Financial Planning
Exam Solutions
Course Introduction
Financial Planning is a comprehensive course that explores the principles and practices of managing personal and organizational finances to achieve long-term financial goals. Through this course, students develop an understanding of budgeting, saving, investing, risk management, retirement planning, tax strategies, and the ethical considerations in financial decision-making. Emphasis is placed on creating financial plans, evaluating financial products and services, and applying analytical tools to assess financial health. The course combines theoretical frameworks with real-world case studies to equip students with the practical skills needed for effective financial planning in a dynamic economic environment.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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20 Chapters
2091 Verified Questions
2091 Flashcards
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Page 2
Chapter 1: Getting Started-Principles of Finance
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87 Verified Questions
87 Flashcards
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Sample Questions
Q1) Which of the following categories of owners have limited liability?
A)General partners
B)Sole proprietors
C)Shareholders of a corporation
D)Both A and B
Answer: C
Q2) Foregoing the earning potential of a dollar today is referred to as the:
A)time value of money.
B)opportunity cost concept.
C)risk/return tradeoff.
D)creation of wealth.
Answer: B
Q3) What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?
A)Sole proprietorships are subject to double taxation of profits.
B)The cost of formation.
C)Inadequate profit sharing.
D)Owners have unlimited liability.
Answer: D
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Page 3
Chapter 2: Firms and the Financial Market
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35 Flashcards
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Sample Questions
Q1) Most businesses are considered to be savers.
A)True
B)False
Answer: False
Q2) Each year,shareholders receive a dividend equal to the firm's net earnings divided by the number of shares of common stock.
A)True
B)False
Answer: False
Q3) In Financial markets,borrowers and lenders most both be located in the same country.
A)True
B)False Answer: False
Q4) Banks that are financial intermediaries generate earnings when they facilitate the transfer of money from savers to borrowers by paying savers a smaller return than they demand from borrowers.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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63 Flashcards
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Sample Questions
Q1) Corporate income statements are usually compiled on an accrual,rather than cash,basis.
A)True
B)False Answer: True
Q2) Which of the following would NOT be included as a liability in a corporate balance sheet?
A)Accruals
B)Notes payable
C)Accounts payable
D)Bonds
E)Depreciation
Answer: E
Q3) The income statement represents a snapshot of account balances at one point in time.
A)True
B)False Answer: False
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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114 Flashcards
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Sample Questions
Q1) GAAP,Inc.has total assets of $2,575,000,sales of $5,950,000,total liabilities of $1,855,062,and a net profit margin of 2.9%.What is GAAP's return on equity? Round to the nearest 0.1%.
A)8.6%
B)24.0%
C)16.4%
D)4.4%
Q2) Which of the following statements is true?
A)Current assets consist of cash,accounts receivable,inventory,and net plant,property,and equipment.
B)The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
C)For the average firm,inventory is considered to be more "liquid" than accounts receivable.
D)A successful firm's current liabilities should always be greater than its current assets.
Q3) There is no such thing as a liquidity ratio being too high.
A)True
B)False
Q4) Discuss the limitations of ratio analysis.
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Page 6
Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) To compound $100 quarterly for 20 years at 8%,we must use:
A)40 periods at 4%.
B)five periods at 12%.
C)10 periods at 4%.
D)80 periods at 2%.
Q2) Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years.What annual rate of interest will you be paying?
Q3) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?
A)$1,048
B)$1,010
C)$1,038
D)$808
Q4) Which of the following provides the greatest annual interest?
A)10% compounded annually
B)9.5% compounded monthly
C)9% compounded quarterly
D)8.5% compounded daily
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) Which of the following statements is true?
A)The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period.
B)An annuity is a series of equal payments that are made,or received,forever.
C)The effective annual rate (APR)of a loan is higher the less frequently payments are made.
D)The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period.
Q2) Your parents are planning to retire in Phoenix,AZ in 20 years.Currently,the typical house that pleases your parents costs $200,000,but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years.In order to buy a house upon retirement,what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?
A)$21,910.00
B)$7,650.94
C)$10,000.00
D)$14,715.52
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Less risky investments have lower standard deviations than do more risky investments.
A)True
B)False
Q2) Under the efficient market hypothesis,would securities be properly priced.
Q3) Investments in emerging markets have higher volatility than do U.S.Stocks.
A)True
B)False
Q4) Because returns are more certain for the least risky investments,the required return on these investments should be higher than the required returns on more risky investments.
A)True
B)False
Q5) The holding period return is always positive.
A)True
B)False
Q6) The expected rate of return is the sum of each possible return times it likelihood of occurrence.
A)True
B)False Page 9
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Page 10
Chapter 8: Risk and Return-Capital Market Theory
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105 Flashcards
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Sample Questions
Q1) The beta of ABC Co.stock is the slope of:
A)the security market line.
