Financial Economics
Exam Preparation Guide
Course Introduction
Financial Economics explores the fundamental principles and analytical frameworks used to understand how financial markets operate and how financial instruments are priced. The course covers topics such as the time value of money, risk and return, portfolio theory, asset pricing models, market efficiency, and the behavior of financial institutions. Students will gain insights into how individuals and firms make investment and financing decisions, the role of financial markets in allocating resources, and the impact of monetary and fiscal policies on financial systems. Through theoretical and practical approaches, the course equips students with the skills to analyze financial strategies and assess the implications of economic events on financial markets.
Recommended Textbook
Foundations of Finance 7th Edition by Arthur J. Keown
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17 Chapters
2496 Verified Questions
2496 Flashcards
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Chapter 1: An Introduction to the Foundations of Financial Management
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127 Verified Questions
127 Flashcards
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Sample Questions
Q1) Shareholder wealth maximization means maximizing the price of the existing common stock.
A)True
B)False
Answer: True
Q2) All of the following statements about agency problems are true except:
A) Agency problems interfere with the goal of maximizing shareholder value.
B) Agency costs are paid by the managers who do not act in the shareholders' best interest.
C) Agency problems result from the separation of management and the ownership of a firm.
D) The root cause of agency problems is conflicts of interest.
Answer: B
Q3) All of the following forms of business organizations provide limited liability to all owners except:
A) Limited Liability Company.
B) S-Type Corporation.
C) Corporation.
D) Limited Partnership.
Answer: D
Page 3
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Chapter 2: The Financial Markets and Interest Rates
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) A basis point is equal to
A) one percent.
B) one-tenth of one percent.
C) one-hundredth of one percent.
D) one-half of one percent.
Answer: C
Q2) Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units.
A)True
B)False
Answer: True
Q3) Over the period 1926 to 2008 the standard deviation of returns has been the greatest for which of the following:
A) treasury bills.
B) corporate bonds.
C) common stocks.
D) common stocks of small firms.
Answer: D
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Chapter 3: Understanding Financial Statements and Cash Flows
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Net working capital is equal to gross working capital minus depreciation.
A)True
B)False Answer: False
Q2) A firm's income statement reports the results from operating the business for a period of time,while the firm's balance sheet provides a snapshot of the firm's financial position at a specific point in time.
A)True
B)False Answer: True
Q3) An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date.
A)True
B)False Answer: False
Q4) The income statement describes the financial position of a firm on a given date. A)True
B)False
Answer: False
Page 5
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Chapter 4: Evaluating a Firms Financial Performance
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148 Flashcards
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Sample Questions
Q1) Seasonality is introduced into financial ratios by averaging monthly account balances,and thus it is recommended that ending account balances be used.
A)True
B)False
Q2) A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was
A) equal to one.
B) greater than one.
C) less than one.
D) greater than or less than one, but not equal to one.
Q3) Based on the information in Table 4-3,the debt ratio is
A) 18.38%.
B) 40.24%.
C) 48.48%.
D) 53.43%.
Q4) How could an analyst determine whether a company's ratio is good or bad?
Q5) Discuss five limitations to ratio analysis.
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Chapter 5: The Time Value of Money
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) The present value of $1,000 to be received in 5 years is ________ if the discount rate is 7.8%.
A) $368
B) $494
C) $548
D) $687
Q2) Today is your 21<sup>st</sup> birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded semiannually.How much will be in the account on your 50<sup>th</sup> birthday?
A) $159,795
B) $162,183
C) $163,823
D) $164,631
Q3) When repaying an amortized loan,the interest payments increase over time due to the compounding process.
A)True
B)False
Q4) You borrow $30,000 and agree to pay it off with one lump sum payment of $40,000 in 6 years.What annual rate of interest will you be charged?
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) Changes in the general economy,like changes in interest rates or tax laws represent what type of risk?
