Financial Planning Exam Review
Course Introduction
Financial Planning is a comprehensive course designed to introduce students to the foundational principles, strategies, and tools utilized in effective personal and professional financial management. Through topics such as budgeting, investment analysis, retirement and estate planning, insurance, and tax considerations, students will learn to identify financial goals, assess financial health, and develop actionable plans to achieve long-term financial stability. The course emphasizes ethical decision-making, risk assessment, and the use of financial software, preparing students to confidently navigate real-world financial scenarios both as individuals and as future professionals in the financial services industry.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) The formation of a Subchapter S corporation is a way to circumvent the double taxation of a small corporation.
A)True
B)False
Answer: True
Q2) Agency theory would imply that conflicts are more likely to occur between management and shareholders when
A) the company is owned and operated by the same person.
B) management acts in the best interests of maximizing shareholder wealth.
C) the chairman of the board is also the chief executive officer (CEO).
D) the board of directors exerts strong and involved oversight of management.
Answer: C
Q3) Which of the following is not a true statement about the goal of maximizing shareholder wealth?
A) It takes into account the timing of cash-flows.
B) It is a short-run point of view which takes risk into account.
C) It considers risk as a factor.
D) None of these.
Answer: B
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Book value per share is the most important measure of value for a stockholder.
A)True
B)False
Answer: False
Q2) Paying dividends to common shareholders will not affect cash flows from financing activities.
A)True
B)False
Answer: False
Q3) Asset accounts on the balance sheet are listed in the order of:
A) liquidity.
B) profitability.
C) size.
D) importance.
Answer: A
Q4) An increase in accounts receivable represents a reduction in cash flows from operations.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Financial Analysis
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Sample Questions
Q1) XYZ's receivables turnover is 4x. The accounts receivable at year-end are $600,000. The average collection period is 90 days. What was the sales figure for the year assuming all sales are on credit?
A) $60,000
B) $6,000,000
C) $2,400,000
D) None of these
Answer: C
Q2) If government bonds pay 7.0% interest and insured savings accounts pay 5.0% interest, stockholders in a moderately risky firm would expect return-on-equity values of A) 5.0%
B) 7.0%
C) 9.0%
D) above 7.0%, but the exact amount is uncertain.
Answer: D
Q3) Liquidity ratios indicate how fast a firm can generate cash to pay bills. A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) The percent-of-sales forecast is likely to be most accurate when used with cyclical companies.
A)True
B)False
Q2) The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period.
A)True
B)False
Q3) Net cash flow is equal to:
A) income after taxes minus depreciation.
B) income after taxes minus dividends.
C) cash receipts minus cash payments.
D) cash receipts minus cash payments minus depreciation.
Q4) When sales volume varies from month to month it is not advisable to use level production.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Operating leverage primarily affects the left hand side of the balance sheet while financial leverage affects the right hand side of the balance sheet.
A)True
B)False
Q2) If a firm has fixed costs of $30,000, variable cost per unit of $.75, and a breakeven point of 5,000 units, the price is:
A) $2.50
B) $6.75
C) $4.00
D) $4.50
Q3) A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle.
A)True
B)False
Q4) The degree of financial leverage measures the percentage change in EPS for every 1 percent move in EBIT.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Yield curves change very little in the short run (3 months).
A)True
B)False
Q2) Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan their rate will be 9 percent. By how much will their earnings after tax change if they choose the more aggressive financing plan instead of the more conservative?
A) $10,800
B) ($10,000)
C) ($6,000)
D) $6,000
Q3) During tight money periods
A) long-term rates are higher than short-term rates.
B) short-term rates are higher than long-term rates.
C) short-term rates are equal to long-term rates.
D) the relationship between short and long-term rates remains unchanged.
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Page 8
Chapter 7: Current Asset Management
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Sample Questions
Q1) Which of the following securities represents an unsecured promissory note issued by a corporation?
