Financial Planning Exam Bank
Course Introduction
Financial Planning is a comprehensive course that introduces students to the core principles and strategies of managing personal and organizational finances. The course covers essential topics such as budgeting, saving, investing, tax planning, retirement planning, risk management, and estate planning. Through real-world case studies and practical exercises, students will learn to develop customized financial plans, assess various investment options, and make informed financial decisions. By the end of the course, students will possess the fundamental skills necessary to create and implement effective financial plans to achieve short- and long-term financial goals.
Recommended Textbook Essentials of Corporate Finance 7th Edition by
Stephen A. Ross Westerfield
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Chapter 1: Introduction to Financial Management
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Q1) Which one of the following occupations best fits into the international area of finance?
A) Bank teller
B) Treasury bill analyst
C) Currency trader
D) Insurance risk manager
E) Local bank manager
Answer: C
Q2) The goal of financial management is to increase the:
A) future value of the firm's total equity.
B) book value of equity.
C) dividends paid per share.
D) current market value per share.
E) number of shares outstanding.
Answer: D
Q3) Todd wants to start his own business and is debating between organizing the business as a sole proprietorship or a corporation. Explain the pros and cons of both forms of business organization.
Answer: 11ea6eac_0fca_a420_8f54_ef199a56b08c_TB2378_00
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Which one of the following statements concerning market and book values is correct?
A) The market value of accounts receivable is generally higher than the book value of those receivables.
B) The market value tends to provide a better guide to the actual worth of an asset than does the book value.
C) The market value of fixed assets will always exceed the book value of those assets.
D) Book values represent the amount of cash that will be received if an asset is sold.
E) The current book value of equipment purchased last year is equal to the initial cost of the equipment.
Answer: B
Q2) Explain why the marginal tax rate, rather than the average tax rate, is used when computing the cash flows from a proposed new project.
Answer: The marginal tax rate is used because that is the tax rate that will apply to the incremental taxable income generated by the new project.
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Chapter 3: Working With Financial Statements
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Q1) Freedom Health Centers has total equity of $861,300, sales of $1.48 million, and a profit margin of 5.2 percent. What is the return on equity?
A) 5.82 percent
B) 6.49 percent
C) 7.18 percent
D) 8.68 percent
E) 8.94 percent
Answer: E
Q2) Eastern Hardwood Sales has total equity of $89,000, a profit margin of 4.8 percent, an equity multiplier of 1.5, and a total asset turnover of 1.3. What is the amount of the firm's sales?
A) $168,200
B) $173,550
C) $181,430
D) $185,620
E) $187,500
Answer: B
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) You and your brother are planning a large anniversary party 3 years from today for your grandparents' 50<sup>th</sup> wedding anniversary. You have estimated that you will need $2,500 for this party. You can earn 3.5 percent compounded annually on your savings. How much would you and your brother have to deposit today in one lump sum to pay for the entire party?
A) $2,199.74
B) $2,254.86
C) $2,308.16
D) $2,334.90
E) $2,368.81
Q2) Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:
A) aggregating.
B) discounting.
C) simplifying.
D) compounding.
E) extrapolating.
Q3) Explain the time value of money principle and also identify the underlying assumption of that principle.
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Chapter 5: Discounted Cash Flow Valuation
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Q1) Appalachian Bank offers you a $135,000, 9-year term loan at 7.5 percent annual interest. What will your annual loan payment be?
A) $18,507.16
B) $19,229.08
C) $20,660.02
D) $20,889.20
E) $21,163.57
Q2) Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for 5 years. What is the amount of each monthly payment?
A) $1,108.91
B) $1,282.16
C) $1,333.33
D) $1,401.49
E) $1,487.06
Q3) Explain the similarities and differences among an ordinary annuity, an annuity due, and a perpetuity.
Q4) What does it mean when a loan is amortized? Explain how amortization methods can vary from one loan to another.
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Chapter 6: Interest Rates and Bond Valuation
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Q1) The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value. The bonds mature in 8 years and pay interest semiannually. These bonds have current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent.
A) 6.12; 6.32; 6.36
B) 6.12; 6.32; 6.42
C) 6.12; 6.36; 6.42
D) 6.23; 6.32; 6.36
E) 6.23; 6.36; 6.42
Q2) A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $27.50 each and matures in 6 years. What is the coupon rate?
