Financial Analysis
Test Bank
Course Introduction
Financial Analysis is a foundational course that equips students with the essential tools and techniques used to evaluate the financial health and performance of businesses and organizations. The course covers the interpretation of financial statements, ratio analysis, trend analysis, and the use of financial models to assess profitability, liquidity, solvency, and operational efficiency. Students will learn to critically analyze income statements, balance sheets, and cash flow statements, enabling them to make informed decisions regarding investments, lending, and strategic planning. Emphasis is also placed on real-world applications and ethical considerations in financial reporting and analysis.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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16 Chapters
1175 Verified Questions
1175 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following statements increases the complexity of the manager's task in a multinational corporation?
A) The currency values of different countries in which a firm operate experience fluctuations.
B) Cash flows in various parts of a multinational corporate system are often denominated in the same currencies.
C) All the countries in which a firm operates have uniform political and economic institutions.
D) The management personnel of a firm in different countries are fluent in English and several other languages.
E) No nation can place constraints on the transfer of corporate resources.
Answer: A
Q2) A financial manager's task is to make decisions concerning the acquisition and use of funds for the greatest benefit of the firm.
A)True
B)False
Answer: True
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Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
A) The transactions will have no effect on the current ratios.
B) The current ratios of both firms will be increased.
C) The current ratios of both firms will be decreased.
D) Only Emerald Corporation's current ratio will be increased.
E) Only Ruby Company's current ratio will be increased.
Answer: D
Q2) How is the net worth of a firm calculated?
A) Net worth = Current assets minus current liabilities
B) Net worth = Total assets minus current liabilities
C) Net worth = Total liabilities minus current assets
D) Net worth = Total assets minus total liabilities
E) Net worth = Total liabilities minus current liabilities
Answer: D
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Page 4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) Identify the form of market efficiency where the information about past trends in investment prices is of no use in selecting winning investments, but the investors can still make use of privately held information to earn abnormal return.
A) economic efficiency
B) strong-form efficiency
C) semistrong-form efficiency
D) weak-form efficiency
E) real-time efficiency
Answer: C
Q2) Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition with the stock exchanges.
A)True
B)False
Answer: True
Q3) The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Sample Questions
Q1) William buys 20 shares of Zync Corporation at $18.5 per share. Zync pays dividend at the end of each year on the basis of profits made during the year. In its 25 years history, Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end of every year is referred to as _____ and _____ respectively.
A) uneven cash flows; annuity due
B) uneven cash flows; ordinary annuity
C) lump-sum payment; annuity due
D) lump-sum payment; uneven cash flows
E) lump-sum payment; ordinary annuity
Q2) Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?
A) 7.25%
B) 8.18%
C) 9.52%
D) 10.75%
E) 11.66%
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will probably be greater than the increase in rates in the long-term market.
A)True
B)False
Q2) Which of the following factors will lead to an increase in interest rates?
A) Deflation
B) Federal deficit
C) Contraction
D) Recession
E) Trade surplus
Q3) During or near peaks of business activity, yield curves that are flat or downward sloping (possibly with humps) are prevalent.
A)True
B)False
Q4) The value of an asset is the future value of the future cash flows that the asset is expected to generate during its life.
A)True
B)False
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Chapter 6: Bonds Debtcharacteristics and Valuation
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Sample Questions
Q1) One of the disadvantages of issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.
A)True
B)False
Q2) Which of the following types of investor would be most likely to purchase zero coupon bonds?
A) Retired individuals seeking income for current consumption
B) Individuals in high tax brackets
C) Tax-free investors such as pension funds
D) Risk-averse individuals anticipating increases in interest rates
E) Individuals with no interest income
Q3) Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.
A) higher than
B) lower than
C) the same as
D) moving with
E) unrelated to
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) What is the stockholder's minimum financial obligation in the event the corporation is liquidated and its debts are repaid?
A) Assets of the firm
B) Par value of the firm's stock
C) Earnings of the firm
D) Total liabilities of the firm
E) Market value of the firm's stock
Q2) Scubapro Corporation currently has 500,000 shares outstanding and plans to issue 200,000 more shares in a seasoned equity offering. The current shareholders have preemptive rights on any new issue of stock by Scubapro Corporation. How many stocks would an investor with 20,000 shares, who exercises his preemptive rights on the new stock issue, have the right to buy?
A) 200,000 shares
B) 120,000 shares
C) 20,000 shares
D) 12,000 shares
E) 8,000 shares
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Market portfolio contains only unsystematic risk, therefore market risk premium represents the return that investors require to be compensated for, taking an average amount of relevant, or unsystematic, risk.
A)True
B)False
Q2) The probability distribution of the payoffs on an investment refers to a _____.
A) listing of all payoffs and then determining the chance that each payoff will occur
B) measure of the tightness, or variability, of a set of payoffs
C) standardized measure of the risk per payoff
D) listing of the degree of relationship between two payoffs
E) measure of the extent to which the payoffs move with the capital market
Q3) The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.
A) standard deviation of returns
B) variance of returns
C) actual rate of return
D) risk premium
E) risk adjusted return
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)? (Round off the answer to two decimal places.)