A) Certificates of deposit
B) Savings accounts
C) Commercial paper
D) Money market fund
Q2) Level production offers all of the following benefits except:
A) lower overtime usage
B) maximum efficiency
C) greater storage space
D) higher use of capacity
Q3) One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future.
A)True
B)False
Q4) Treasury bills are unique in that they trade on a premium basis.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
A)True
B)False
Q2) Annual payment.
Q3) The cost of not taking the discount on trade credit of 3/20, net 90 is equal to
A) 15.9%
B) 16.3%
C) 18.0%
D) 17.4%
Q4) Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.
A)True
B)False
Q5) At historically low interest rate levels, compensating balances increase.
A)True B)False
Q6) What is the effective rate of interest if the loan is an installment loan with 12 payments?
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment?
A) $566,400
B) $681,550
C) $150,000
D) $162,000
Q2) A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be?
Present value of $1 PV<sub>IF</sub>= .178
Future value of $1 FV<sub>IF</sub>= 5.604
Present value of annuity PV<sub>IFA</sub>= 9.129
Future value of annuity FV<sub>IFA</sub>= 51.16
A) $1,435
B) $13,070
C) $8,043
D) $13,102
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The Nickelodeon Manufacturing Co. has a series of $1000 par value bonds outstanding. Each bond pays interest semi-annually and carries an annual coupon rate of 6%. Some bonds are due in four years while others are due in 10 years. If the required rate of return on bonds is 10%, what is the current price of:
a) the bonds with 4 years to maturity?
b) the bonds with 10 years to maturity?
c) Explain the relationship between the number of years until a bond matures and its price.
Q2) High-risk corporate bonds are as risky as junk bonds.
A)True
B)False
Q3) The yield to maturity is always equal to the interest payment of a bond.
A)True
B)False
Q4) Which of the following regarding preferred stock is true?
A) If the price decreases, required rate of return has decreased
B) If the required rate of return increases, the price decreases
C) If the required rate of return increases, the price increases
D) The price in the market remains at par
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital.
A)True
B)False
Q2) A firm with a higher beta than another firm will have a higher required rate of return.
A)True
B)False
Q3) In determining the cost of preferred stock, the earnings on outstanding preferred stock may be used as a proxy.
A)True
B)False
Q4) Using the constant growth model, a firm's expected (D<sub>1</sub>) dividend yield is 4% of the stock price, and its growth rate is 5%. If the tax rate is .35%, what is the firm's cost of equity?
A) 10%
B) 6.65%
C) 9.0%
D) More information is required
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) Investors discount the later years of a long-term project at a lower rate because they are generally less precise.
A)True
B)False
Q2) In a replacement decision, a book loss on an old asset can be a valuable feature.
A)True
B)False
Q3) The modified internal rate of return assumes that inflows are reinvested at 80 percent of the internal rate of return.
A)True
B)False
Q4) A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset) would:
A) go up.
B) go down.
C) remain the same.
D) more information required.
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Projects with high positive correlation are sometimes valuable because they allow us to smooth out the overall performance of the firm during a business cycle.
A)True B)False
Q2) The coefficient of correlation represents the standard deviation divided by the expected value.
A)True B)False
Q3) A common stock with a beta of 1.0 is said to be of equal risk with the market.
A)True B)False
Q4) The "efficient frontier" indicates
A) alternatives with neutral combinations of risk and return.
B) alternatives with the highest returns.
C) alternatives with the best combination of risk and return.
D) alternatives with no risk.
Q5) Risk is not only measured in terms of losses, but also in terms of variability. A)True B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) In times of recession, retain earnings decline as a percent of internal funds.
A)True
B)False
Q2) Municipal securities are called tax exempt because no federal taxes must be paid on interest received.
A)True
B)False
Q3) The formation of the European Monetary Union and its single currency Euro is expected to
A) eliminate foreign currency risk between its member countries.
B) create stock and bond prices denominated in Euros.
C) have stock and bond indexes tracking a combined group of common stocks and bonds from the member countries.
D) All of these.