A) 2.72 percent
B) 2.75 percent
C) 5.00 percent
D) 5.43 percent
E) 5.50 percent
Q3) List the various determinants of bond yields and indicate the type of situation that would cause each determinant to increase the yield on a bond.
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Chapter 7: Equity Markets and Stock Valuation
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Q1) Pluto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $82.30 per share, what is the required return?
A) 5.47 percent
B) 6.89 percent
C) 7.70 percent
D) 8.23 percent
E) 8.98 percent
Q2) The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return?
A) $2.38
B) $2.43
C) $2.56
D) $2.60
E) $2.64
Q3) Explain how staggering offsets some of the benefits associated with cumulative voting.
Q4) Explain the differences between a broker market and a dealer market.
Page 9
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) The reinvestment approach to the modified internal rate of return:
A) individually discounts each separate cash flow back to the present.
B) reinvests all the cash flows, including the initial cash flow, to the end of the project.
C) discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project.
D) discounts all negative cash flows back to the present and combines them with the initial cost.
E) compounds all of the cash flows, except for the initial cash flow, to the end of the project.
Q2) The average accounting return:
A) measures profitability rather than cash flow.
B) discounts all values to today's dollars.
C) is expressed as a percentage of an investment's current market value.
D) will equal the required return when the net present value equals zero.
E) is used more often by CFOs than the internal rate of return.
Q3) Explain why the net present value is considered to be the best method of analyzing an investment.
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Chapter 9: Making Capital Investment Decisions
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Q1) The tax shield approach to computing the operating cash flow, given a tax-paying firm:
A) ignores both interest expense and taxes.
B) separates cash inflows from cash outflows.
C) considers the changes in net working capital resulting from a new project.
D) is based on the fact that depreciation does not affect the operating cash flows. E) recognizes that depreciation creates a cash inflow.
Q2) The ability to delay an investment:
A) is commonly referred to as the best case scenario.
B) is valuable provided there are conditions under which the investment will have a positive net present value.
C) ensures that the investment will have an expected net present value that is positive. D) offsets the need to conduct sensitivity analysis.
E) is referred to as the option to abandon.
Q3) Explain the difference between scenario analysis and sensitivity analysis and identify the purpose of each.
Q4) Explain the concept of incremental cash flow analysis and its purpose.
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Chapter 10: Some Lessons From Capital Market History
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Q1) The stock of Turner United is priced at $46 a share and has a dividend yield of 2.1 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share?
A) $0.021
B) $0.210
C) $0.966
D) $0.096
E) $0.219
Q2) Katie earned a 2.7 percent real rate of return on her investments for the past year. During that time, the risk-free rate was 4.1 percent and the inflation rate was 3.6 percent. What was her nominal rate of return?
A) 5.30 percent
B) 5.87 percent
C) 6.40 percent
D) 6.67 percent
E) 6.91 percent
Q3) Explain why investors receive exactly what they pay for in a totally efficient market.
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Chapter 11: Risk and Return
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Q1) A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is 1.29 while the beta of stock B is 0.90. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the portfolio is 0.58?
A) $6,000
B) $9,000
C) $12,000
D) $15,000
E) $18,000
Q2) You own a portfolio that is invested 38 percent in stock A, 43 percent in stock B, and the remainder in stockC. The expected returns on these stocks are 10.7 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?
A) 10.55 percent
B) 11.02 percent
C) 11.67 percent
D) 12.42 percent
E) 13.01 percent
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Chapter 12: Cost of Capital
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Q1) The common stock of Yanderloft and Sons has a beta that is 25 percent larger than the overall market beta. Currently, the market risk premium is 9.2 percent while the U.S. Treasury bill is yielding 4.7 percent. What is the cost of equity for this firm?
A) 13.76 percent
B) 14.96 percent
C) 15.80 percent
D) 16.20 percent
E) 17.85 percent
Q2) A firm that uses its weighted average cost of capital as the required return for all of its investments will:
A) maintain a constant value for its shareholders.
B) increase the risk level of the firm over time.
C) make the best possible accept and reject decisions related to those investments.
D) find that its cost of capital declines over time.
E) accept only the projects that add value to the firm's shareholders.
Q3) Explain the concept of the subjective approach to assigning a required return to a project.
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Chapter 13: Leverage and Capital Structure
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Q1) The Outlet has a cost of equity of 16.8 percent, a pre-tax cost of debt of 8.1 percent, and a return on assets of 14.5 percent. Ignore taxes. What is the debt-equity ratio?