A) Company-unique risk
B) Market risk
C) Unsystematic risk
D) Diversifiable risk
Q2) Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a yearend value of $21,000 with a 30% probability; a yearend value of $24,000 with a 45% probability; and a yearend value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?
A) 12.06%
B) 14.36%
C) 16.36%
D) 33.45%
Q3) Most stocks have betas between
A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
Page 8
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Chapter 7: The Valuation and Characteristics of Bonds
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145 Flashcards
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Sample Questions
Q1) A bond's yield to maturity varies from investor to investor because each investor has his or her own required return.
A)True
B)False
Q2) When using the PV (present value)function in Excel to calculate bond values,the bond's coupon rate is entered as the Rate variable.
A)True B)False
Q3) The interest on corporate bonds is typically paid
A) semi-annually. B) annually.
C) quarterly.
D) monthly.
Q4) Restrictive provisions in bond indenture agreements are designed to protect bondholders and lessen the agency problems between bondholders and stockholders. A)True
B)False
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Chapter 8: The Valuation and Characteristics of Stock
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) Minority shareholders have a greater chance of electing a member to the board of directors if the company uses
A) cumulative voting.
B) majority voting.
C) minority voting.
D) proxy voting.
Q2) A sinking-fund provision allows for the retirement of a portion of preferred stock each year.
A)True
B)False
Q3) The most relevant form of growth for valuing a firm's common stock is internal growth.
A)True
B)False
Q4) If a shareholder cannot attend the corporation's annual meeting,the shares may still be voted using
A) the preemptive right.
B) a proxy.
C) majority voting rules.
D) the cumulative voting right.
Page 10
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The best financial structure is determined by finding the debt and equity mix that maximizes the firm's cost of capital.
A)True
B)False
Q2) Five Rivers Casino is undergoing a major expansion.The expansion will be financed by issuing new 15-year,$1,000 par,9% annual coupon bonds.The market price of the bonds is $1,070 each.Gamblers flotation expense on the new bonds will be $50 per bond.Gamblers marginal tax rate is 35%.What is the pre-tax cost of debt for the newly-issued bonds?
A) 8.76%
B) 8.12%
C) 7.49%
D) 10.25%
Q3) A reasonable estimate of the market risk premium based on historical data and expert opinion is between 5% and 7%.
A)True
B)False
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11
Chapter 10: Capital-Budgeting Techniques and Practice
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155 Flashcards
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Sample Questions
Q1) Welltran Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.
A) $558,378
B) $513,859
C) $473,498
D) $447,292
Q2) The most critical aspect in determining the acceptability of a capital budgeting project is the impact the project will have on the company's net income over the projects entire useful life.
A)True
B)False
Q3) Because the NPV and PI methods both yield the same accept/reject decision,a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.
A)True
B)False
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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155 Flashcards
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Sample Questions
Q1) JW Enterprises is considering a new marketing campaign that will require the addition of a new computer programmer and new software.The programmer will occupy an office in JW's current building and will be paid $8,000 per month.The software license costs $1,000 per month.The rent for the building is $4,000 per month.JW's computer system is always on,so running the new software will not change the current monthly electric bill of $900.The incremental expenses for the new marketing campaign are
A) $13,900 per month.
B) $9,000 per month.
C) $13,000 per month.
D) $8,000 per month.
Q2) Which of the following are included in the terminal cash flow?
A) the expected salvage value of the asset
B) any tax payments or receipts associated with the salvage value of the asset
C) recapture of any working capital increase included in the initial outlay
D) all of the above
Q3) Depreciation is a non-cash deduction so it may be ignored in the calculation of a project's incremental after-tax cash flows.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet,but rather is determined by the firm's mix of assets.
A)True
B)False
Q2) Stan's Cans,Inc.expects to earn $150,000 next year after taxes on sales of $2,200,000.Stan's manufactures only one size of garbage can.Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece.Stan's tax rate is currently 34%.
a.What are the firm's expected fixed costs for next year?
b.What is the break-even point in units?