B)the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C)the arbitrage pricing line.
D)the characteristic line for a plot of ABC Co.returns against the returns of the market portfolio for the same period.
Q2) The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.
A)True
B)False
Q3) If there is a 20% chance we will get a 16% return,a 30% chance of getting a 14% return,a 40% chance of getting a 12% return,and a 10% chance of getting an 8% return,what is the expected rate of return?
A)12%
B)13%
C)14%
D)15%
Q4) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Given the anticipated rate of inflation (i)of 6.3% and the real rate of interest (R)of 4.7%,find the nominal rate of interest (r).
Q2) A(n)________ is used to outline the issuing company's contractual obligations to bondholders.
A)mortgage
B)debenture
C)bond rating
D)indenture
Q3) As investors' required rate of return on a bond increases,the value of the bond increases also.
A)True
B)False
Q4) The market price of a 20-year,$1,000 bond that pays 9% interest semiannually is $774.31.What is the bond's yield to maturity?
Q5) Mortgage bonds:
A)are a type of debenture.
B)are secured by a lien on real property.
C)usually pay little or no interest.
D)can only be issued by financial institutions.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) What is the value of a preferred stock that pays a $2.10 dividend to an investor with a required rate of return of 11% (round your answer to the nearest $1)?
A)$19
B)$23
C)$17
D)$21
Q2) Edison Power of light has an outstanding issue of cumulative preferred stock with an annual fixed dividend of $2.00 per share.It has not paid the preferred dividend for the last 3 years,but intends to pay a dividend on the common stock in the coming year.Before Edison can pay a dividend on the common stock
A)preferred shareholders may cast all their votes for a single director.
B)preferred shareholders must receive dividends totaling $8.00 per share.
C)preferred shareholders must receive $2.00 per share.
D)will not necessarily receive any dividend.
Q3) Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.
Q4) Determine the rate of return on a preferred stock that costs $50 and pays a $6 per share dividend.
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Page 13
Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).The company accepts all projects with a payback period of 2 years or less.
A)The payback rule would reject this project because of its risks are too high.
B)The payback rule would reject this project because all negative cash flows are added together.
C)If strictly applied,the payback rule would reject this project.
D)If strictly applied,the payback rule would accept this project.
Q2) One of the disadvantages of the payback method is that it ignores cash flows beyond the payback period.
A)True
B)False
Q3) Which of the following factors is least important to capital budgeting decisions.?
A)The time value of money
B)The risk-return tradeoff
C)Net income based on accrual accounting principles
D)Cash flows directly resulting from the decision
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Page 14
Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the depreciable cost basis of the machine?
A)$3,025,000
B)$2,950,000
C)$2,575,000
D)$2,350,000
Q2) In the fourth and final year of a project,SVC expects operating cash flow of $440,000.The project required an $80,000 investment in working capital at the beginning.Of that amount,$60,000 will be recovered in year 4.Machinery associated with the project will be sold for exactly its under appreciated value of $15,000.Total free cash flow for the fourth year is:
A)$75,000.
B)$1$500,000.
C)$515,000.
D)$535,000.
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Page 15
Chapter 13: Risk Analysis and Project Evaluation
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103 Flashcards
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Sample Questions
Q1) List at least four typical value drivers that could seriously impact the outcome of a project.
Q2) Which of the following is a reason why risk analysis is an important part of capital budgeting?
A)The people who propose projects have no vested interest in whether or not they are accepted.
B)Marketing managers are rarely excessively optimistic.
C)Project cash flows can be highly uncertain.
D)Financial analysts are rarely excessively pessimistic.
Q3) What is the project's NPV if success is modest and it is not expanded?
A)$10,000
B)($10,000)
C)$110,000
D)The present value of a perpetual cash flow cannot be determined.
Q4) Webster Footwear believes that a new line of foul weather footwear they are planning to introduce this year will result in an NPV of $500,000 if the winter weather is exceptionally cold and wet,$400,000 if weather is normal,and $200,000 if winter is relatively warm and dry.The probability of a hard winter is 30%,an average winter is 50%,and a mild winter 20%.Compute the project's expected NPV.
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Assuming an after-tax cost of preferred stock of 12% and a corporate tax rate of 40%,a firm must earn at least $20 before tax on every $100 invested.
A)True
B)False
Q2) Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of common equity using the CAPM approach?
A)21.25%
B)15.81%
C)9.25%
D)6.32%
Q3) Flotation costs increase the amount of funds that must be raised to finance an investment.
A)True B)False
Q4) The cost of common equity using the dividend-growth model is:
A)11.00%.
B)11.32%.
C)11.50%.
