Financial Planning and Control
Mock Exam
Course Introduction
Financial Planning and Control is a course designed to equip students with the knowledge and skills necessary to effectively manage and oversee an organizations financial resources. The course covers essential topics such as budgeting, forecasting, variance analysis, and strategic financial decision-making. Emphasizing both theoretical frameworks and practical applications, students learn to develop comprehensive financial plans, set realistic objectives, monitor financial performance, and implement control systems to ensure organizational goals are met. Through case studies, hands-on exercises, and financial modeling, the course prepares students to play a pivotal role in guiding organizations toward sustainable financial success.
Recommended Textbook Business Finance 11th Edition by Graham Peirson
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Chapter 1: Introduction
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Q1) Partnerships are a common form of business entity for small service businesses because:
A)they provide legal protection for the proprietor from the creditors of the firm.
B)they are ideal for where the business is owned by one person.
C)there are no legal requirements that need to be met to form a partnership.
D)they allow the company to buy,own and sell property.
Answer: C
Q2) A company has an indefinite life.
A)True
B)False
Answer: True
Q3) The interest rate quoted in the financial markets for borrowing and lending transactions is the:
A)real interest rate.
B)prime lending rate.
C)nominal interest rate.
D)cash rate.
Answer: C
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Chapter 2: Consumption, Investment and the Capital Market
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Q1) According to Fisher's Theorem,provided that the company does not alter its investment decision,the dividend decision does not affect
Answer: shareholders wealth
Q2) An indifference curve represents a set of possible consumption outcomes,which yields equal utility to the individual.
A)True
B)False
Answer: True
Q3) Pursuing a goal of maximising the market value of a company's shares is easy when:
A)dividends are growing at a constant rate.
B)there is limited uncertainty.
C)there are limited market imperfections.
D)there are no market imperfections and no uncertainty.
Answer: D
Q4) Fisher's separation theorem has no implications for the investment decision. A)True
B)False
Answer: False
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Chapter 3: The Time Value of Money: An Introduction to Financial Mathematics
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Q1) The nominal interest rate is difference between the inflation rate and the real rate of interest.
A)True
B)False
Answer: False
Q2) Calculate the present value of the following cash flows assuming they occur at the end of each year and the interest rate is 12% p.a.:
Year 0,($12 000);Year 1,$5670;Year 2,$11 250.
A)$2030.93
B)$26 030.93
C)$28 920
D)($1163.19)
Answer: A
Q3) The ______ interest rate is an interest rate calculated after taking out the effects of inflation.
Answer: real
Q4) Continuous interest rates are an example of where the future sum grows
Answer: exponentially
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Chapter 4: Applying the Time Value of Money to Security
Valuation
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Q1) You have a choice between receiving $500 now and $530 in six months' time.Current interest rates are 10% p.a.(simple interest).As a rational investor,which option would you choose and why?
A)$500 now,because receiving $530 in six months' time is equivalent to earning only 6% interest,whereas in the bank you can earn 10% interest.
B)$530 in six months' time,because $500 invested for six months is only worth $525.
C)$500 now,because it would be worth $550 in six months' time.
D)$500 now,because you have the option to invest or consume goods.
Q2) A company just paid a dividend of $1.20.If this is expected to increase by 3% p.a.indefinitely,and the required rate of return is 8%,then the theoretical share price is $15.
A)True
B)False
Q3) Risk of default implies that:
A)there is an upward-sloping yield curve.
B)there is a downward-sloping yield curve.
C)AAA-rated bonds are more heavily discounted than BBB-rated bonds.
D)AAA-rated bonds are less heavily discounted than BBB-rated bonds.
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Chapter 5: Project Evaluation: Principles and Methods
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Q1) The problems associated with ranking mutually exclusive projects using the internal rate of return methodology can be overcome by determining the __________ internal rate of return.
Q2) A post-completion audit of investment projects is important because:
A)wasted expenditure may be avoided if internal control systems are in place.
B)approval of an investment proposal is required before expenditure can take place.
C)accountants need to understand the capital expenditure process when auditing it.
D)it provides valuable information to enable implementation of improvements in the project's operating performance.
Q3) A company has the opportunity to invest in two projects,both of which have a positive net present value.They will accept both projects if they are ____________ investments.
Q4) The number of internal rates of return is:
A)not affected by the magnitude of cash flows.
B)not limited to the number of sign reversals in the cash flow stream.
C)limited to the number of sign reversals in the cash flow stream.
D)limited by the life of the investment.
Q5) A company should approve all projects with a ___________ net present value.
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Chapter 6: The Application of Project Evaluation Methods
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Q1) A method which states that each project is assumed to be replaced at the end of its economic life by an identical project is:
A)the chain of replacement assumption.