Q4) Federally sponsored credit agencies include all but which of the following?
A) Securities Investor Protection Corporation (SIPC)
B) Federal Home Loan Banks (FHLB)
C) Student Loan Marketing Association (Sallie Mae)
D) Federal National Mortgage Association (Fannie Mae)
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) Which of the following is not an advantage of private placement?
A) No expensive registration process
B) Lower interest rates
C) More flexibility in negotiation
D) No extensive public relations requirements
Q2) The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.
A)True
B)False
Q3) The term "underwriter" is synonymous with risk-taker or risk-bearer.
A)True
B)False
Q4) Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering.
A)True
B)False
Q5) Which of the following are advantages of being privately placed?
A) Lower costs
B) Basic registration with the SEC
C) More investors to purchase shares
D) Two of the above
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium?
A) $390,000
B) $1,080,000
C) $585,000
D) $702,000
Q2) If investors are pessimistic about the future, the spread between yields on high-grade and low-grade bonds
A) increases.
B) stays the same.
C) decreases.
D) none of these
Q3) Leasing is a popular form of financing because
A) lease provisions are generally less restrictive than a bond indenture.
B) the lessor likely has experience with the equipment being leased.
C) the lessee may not be financially able to purchase.
D) all of these.
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Primary investors in preferred stock include all of the following except:
A) commercial banks
B) corporations
C) insurance companies
D) pension funds
Q2) Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.
A)True
B)False
Q3) Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.
Q4) Investors are usually in favor of poison pills because it prevents takeovers.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) All of the following uses of annual earnings would contribute toward an increase in shareholder value except:
A) repurchase shares
B) invest in projects with high profit potential
C) payoff debt
D) all of these increase shareholder value
Q2) The residual theory of dividend policy asserts that
A) sufficient dividends are paid to maintain a stable total dividend payment-any residual is invested internally by the firm.
B) sufficient dividends are paid to maintain a stable dividend payout ratio-any residual is invested internally by the firm.
C) dividends are paid out of the residual remaining after internal investments by the firm.
D) dividend payments are adjusted to maintain dividends at a constant percentage of total cash flows.
Q3) A firm will pay dividends as long as it has cash available.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The interest rate on convertible bonds is typically one-third higher than similar non-convertible issues.
A)True
B)False
Q2) Which of the following is true about warrants?
A) At high stock prices, the warrant premium is high.
B) A rising stock price is usually followed by an increase in the price of the warrant.
C) a and b are true.
D) None of these are true.
Q3) A $1,000 par value bond with a conversion price of $50 has a conversion ratio of
A) $40
B) 40 shares
C) $20
D) 20 shares
Q4) A derivative is a financial instrument whose value is determined by A) a regulatory body such as the SEC.
B) an underlying security.
C) futures and options.
D) None of these.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) A cash purchase is similar to a capital budgeting decision.
A)True
B)False
Q2) Synergy is said to occur when the whole is
A) equal to the sum of the parts.
B) less than the sum of the parts.
C) greater than the sum of the parts.
D) greater than or equal to the sum of the parts.
Q3) Which of the following terms is not specifically related to an unfriendly buyout?
A) Takeover tender offer.
B) White knight.
C) Saturday night special.
D) Synergy.
Q4) A takeover tender offer lets a company attempt to acquire a target firm against its will.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) The value of a country's currency may increase by
A) continuous excessive government spending.
B) a stock market rally in that country.
C) an increase in that country's money supply.
D) more than one of the above.
Q2) Investors and firms who diversify their U.S. portfolios by buying foreign stocks or investing in foreign subsidiaries take on a much higher level of portfolio risk than if they had invested in domestic stocks or companies.
A)True
B)False
Q3) Which of the following is not a reason for U.S. firms operating in foreign markets?
A) Less expensive labor.
B) Better economic and political environment.
C) Tax incentives.
D) Achieve international diversification.
Q4) A rising euro and falling dollar will increase U.S. exports to Europe.
A)True
B)False
Q5) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
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