A) 10.04 percent
B) 12.87 percent
C) 15.23 percent
D) 18.34 percent
E) 20.72 percent
Q2) The present value of the expected net cash inflows of all the projects undertaken by a firm will most likely exceed the present value of the firm's expected net profit after tax, because:
A) income is reduced by taxes paid, but cash flow is not.
B) there is a greater probability of realizing the projected cash flows than the forecasted income.
C) income is reduced by dividends paid, but cash flow is not.
D) income is reduced by depreciation charges, but cash flows are not.
E) cash flows lead to changes in net working capital, but sales do not.
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Page 11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) A sunk cost is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. These sunk costs are extremely important in capital budgeting decisions.
A)True
B)False
Q2) Ziker Golf Company evaluated a project as a risky project. Ziker generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent. If Ziker expects 12% return on average risk projects, then it should expect a return of _____ for a risky project.
A) 8%
B) 12%
C) 16%
D) 10%
E) 48%
Q3) A key difference between a replacement project analysis and an expansion project analysis is that only the expansion project uses the net present value (NPV) method for project evaluation.
A)True
B)False
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Page 12
Chapter 11: The Cost of Capital
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Sample Questions
Q1) Diggin Tools just issued new preferred stock, which sold for $85 in the stock markets. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. Which of the following is the component cost of preferred stock, rps? (Round off the answer to two decimal places.)
A) 10.75 percent
B) 10.52 percent
C) 12.25 percent
D) 11.70 percent
E) 11.05 percent
Q2) Super Solutions Inc. is a constant growth firm, which just paid a dividend of $3.00, sells for $33.00 per share, and has a growth rate of 6 percent. Which of the following is the cost of retained earnings using the discounted cash flow (DCF) approach? (Round off the answer to two decimal places.)
A) 12.55 percent
B) 15.64 percent
C) 16.25 percent
D) 13.35 percent
E) 12.40 percent
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) With which of the followingis a firm's target capital structure consistent?
A) Maximum earnings per share
B) Minimum cost of debt (rd)
C) Minimum risk
D) Minimum cost of equity (rs)
E) Minimum weighted average cost of capital
Q2) The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.
A) degree of financial leverage
B) degree of operating leverage
C) degree of working capital leverage
D) degree of current asset leverage
E) degree of total leverage
Q3) Which of the following capital structure theories assumes that market information is symmetric?
A) Signaling theory
B) Contingent theory
C) Arbitrary theory
D) Budgeting theory
E) MM capital structure theory
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) Which of the following is true about the dividend relevance theory?
A) If investors prefer capital gain on their investment, then the tax effect of dividend receipts does not have any effect on the price of stocks.
B) If investors prefer current income on their investment, then the tax effect of dividend receipts does not have any effect on the price of stocks.
C) If investors prefer current income on their investment, the required return on equity should decrease as the dividend payout is increased.
D) If investors prefer capital gain on their investment, free cash flows to equity should decrease.
E) If investors prefer both capital gain and current income, the net income of the firm should decrease.
Q2) Firms using the constant payout ratio dividend policy offer to reinvest dividends in the stocks of the dividend-paying firm.
A)True
B)False
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Page 15
Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) Which of the following types of inventory financing is generally used when the inventory put up as collateral is relatively low priced, fast moving, and difficult to identify individually?
A) Recourse
B) Factoring
C) Trust receipts
D) Warehouse receipt
E) Blanket liens
Q2) A type of unsecured promissory note issued by large, financially strong firms is called:
A) trade credit.
B) commercial paper.
C) a compensating balance.
D) revolving credit.
E) a promissory note.
Q3) Accruals are generally considered free debt in the sense that no explicit interest is paid on funds raised through them.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) Outsourcing is an inventory control procedure where a red line is drawn around the inside of an inventory-stocked bin to indicate the reorder point level.
A)True
B)False
Q2) A _____ current asset investment policy calls for relatively large amounts of current assets to be carried by a company.
A) relaxed
B) restricted
C) moderate
D) lean-and-mean
E) precautionary
Q3) The value of checks that have been written and given to the customers but have not been deducted from the account on which they were written is the _____ float.
A) disbursement
B) net
C) collections
D) balance
E) deposit
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17
Chapter 16: Financial Planning and Control
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Sample Questions
Q1) If a firm does not meet its forecasted sales level, then leverage will result in a magnified loss in income compared to what is expected because:
A) retained earnings will increase rapidly.
B) inventories will be built very slowly.
C) production facilities will be expanded greatly.
D) additional external funds needed will be reduced.
E) sales operations will be reduced drastically.
Q2) Funds that are obtained from routine business transactions are known as _____.
A) spontaneously generated funds
B) additional funds needed
C) cash flows from financing activities
D) internally financed funds
E) financial feedback funds
Q3) Projected statements must be analyzed to determine if they meet the targets by
A) preparing financial ratios
B) preparing the statement of cash flows
C) determining economies of scale
D) calculating lumpy assets
E) preparing budgetary notes
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