Financial Planning
Mock Exam
Course Introduction
Financial Planning is a comprehensive course that introduces students to the principles, practices, and importance of managing personal and organizational finances effectively. Topics covered include budgeting, saving, investing, insurance, retirement planning, tax strategies, and the ethical considerations of financial decision-making. Students will learn to analyze financial statements, develop strategic financial plans, assess risk, and apply forecasting techniques. By the end of the course, participants are equipped with the knowledge and practical skills required to create and implement sound financial strategies for both short-term needs and long-term objectives.
Recommended Textbook
Financial Management Theory and Practice 3rd Canadian Edition by Eugene Brigham
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1934 Verified Questions
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements best describes articles of incorporation and bylaws?
A)The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations, and their purpose is to ensure that the firm's managers run the firm in accordance with government laws.
B)Companies must establish a home office in a particular province, and that province must be the one in which most of their business is conducted.
C)Attorney fees are generally involved when a company develops its articles of incorporation and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have any.
D)The articles of incorporation are concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.
Answer: D
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3
Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) The current cash flow from existing assets is highly relevant to the investor.However,since the value of the firm depends primarily upon its growth opportunities,profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Answer: False
Q2) Hunter Manufacturing Inc.'s December 31,2011,balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding.During 2012,Hunter had $250,000 of net income,and it paid out $100,000 as dividends.What was the book value per share at 12/31/12,assuming that Hunter neither issued nor retired any common stock during 2009?
A)$20.90
B)$22.00
C)$23.10
D)$24.26
Answer: B
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4
Chapter 3: Analysis of Financial Statements
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Q1) Orono Corp.'s sales last year were $435,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times-interest-earned (TIE) ratio?
A)4.97
B)5.23
C)5.51
D)5.80
Answer: D
Q2) The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio,relative to industry norms,suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
A)True
B)False
Answer: True
Q3) High current and quick ratios always indicate that a firm is managing its liquidity position well.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time Value of Money
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Q1) Pace Co.borrowed $25,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Pace have to pay in a 30-day month?
A)$136.32
B)$143.49
C)$151.04
D)$158.59
Q2) What is the present value of the following cash flow stream if the interest rate is 6.0% per year: 0 at Time 0; $1,000 at the end of Year 1; and $2,000 at the end of Years 2,3,and 4?
A)$5,986.81
B)$6,286.16
C)$6,600.46
D)$6,930.4
Q3) How many years would it take $50 to triple if it were invested in a bank that pays 3.8% per year?
A)25.26
B)26.58
C)27.98
D)29.46
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Chapter 5: Financial Planning and Forecasting Financial Statements
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Q1) To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.
A)True
B)False
Q2) Which of the following best describes a firm that professionally uses corporate financial planning?
A)High-performance companies are likely to place more emphasis on forecasting, planning, and business strategy than on cost management and cost accounting.
B)High-performance companies are less likely to place more emphasis on forecasting, planning, and business strategy than on cost management and cost accounting.
C)High-performance companies are indifferent regarding the use of forecasting, planning, and business strategy than on cost management and cost accounting.
D)Low-performance companies are likely to place more emphasis on forecasting, planning, and business strategy than on cost management and cost accounting.
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Chapter 6: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars.What is this an example of?
A)a domestic bond
B)a global bond
C)a foreign bond
D)a Eurobond
Q2) What does the yield to maturity on bonds refer to?
A)the number of years before the bond's maturity
B)the amount of interest income received by investors each year
C)the promised rate of return on the bonds if purchased at current price and held to maturity
D)the capital gain that investors can get in relation to the average industry price of the bonds
Q3) If a bond's par value is greater than its market price,which of the following can we reasonably state about the general direction of interest rates in the recent past?
A)Interest rates have risen.
B)Interest rates have remained relatively stable.
C)Interest rates have declined.
D)None of the above are accurate.
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Page 8
Chapter 7: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is correct?
A)Stock A has more market risk than Portfolio AB.
B)Stock A has more market risk than Stock B but less stand-alone risk.
C)Portfolio AB has more money invested in Stock A than in stock B.
D)Portfolio AB has the same amount of money invested in each of the two stocks.
Q2) What happens to the amount of market risk as the number of assets in a portfolio increases?
A)It decreases.
B)It increases.
C)It remains constant.
D)It changes randomly.
Q3) Diversification obtained within an indexed mutual fund can protect investors from losses during an economic downturn.
A)True
B)False
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Chapter 8: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Q1) If the stock market is semistrong efficient,which of the following statements is correct?
A)All stocks should have the same expected returns; however, they may have different realized returns.
B)Investors can outperform the market if they have access to information that has not yet been publicly revealed.
C)In equilibrium, stocks and bonds should have the same expected returns.
D)All stocks should have the same expected return.
Q2) Clinton's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $50.00,what is its effective annual (not nominal) rate of return?
A)7.52%
B)7.76%
C)8.00%
D)8.24%
Q3) According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
A)True
B)False
Page 10
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) What is the best estimate of the WACC for CGT?