A) 0.28
B) 0.36
C) 0.44
D) 0.52
E) 0.57
Q2) Explain why the capital structure of a firm is irrelevant to equity investors.
Q3) Explain how taxes affect the value of a firm based on M&M Proposition I.
Q4) Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed?
A) Claims by unsecured creditors
B) Employee wages
C) Government tax claims
D) Contributions to employee retirement plans
E) Bankruptcy administrative expenses
Q5) Explain the primary difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy.
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Chapter 14: Dividends and Dividend Policy
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Q1) Tuesday, December 1, is the ex-dividend date for Alpha stock. Which one of the following dates is the record date? Assume there are no banking holidays to consider.
A) Friday, November 27
B) Monday, November 30
C) Wednesday, December 2
D) Thursday, December 3
E) Friday, December 4
Q2) Mueller Brothers has 38,000 shares of stock outstanding at a price per share of $59. How many shares will be outstanding if the firm does a 3-for-2 stock split?
A) 24,000 shares
B) 25,333 shares
C) 55,667 shares
D) 57,000 shares
E) 61,000 shares
Q3) You are having a discussion with one of your classmates on dividend policy. Your classmate states that dividend policy is totally irrelevant. Write a response to this statement justifying that in the real-world dividend policy does matter.
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Chapter 15: Raising Capital
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Q1) Currently, you own 5.4 percent of the outstanding stock of Keiffer Industries. The firm has decided to issue additional shares of stock and has given you the first option to purchase 5.4 percent of those additional shares. Which one of the following will you be participating in if you opt to purchase the shares you have been offered?
A) Rights offer
B) Red herring offer
C) Private placement
D) IPO
E) General cash offer
Q2) Lunar Excursions wants to do an IPO but is very uncertain that underwriters will set the most optimal offer price for the securities. Which one of the following might the firm consider to address this uncertainty?
A) Extended quiet period
B) Extended lockup period
C) Best efforts underwriting
D) Dutch auction underwriting
E) Standby underwriting
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Chapter 16: Short-Term Financial Planning
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Q1) Can a firm have a negative cash cycle? If yes, explain how that can occur and discuss whether or not that would be good for a firm. If no, explain why that cannot occur and why preventing it from occurring is good for a firm.
Q2) Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?
A) Inventory period
B) Accounts receivable period
C) Accounts payable period
D) Operating cycle
E) Cash cycle
Q3) Accounts receivable financing is the term used to describe which of the following types of loans which involve either the assignment or the factoring of a firm's accounts receivables?
A) Secured short-term loan
B) Unsecured short-term loan
C) Secured long-term loan
D) Unsecured long-term loan
E) Trust receipt loan
Q4) How can a firm benefit from preparing a short-term financial plan?
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Chapter 17: Working Capital Management
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Q1) A firm offers credit terms of 1/5, net 25. How long is the net credit period?
A) I day
B) 5 days
C) 20 days
D) 25 days
E) 30 days
Q2) How are checks which are deposited into a typical lockbox handled?
A) The checks are deposited into a local bank which then overnights one check for the entire amount to the firm.
B) The checks are collected once a day, normally in the early morning, by a bank employee.
C) The checks are posted to the customer's account prior to being deposited.
D) The checks are collected throughout the day and immediately deposited into the firm's account.
E) The checks are collected and sent overnight to the firm's main office for processing.
Q3) Identify some of the specific costs firms incur if their current asset levels are either too high or too low.
Q4) What are some of the pros and cons of a JIT inventory management system?
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Chapter 18: International Aspects of Financial Management
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Q1) Assume you can currently exchange one U.S. dollar for one hundred Japanese yen. Also assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in Japan. Given these assumptions, how many yen should you expect in exchange for one U.S. dollar next year?
A) More than 100
B) Either 100 or more than 100
C) Exactly 100
D) Either 100 or less than 100
E) Less than 100
Q2) The 1-year forward rate between the U.S. and Japan is ¥122.47 = $1. A 1-year risk-free security in Japan is yielding 5.3 percent while it is 4.6 percent in the U.S. Assume interest rate parity exists. What is the spot rate between the U.S. and Japan?
A) ¥120.41
B) ¥121.08
C) ¥121.66
D) ¥121.94
E) ¥122.03
Q3) Identify four parties that have a demand for U.S. dollars and explain why they wish to obtain those dollars.
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