B)the equivalent annual value assumption.
C)the constant chain of replacement assumption.
D)none of the given options.
Q2) Break-even analysis can be defined as:
A)analysis of the amount by which one input variable falls before a project ceases to be profitable.
B)analysis of the amounts by which one or more input variables may fall before a project ceases to be profitable.
C)analysis of the effect of changing all of the input variables whose values are uncertain to observe the effects on the results.
D)none of the given options.
Q3) The constant chain of replacement assumption is used when:
A)comparing mutually exclusive projects.
B)comparing independent projects.
C)the life of a project cannot be ascertained with certainty.
D)comparing mutually exclusive projects with unequal economic lives.
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Page 8
Chapter 7: Risk and Return
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Q1) From the following information,calculate the expected return and standard deviation of a portfolio that consists of 60% of Security A (expected return of 0.10 and standard deviation of 0.03)and 40% of Security B (expected return of 0.20 and standard deviation of 0.05),assuming the co-variance between A and B is -0.0012.
A)E(R)= 0.152, = 0.161
B)E(R)= 0.138, = 0.012
C)E(R)= 0.14, = 0.085
D)E(R)= 0.14, = 0.012
Q2) Which investor attaches equal utility to each increment in wealth?
A)A risk-seeking investor.
B)A risk-averse investor.
C)A well diversified investor.
D)A risk-neutral investor.
Q3) Which investor has a positive attitude towards expected return and a negative attitude towards risk?
A)A risk-averse investor.
B)A risk-neutral investor.
C)A risk-seeking investor.
D)A well-diversified investor.
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Chapter 8: The Capital Market
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Q1) The major difference between investing institutions and financial intermediaries is that:
A)investing institutions accept money from the public and invest the funds in assets,while financial intermediaries merely act as a third party and oversee the transfer of funds.
B)financial intermediaries generally have a much wider spread of assets than investing institutions.
C)the major role of financial intermediaries is to accept deposits and make loans while investing institutions are directed towards providing insurance and funds management.
D)investing institutions are not required to pay tax under the current Australian tax system.
Q2) Open-market operations refer to:
A)the method by which the Reserve Bank of Australia implements monetary policy.
B)the method by which the Reserve Bank of Australia allows banks to raise finance.
C)the method by which the Reserve Bank of Australia regulates the finance sector.
D)the market for short-term securities.
Q3) Superannuation funds are characterised as ___________ institutions.
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Chapter 9: Sources of Finance: Equity
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Q1) Which of the following is not a source of finance for new ventures?
A)Loans from banks.
B)Funds from venture capitalists.
C)Rights issues.
D)Initial public offerings (IPOs).
Q2) A plan in which payments are made to employees based on the achievement of certain performance criteria is known as a/an:
A)replicator plan.
B)option plan.
C)fully paid share plan.
D)employee share trust.
Q3) Which act requires that the rights of preference shareholders be fully stated in the company's constitution?
A)Corporations Law 2001.
B)Corporations Act 2000.
C)Corporations Act 2001.
D)Corporations Act 1999.
Q4) The primary purpose of ______________________ is to reduce agency costs by giving managers and employees an ownership share in the company.
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Chapter 10: Sources of Finance: Debt
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Q1) A non-bank bill may be more difficult to discount than a bank bill because:
A)the interest rate is recalculated each time a new bill is issued.
B)bank bills are regarded as inferior quality.
C)there is a cost associated with the bill facility.
D)the financial stature of the acceptor or endorser is not well regarded.
Q2) Which of the following statements with regard to factoring is true?
A)When the customer makes payment,the money initially goes to the factor,which then passes it to the company,plus a factor charge.
B)The discount charged by the factor is generally calculated at a rate approximately equal to the secured overdraft rate.
C)From the factor's viewpoint,the company accelerates its cash inflow from accounts receivable.
D)Some banks and bank subsidiaries may provide factoring.
E)None of the given options.
Q3) In order to discount a commercial bill:
A)a buyer must be found.
B)a seller must be found.
C)the Reserve Bank must be willing to lend.
D)the borrower must pay back the loan within a specified time.
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Page 12
Chapter 11: Payout Policy
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Q1) Which of the following statements is false?
A)Resident investors,who have marginal tax rates equal to or less than the company tax rate,will always prefer that companies pay dividends instead of retaining profits.
B)The payment of dividends,franked or unfranked,can reduce future capital gains tax.
C)An unexpected increase in dividends should cause an increase in the market's expectation of future earnings.
D)None of the given options.
Q2) If managers commit themselves to paying out cash in excess of investment needs as dividends rather than retaining it within the company,shareholders' wealth may increase because:
A)it indicates that management will not waste resources.
B)shareholders prefer dividends now rather than in the future.