A)9.88%
B)10.18%
C)10.50%
D)11.14%
Q2) ABC Canada pays a $2.50 dividend on its preferred shares.If the price of its preferred shares is $48 and floatation costs would be 5% per share,what is the required rate of return on ABC's preferred shares?
A)4.08%
B)5.48%
C)6.00%
D)3.00%
Q3) Kovach Lumber Company hired you to help estimate its cost of capital.You were provided with the following data: D<sub>1</sub> = $1.10; P<sub>0</sub> = $27.50; g = 6.00% (constant); and F = 5.00%.What is the cost of equity raised by selling new common stock?
A)9.41%
B)9.80%
C)10.21%
D)10.62%
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) McCall Manufacturing has a WACC of 10%.The firm is considering two normal,equally risky,mutually exclusive,but not repeatable projects.The two projects have the same investment costs,but Project A has an IRR of 15%,while Project B has an IRR of 20%.Which of the following statements is correct?
A)Each project must have a negative NPV.
B)Since the projects are mutually exclusive, the firm should always select Project B.
C)If the crossover rate is 8%, Project B will have the higher NPV.
D)If the crossover rate is 8%, Project A will have a higher NPV than Project B.
Q2) In theory,any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity cost of capital.The rule itself should not be affected by managers' tastes,the choice of accounting method,or the profitability of other independent projects.
A)True
B)False
Q3) The MIRR method has wide appeal for professors,but most business executives prefer the NPV method to either the regular IRR or MIRR.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) What is the best approach to take into account the relative risk of a proposed project?
A)adjusting the discount rate upward if the project is judged to have above-average risk
B)reducing the NPV by 10% for risky projects
C)picking a risk factor equal to the average discount rate
D)ignoring risk because project risk cannot be measured accurately
Q2) What is the correct rule for capital budgeting analysis?
A)The interest paid on funds borrowed to finance a project must be included in the project's estimated cash flows.
B)Only incremental cash flows are relevant when making accept/reject decisions.
C)Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision.
D)If a product is competitive with some of the firm's other products, this fact should be incorporated into the estimate of the relevant cash flows. However, if the new product is complementary to some of the firm's other products, this will have no effect on the cash flows used in the analysis.
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Page 13
Chapter 12: Capital Structure Decisions
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Sample Questions
Q1) Canada Manu Corp.(CMC) reports total fixed costs of $10,000.If its average price per unit is $10 and its variable costs per unit are $3,what is CMC's break-even unit production?
A)1,429
B)1,000
C)500
D)$5,000
Q2) Which statement best describes optimal capital structure?
A)As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
B)The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
C)The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
D)The optimal capital structure simultaneously maximizes common share price and minimizes the WACC.
Q3) A firm's financial policy drives its equity beta.
A)True
B)False
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Chapter 13: Distributions to Shareholders: Dividends and Repurchases
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Q1) Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However,M's growth prospects are quite limited,so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized,so its annual operating income fluctuates considerably.However,N has substantial growth opportunities,and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is correct?
A)Firm M probably has a lower debt ratio than Firm N.
B)Firm M probably has a higher dividend payout ratio than Firm N.
C)If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
D)Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
Q2) Which action will best enable a company to raise additional equity capital?
A)Declare a stock split.
B)Begin an open-market purchase dividend reinvestment plan.
C)Initiate a stock repurchase program.
D)Begin a new-stock dividend reinvestment plan.
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Page 15
Chapter 14: Initial Public Offerings Investment Banking and Financial Restructuring
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Sample Questions
Q1) Which of the following best describes the secondary market for stocks?
A)The secondary market is the market in which securities are sold by the first and subsequent buyers.
B)The secondary market is the market in which securities are sold only by the first buyers.
C)The secondary market is the market in which options on stocks are bought and sold by IPO investors
D)The secondary market is the market in which options on stocks are bought and sold by secondary investors.
Q2) Investment banks sometimes act as an agent for the issuer on a best efforts basis,whereby they are paid with a fixed commission.
A)True
B)False
Q3) Best efforts deals are commonly used by well-known,established issuers. A)True
B)False
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Page 16
Chapter 15: Lease Financing
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Q1) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under CRA guidelines.
A)True
B)False
Q2) Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and,under certain conditions,leased assets and associated liabilities do not appear on the firm's balance sheet.
A)True
B)False
Q3) Which of the following describes a sales and leaseback arrangement?
A)A sale and leaseback arrangement is a type of operating lease.
B)A sale and leaseback arrangement is a type of buyback loan.
C)A sale and leaseback arrangement is a type of financial, or capital, lease.
D)A sale and leaseback arrangement is a type of asset-based loan.
Q4) Under which circumstances should an asset be leased?
A)when the NPV is positive and the NAL is also positive
B)when the NPV is positive but the NAL is negative
C)when the NPV is negative and the NAL is negative too
D)when the NPV is negative and the NAL is positive, but smaller than the NPV
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Chapter 16: Capital Market Financing: Hybrid and Other Securities
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Q1) Which of the following best describes a detachable warrant?