D)11.72%.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Zybeck Corp.projects operating income of $4 million next year.The firm's income tax rate is 40%.Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share,no preferred stock,and no debt.The firm is considering two alternatives to finance a new product: (a)the issuance of $6 million of 10% bonds,or (b)the issuance of 60,000 new shares of common stock.There are no issuance costs for either the bonds or the stock.If Zybeck issues common stock this year,what will projected EPS be next year?
A)$2.10
B)$2.96
C)$2.33
D)$1.67
Q2) A company whose rate of return on investments is higher than the interest rate on its debt is said to have:
A)unfavorable financial leverage.
B)a sub-optimal capital structure.
C)favorable financial leverage.
D)negative financial leverage.
Q3) List and briefly explain at least two important reasons why capital structures tend to differ between industries and even companies within the same industry.
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Page 18
Chapter 16: Dividend Policy
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Sample Questions
Q1) Since 2003 for most investors the tax rate on dividends has been ________ and the tax rate on capital gains has been ________.
A)28%,15%
B)15%,15%
C)25%,25%
D)20%,34%
Q2) A stock split will cause changes in the dollar value of which of the following?
A)The total value of an investment in the company's stock
B)The book value of common equity
C)The market value of common equity
D)The price of the stock
Q3) Which of the following would result from payment of the stock dividend?
A)Total equity would remain at $50,000,000.
B)Total equity would increase to $57,500,000.
C)Total equity would decrease to $43,478,261.
D)The effect on the equity account would depend on the market's reaction to the dividend.
Q4) The ex-dividend date occurs prior to the declaration date.
A)True
B)False
Page 19
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Long-term financial planning results in:
A)a cash budget.
B)pro forma financial statements.
C)a sales forecast for the next 1 to 3 years.
D)a general narrative detailing near-term scenarios.
Q2) If the firm's current fixed assets are sufficient to support the projected level of new sales,then these assets would be projected to remain unchanged for the forecast period.
A)True
B)False
Q3) The percent-of-sales method is a commonly used method for estimating a firm's financing needs.
A)True
B)False
Q4) The first step involved in predicting financing needs is:
A)projecting the firm's sales revenues and expenses over the planning period.
B)estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C)determining the firm's financing needs throughout the planning period.
D)none of the above.
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Chapter 18: Working Capital Management
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Sample Questions
Q1) The primary advantage that factoring accounts receivable provides is:
A)the flexibility it gives to the borrower.
B)that the financial institution bears the risk of collection.
C)the low cost as compared with other sources of short-term financing.
D)that the financial institution services the accounts.
Q2) The use of short-term debt provides flexibility in financing since the firm is only paying interest when it is actually using the borrowed funds.
A)True
B)False
Q3) Which of the following is most likely to be a temporary source of financing?
A)Commercial paper
B)Preferred stock
C)Long-term debt
D)All of the above
Q4) The Smith Corporation has purchased $500,000 worth of inventory.The vendor offers terms of 1/15 net 45.Unfortunately,Smith does not have enough cash available to take advantage of the discount.It can borrow $500,000 from Wesson National Bank for 30 days at an annual percentage rate of 6%.Should Smith forego the discount or pay within the discount period with money borrowed from the bank?
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Chapter 19: International Business Finance
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Sample Questions
Q1) Trading in foreign exchange markets is dominated by:
A)Russian rubles,Indian rupees and Indonesian rupeas.
B)Spanish pesetas,German marks,French francs.
C)Chinese renminbis,Indian rupees and pesos of various Latin American countries.
D)U.S.dollars,the British pound,the euro and the yen.
Q2) According to the international Fisher effect,if the nominal interest rate in Russia is 9.5% and the inflation rate is 8%,the real rate of interest is approximately:
A)18.26%.
B)6.5%.
C)1.5%.
D)-1.5%.
Q3) Transactions carried out in the foreign exchange markets include:
A)spot transactions.
B)forward exchange contracts which allow the exchange of one currency for another today.
C)swaps.
D)both A and B.
Q4) What is the role of arbitrage in the foreign exchange markets?
Q5) What is the difference between and "ask" quote and a "bid" quote.
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enters into an agreement to buy the wine at a price of 30 euros to the case.Payment will be due at the end of November.They expect to sell the wine to restaurants and retailers for $63 per case.If Hudson Valley does not hedge its position and the exchange rate in November is $1.50 /euro,what is the gross profit on the wine?
A)$180,000
B)($180,000)
C)$330,000
D)$150,000
Q2) What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?
Q3) A purchaser of commodities who is completely hedged with forward contracts will profit if prices fall before the purchase is concluded.
A)True
B)False
Q4) (Business of Life)What guidelines should determine whether or not an individual should buy life insurance?
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Page 23