the spot market
D) Buy dollars in the forward market
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24
Chapter 23: Options
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Q1) The Financial Accounting Standards Board (FASB)requires that companies recognize the fact that employee stock options are valuable and therefore are an expense just like salaries and wages.
A)True
B)False
Q2) If you own a call and a put on a stock with the same exercise price and exercise date,your payoffs:
A) will be positive only if the stock price rises.
B) will be positive only if the stock price declines.
C) will always be positive and will increase with the size of the stock price change. D) will always be positive but will be larger if the stock price is relatively stable.
Q3) The writer of a call option hopes that the stock price will: A) decrease. B) increase.
C) split.
D) produce quarterly cash dividends.
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Chapter 24: Risk Management
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Q1) Which one of the following is not true of the financial futures markets?
A) Financial futures trade on the Chicago Mercantile Exchange.
B) When many financial future mature, the seller cannot deliver the asset to the buyer.
C) A major use of financial futures is protection from interest rate risk.
D) Trading in financial futures is significantly less than trading in financial futures.
Q2) Which one of the following is not generally considered a benefit of hedging?
A) Hedging reduces business risk.
B) Hedging allows prices to be locked in ahead of time.
C) Hedging can be very profitable.
D) Hedging can stabilize profits.
Q3) Selling a futures contract may be appropriate for someone who wishes to:
A) lock in a future sales price.
B) lock in a future purchase price.
C) speculate that future spot prices are going up.
D) have a ready market in which to sell a product.
Q4) A company that hedges simply passes the risk on to someone else.
A)True
B)False
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Page 26