A)A detachable warrant is a warrant that can be detached and traded separately from the security with which it was issued. Most traded warrants are originally attached to common shares.
B)A detachable warrant is a warrant that cannot be detached and traded separately from the security with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.
C)A detachable warrant is a warrant that can be detached and traded separately from the security with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.
D)A detachable warrant is a convertible bond that can be detached and traded separately from the security with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.
Q2) Asset-backed commercial papers do not appeal to investors because little is known about the assets backing the securities.
A)True
B)False
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Page 18
Chapter 17: Working Capital Management and Short-Term Financing
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Q1) Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew) its debt.This is especially true if the funds are used to finance long-term rather than short-term assets.
A)True
B)False
Q2) Interest rates charged on loans vary depending on the risk of borrower,and the size of the loan,but not the economic conditions.
A)True B)False
Q3) The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from greater variability of interest costs on short-term debt.Even if its long-term prospects are good,the firm's lender may not renew a short-term loan if the firm is even temporarily unable to repay it.
A)True B)False
Q4) The calculated cost of trade credit can be reduced by paying late.
A)True B)False
Page 19
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Chapter 18: Current Asset Management
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Q1) Which of the following best describes one of the goals of cash management,given that it is referred to as a "non-earning" asset?
A)One goal of cash management is to maximize the amount of cash necessary to conduct business.
B)One goal of cash management is to minimize the amount of cash necessary to conduct business.
C)One goal of cash management is to optimize the amount of cash needed to payout dividends.
D)One goal of cash management is to minimize the amount of cash necessary to pay interest expense.
Q2) An increase in which variable will cause the economic ordering quantity to rise?
A)product demand (sales)
B)current level of inventory
C)purchase price
D)carrying cost
Q3) The aging schedule is a commonly used method for monitoring receivables.
A)True
B)False
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Chapter 19: Financial Options and Applications in Corporate Finance
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Q1) Which of the following statements is correct?
A)If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
B)Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
C)Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
D)Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
Q2) Which term refers to an option that gives the holder the right to buy a stock at a specified price at some future time?
A)a call option
B)a put option
C)a naked option
D)a covered option
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Chapter 20: Enterprise Risk Management
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Q1) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A)Risk management can help a firm maintain its optimal capital budget.
B)Risk management can reduce the expected costs of financial distress.
C)Risk management can help firms minimize taxes.
D)Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
Q2) Which of the following best describes counterparty risk?
A)the risk that one party defaults on its counterparty risk
B)the risk that one party defaults on its bond coupon payments
C)the risk that one party defaults on its derivatives contract obligations
D)there is no such thing as counterparty risk in derivatives markets
Q3) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
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22
Chapter 21: International Financial Management
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Q1) Canada and most other major industrialized nations currently operate under a system of floating exchange rates.
A)True
B)False
Q2) Due to advanced communications technology and the standardization of general procedures,working capital management for multinational firms is no more complex than it is for large domestic firms.
A)True
B)False
Q3) Suppose hockey skates sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals 0.9423 US dollars.If absolute purchasing power parity (PPP) holds,what is the price of hockey skates in the United States?
A)$63.00
B)$74.55
C)$85.88
D)$98.94
Q4) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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Chapter 22: Corporate Valuation and Governance
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Q1) Simonyan Inc.forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?
A)$840
B)$882
C)$926
D)$972
Q2) Suppose Toronto Corp.'s free cash flow in the previous year was $250,000,and FCF is expected to grow at a constant rate of 5%.If the company's weighted average cost of capital is 15%,what is the value of its operations?
A)$2,625,000
B)$2,500,000
C)$2,900,000
D)$2,000,000
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Page 24
Chapter 23: Mergers,Acquisitions,and Restructuring
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Q1) Which of the following is a valid,acceptable reason for a closely held firm proposing a merger activity?
A)synergistic benefits arising from mergers
B)reduction in competition resulting from mergers
C)attempts to stabilize earnings by diversifying
D)minimizing taxes when disposing of excess cash
Q2) The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.
A)True
B)False
Q3) Foreign firms are interested in buying Canadian companies to gain entrance to Canada.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.
A)True
B)False
Q4) Interest expense must be explicitly included in a merger incremental cash flow analysis.
A)True
B)False
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Chapter 24: Decision Trees,real Options and Other Capital Budgeting Techniques
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Q1) Which of the following is an example of a real option?
A)The option to abandon a project is a real option.
B)A call option to abandon a project is a real option.
C)A put option to sell a common stock is a real option.
D)None of the above are real options.
Q2) Refer to Scenario: Oklahoma.Now assume that 1 year from now OI will know if the F-100 has become the industry standard.Also assume that after receiving the cash flows at t = 1,OI has the option to abandon the project,in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1.Assuming that the cost of capital remains at 12%,what is the estimated value of the abandonment option?
A)$2,075
B)$4,067
C)$8,945
D)$10,745
Q3) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
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Page 26