Q3) The "threat hypothesis"
A) reduces management's tendency to spend freely.
B) encourages management to use debt to further their own interests.
C) increases the agency problem.
D) increases agency monitoring costs.
Q4) Raising funds internally is effectively increasing the investment of the firm's existing common shareholders.
A)True
B)False
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Page 14
Chapter 13: Dividend Policy and Internal Financing
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164 Flashcards
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Sample Questions
Q1) We typically expect to find rapidly growing firms to have high payout ratios.
A)True
B)False
Q2) Which of the following dividend policies will cause dividends per share to fluctuate the most?
A) constant dividend payout ratio
B) stable dollar dividend
C) small, low, regular dividend plus a year-end extra
D) no difference between the various dividend policies
Q3) Federal tax law is irrelevant to corporate dividend policy because dividends are not tax deductible.
A)True
B)False
Q4) Conceptually,stock dividends and stock splits may be expected to increase the shareholder's value.
A)True
B)False
Q5) The ex-dividend date occurs prior to the declaration date.
A)True
B)False
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Chapter 14: Short-Term Financial Planning
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141 Flashcards
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Sample Questions
Q1) Which of the following is a spontaneous source of financing?
A) accrued expenses
B) notes payable
C) common stock
D) paid-in-capital
Q2) The percent of sales forecasting method works well because it accounts for economies of scale in assets such as inventory.
A)True
B)False
Q3) Which of the following is the initial and most important step in the preparation of pro forma financial statements?
A) Estimate the levels of investment in current and fixed assets.
B) Determine the rate of interest that will be required for borrowed funds.
C) Project the firm's sales revenues for the planning period.
D) Approximate the cost of raw materials.
Q4) Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.
A)True
B)False
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Chapter 15: Working-Capital Management
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165 Flashcards
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Sample Questions
Q1) When the accounts receivable of a firm have been factored,bad debt losses remain the responsibility of the borrowing firm and must be made good.
A)True
B)False
Q2) Which of the following is an advantage of the use of current liabilities to finance assets?
A) less risk of illiquidity
B) more flexibility
C) lower interest costs
D) Both B and C
Q3) Trade credit is a source of spontaneous financing.
A)True
B)False
Q4) The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.
A)True
B)False
Q5) Discuss the similarities and differences between a line of credit and a revolving credit agreement.
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Chapter 16: Current Asset Management
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181 Verified Questions
181 Flashcards
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Sample Questions
Q1) Fast Delivery Service has received a proposal from its bank to establish a lock-box system to accelerate the receipt of $600 million annually on 900,000 checks.By its own analysis Fast Delivery believes such a system would decrease total float by 3.5 days.If Fast Delivery Service can earn 7 percent before taxes on the released funds,what is the maximum that Fast Delivery Service should be willing to pay the bank per check for the service?
Use a 365-day year.
Q2) A construction firm that accumulates cash in anticipation of a significant drop in lumber costs is an example of the ________ motive for holding cash.
A) transaction
B) speculative
C) hedging
D) precautionary
Q3) In a lockbox system,customer payments are collected directly by the bank and deposited immediately in the corporation's account.
A)True
B)False
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18
Chapter 17: International Business Finance
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134 Flashcards
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Sample Questions
Q1) An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier.Which of the following statements is true regarding the exchange rate risk for this contract?
A) The American company will bear all of the exchange rate risk if the contract is denominated in dollars.
B) The French company will bear all of the exchange rate risk if the contract is denominated in dollars.
C) Both companies could bear exchange rate risk if the contract is denominated in British Pounds.
D) Both B and C are correct.
Q2) Compared with other developed countries,the U.S.is particularly reliant on foreign trade for self-subsistence.
A)True B)False
Q3) A direct quote of $1.6 per British Pound in the United States is equivalent to a direct quote of .625 British Pounds per U.S.dollar in Great Britain.
A)True
B)False
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