C)it reflects badly on future investments.
D)it reflects positively on future investments.
Q3) Under the imputation tax system,dividends are only taxed once at the company tax rate.
A)True
B)False
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Chapter 12: Principles of Capital Structure
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Q1) A trade-off between the benefits of debt finance and the costs of financial distress may lead to a company increasing its debt/equity ratio because:
A)of the low probability of encountering severe financial difficulties.
B)its existing debt/equity ratio is high.
C)the expected increase in financial distress is expected to outweigh the tax benefits.
D)agency costs of equity increase as the level of debt increases.
Q2) Earnings before interest = $0.5 million,D = $1 million,cost of debt = 10%,and company tax rate = 30%.What is the present value of the tax saving on interest?
A)$700 000
B)$300 000
C)$30 000
D)$70 000
Q3) An example of adverse incentive effects of debt is:
A)an increase in the dividend payout ratio.
B)an appointment of a liquidator.
C)disgruntled employees taking sick leave.
D)none of the given options.
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Chapter 13: Capital Structure Decisions
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Q1) Interest on debt:
A)is taxed more heavily than dividends and capital gains received by shareholders.
B)is deducted from the company's taxable income.
C)is taxed as the corporate tax rate.
D)none of the given options.
Q2) Company financing can be considered as a _____________ problem by using the fact that different investors have different tastes,preferences and levels of wealth to explain the coexistence of securities which differ in terms of characteristics such as risk,return,tax treatment and voting rights.
Q3) A survey of financial managers by Allen (1991)found that:
A)the vast majority of Australian companies,as opposed to US companies,do not have a policy of maintaining a substantial 'cushion' of reserve borrowing capacity.
B)financial slack is valuable for all companies.
C)Australian companies,on average,have considerably more financial slack than the expansive US companies.
D)None of the given options is applicable.
Q4) Evidence from surveys of CFOs provides support to the _____________ theory.
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Chapter 14: The Cost of Capital and Taxation Issues in Project Evaluation
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Q1) The _____________________ approach is considered the superior method of risk adjustment where the risk per unit of time is not constant.
Q2) Share prices of companies paying franked dividends:
A)should have increased since the introduction of dividend imputation because overseas residents would have sold this type of shares.
B)should have increased since the introduction of dividend imputation because they have become more attractive to Australian investors.
C)have not changed as a result of imputation.
D)should have decreased since the introduction of dividend imputation because overseas residents are unable to use franking credits.
Q3) Which of the following statements about the risk-adjusted discount rate approach and the certainty equivalent approach to project evaluation is most correct?
A)NPVs will differ under either method according to the 'risk adjustment factor'.
B)NPVs should be the same under either approach.
C)NPVs are generally higher using the 'risk-adjusted discount rate' approach.
D)NPVs are generally lower using the 'risk-adjusted discount rate' approach.
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Chapter 15: Leasing and Other Equipment Finance
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Q1) The default costs of a lease agreement are often significantly higher than the default costs of other forms of debt.
A)True
B)False
Q2) The lessor in a leveraged lease is usually:
A)the lending party.
B)a partnership of debt participants.
C)a partnership of two or more equity participants.
D)a life insurance company or superannuation fund.
Q3) Which of the following statements is not a reason for disposing of an asset earlier than expected?
A)The efficiency of the asset deteriorates faster than expected.
B)The asset becomes obsolete owing to technological change.
C)The asset's service potential is greater than the entity's requirements.
D)None of the given options.
Q4) Chattel mortgages are treated in the same way as other loans in that they are classed as a financial supply and as such no GST is payable on the provision of the loan or loan repayment.
A)True
B)False
Page 17
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Chapter 16: Capital Market Efficiency
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Q1) A _______________ policy is an investment strategy in which shares are bought and then retained in the investor's portfolio for a long period.
Q2) If the stock market is efficient then:
A)investors should consider factors,such as risk preferences,when selecting a portfolio of securities.
B)investors should select their investments randomly since all securities are correctly priced anyway.
C)a portfolio of randomly selected securities will necessarily eliminate all unsystematic risk.
D)portfolio selection becomes easy since all information is impounded in share prices.
Q3) Fama and French (1992)found that companies with a low book-to-market ratio tended to earn _________ returns,while companies with a high book-to-market ratio tended to earn _______ returns.
Q4) In a market that is strong form efficient,___________ information cannot be acted upon to generate abnormal returns.
Q5) In an efficient market,there should be an instantaneous and ____________ share price reaction to information.
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Chapter 17: Futures Contracts
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Q1) To prevent arbitrage,the futures price must be:
A)less than (or equal to)the current spot price plus the carrying price.
B)greater than (or equal to)the current spot price plus the carrying price.
C)less than the present value of all carrying costs.
D)greater than the present value of all carrying costs.
Q2) The SPI 200 futures contract is only used for speculation.
A)True
B)False
Q3) A farmer plans to sell 800 bales of greasy wool (21 micron)in four weeks time.The current spot price is 1300 for a contract of 20 bales and the eight week futures price is 1320 (20 bales per contract).If the farmer hedges how many futures contracts should be purchased?
A)50
B)49
C)39
D)28
Q4) The 10-year bond futures contract can be useful in hedging against an exposure to changes in ____________ fixed-interest rates.
Q5) How can a hedging strategy lead to losses?
Q6) Distinguish between a forward-rate agreement (FRA)and a futures contract.
Page 19
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Chapter 18: Options and Contingent Claims
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Q1) The figure '12.00' of a September series of call options refers to the:
A)date upon which the option must be exercised.
B)market price of the underlying asset.
C)price at which the underlying asset can be sold.
D)price at which the underlying asset can be purchased.
Q2) Calculate the price of a two-month European call option given the following information: the exercise price is $19,the current share price is $20 and the risk-free interest rate is 15% p.a.Furthermore,the share price may go up by 15 per cent or down by 15 per cent at the end of each month.Assume a risk-neutral world and time periods of one month each.
A)$2.40
B)$1.79
C)$2.43
D)$1.82
Q3) The exercise price of an option is:
A)the price at which an option holder has the right to buy or sell an asset.
B)not the strike price but the market price of an option.
C)the traded price of an option.
D)the market price of a put option.
Q4) A convertible bond is an example of a ____________ claim.
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Chapter 19: Analysis of Takeovers
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Q1) In which cases are takeovers likely to be hostile?
A)Cases where synergies are expected.
B)Cases where economies of scale are likely to result.
C)Cases where target management is inefficient.
D)Cases of horizontal takeovers.
Q2) Horizontal takeover can be best defined as a takeover of:
A)a target company operating in the same line of business as the acquiring company.
B)a target company operating in a different line of business.
C)a company which is a supplier of goods to the acquiring company.
D)a target company in an unrelated type of business.
Q3) An acquiring firm cannot use its own shares as consideration in a market takeover bid.
A)True
B)False
Q4) The term _____________ is often used to describe instances where the value of a combined entity exceeds the values of those entities as separate components.
Q5) The most predominant piece of legislation that regulates takeovers is the ___________________ Act.
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Chapter 20: International Financial Management
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Q1) Companies who are only entering into foreign currency markets for a one-off transaction have no need to hedge against exchange risk.
A)True
B)False
Q2) What is the real interest rate if the nominal interest rate is 10 per cent and the expected inflation rate is 3 per cent?
A)7%
B)6.36%
C)6.8%
D)7.2%
Q3) The price at which Australian dollars can be converted into,say,US dollars is known as the:
A)spot exchange rate.
B)direct exchange rate.
C)exchange rate between Australian dollars and US dollars.
D)gold standard.
Q4) ________________ risk is the variability of an entity's value that is due to possible appreciation or depreciation of the currency.
Q5) Foreign currency ___________ are a suitable way to undertake contingent hedging.
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Chapter 21: Management of Short-Term Assets: Inventory
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Q1) Which model assumes that demand for the product is constant and known with certainty?
A)The inventory quantity model.
B)The economic quantity model.
C)The certainty model.
D)The economic order quantity model
Q2) Effective just-in-time operation requires:
A)short distances between suppliers and buyers.
B)carrying only a small amount of safety stocks.
C)the occasional delivery of large quantities of stock.
D)all of the given options.
Q3) Bounce Rubber Store sells 50 000 tyres per year.The wholesale price is $200 per tyre.The cost of processing each order to be placed with the wholesaler is $50 and carrying costs are $1 per tyre per year.What is the optimal time period between orders?
A)22.36 days.
B)1.86 months.
C)3.73 months.
D)2.08 months.
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Chapter 22: Management of Short-Term Assets: Liquid
Assets and Accounts Receivable
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Q1) A major benefit of granting credit to customers is a reduction in the cost of bad debts.
A)True
B)False
Q2) Asset liquidity can be best described as:
A)the ratio of total debt to total assets.
B)the length of time it takes to convert an asset to cash.
C)the ratio of current assets to current liabilities.
D)the ability to meet short-term creditors.
Q3) Treasury management involves decisions about the composition and level of a company's liquid assets.
A)True
B)False
Q4) According to the precautionary motive,businesses hold liquid assets because: A)cash inflows and outflows are not perfectly matched in both timing and amount.
B)there is always the possibility that extra cash will be needed to meet unexpected costs.
C)the opportunity to make profitable investments is anticipated.
D)there is a possibility of bankruptcy.
Page 24
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