Foundations of Finance
Exam Answer Key
Course Introduction
Foundations of Finance introduces students to the fundamental principles and analytical tools essential for understanding financial decision-making within organizations. The course covers key topics such as the time value of money, valuation of bonds and stocks, risk and return, portfolio diversification, capital budgeting, and the functioning of financial markets. Emphasis is placed on applying quantitative techniques to assess investment opportunities and financial performance, while also considering broader economic and ethical implications. Through case studies and practical examples, students gain a solid grounding in the concepts and methods that underpin modern financial management and investment analysis.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley
Available Study Resources on Quizplus
17 Chapters
1889 Verified Questions
1889 Flashcards
Source URL: https://quizplus.com/study-set/3512
Page 2
Chapter 1: An Overview of Finance
Available Study Resources on Quizplus for this Chatper
42 Verified Questions
42 Flashcards
Source URL: https://quizplus.com/quiz/69785
Sample Questions
Q1) The financial manager must execute his or her duties independent of the other activities of the firm in order to properly maximize the value of the firm.
A)True
B)False
Answer: False
Q2) Coordination of the finance function and the marketing function is critical to the success of newly formed companies which must generate enough cash to survive
A)True
B)False
Answer: False
Q3) There are financial implications in virtually all business decisions, and non-financial executives must understand the financial implications of the decisions they make.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above.
3
Chapter 2: Financial Assets Instruments
Available Study Resources on Quizplus for this Chatper
111 Verified Questions
111 Flashcards
Source URL: https://quizplus.com/quiz/69784
Sample Questions
Q1) Sharon has a convertible bond with a face value of $1,000 that can be converted into 40 shares of common stock of Mountain Ice Corporation.If the current price of the stock is $20, what is the conversion price of the bond?
A) $20
B) $50
C) $800
D) $500
E) None of the above.
Answer: E
Q2) The income that an investor earns from municipal bonds is
A) exempt from federal, state, and local taxes.
B) generally exempt from federal taxes, but most states impose local taxes.
C) generally exempt from state and local taxes, but taxed federally.
D) fully taxed by federal, state, and local authorities.
Answer: B
Q3) Retained earnings are the difference between the value of newly issued stock and its par value.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Financial Markets and the Investment Banking Process
Available Study Resources on Quizplus for this Chatper
47 Verified Questions
47 Flashcards
Source URL: https://quizplus.com/quiz/69783
Sample Questions
Q1) The market value of the Japanese stock markets exceeds the market value of the major exchanges in the United States.
A)True
B)False
Answer: False
Q2) After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.
A)True
B)False
Answer: True
Q3) Which of the following assets are traded in the derivative markets?
A) Stocks, bonds, and options
B) Stocks, futures, and options
C) Options, futures, and swaps
D) Futures, bonds, and swaps
Answer: C
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Financial Intermediaries and the Banking System
Available Study Resources on Quizplus for this Chatper
98 Verified Questions
98 Flashcards
Source URL: https://quizplus.com/quiz/69782
Sample Questions
Q1) Depository institutions create money when they use their excess reserves to make loans or acquire new investments.
A)True
B)False
Q2) The major asset of savings and loans is
A) mortgage-backed securities.
B) construction loans.
C) residential (home) mortgages.
D) cash and investment accounts.
E) government securities.
Q3) The Federal Deposit Insurance Corporation (FDIC) approves and charters all federal, or national, banks and many state banks.
A)True
B)False
Q4) Goldsmiths became banks when they began to hold fractional reserves and make loans.
A)True
B)False
Page 6
To view all questions and flashcards with answers, click on the resource link above.
Chapter 5: The Cost of Money Interest Rates
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/69781
Sample Questions
Q1) Assume that the current yield curve is upward sloping, or normal.This implies that
A) Short-term interest rates are more volatile than long-term rates.
B) Inflation is expected to subside in the future.
C) The economy is at the peak of a business cycle.
D) Long-term bonds are a better buy than short-term bonds.
E) None of the above statements is necessarily implied by the yield curve given.
Q2) The market segmentation theory of the term structure is, essentially, the expectations theory with the addition of maturity risk premiums.
A)True
B)False
Q3) The price of a bond bought at a discount cannot go down in the financial markets.
A)True
B)False
Q4) Expectations of high inflation lead to low interest rates and vice versa.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Business Organizations and the Tax Environment
Available Study Resources on Quizplus for this Chatper
96 Verified Questions
96 Flashcards
Source URL: https://quizplus.com/quiz/69780
Sample Questions
Q1) In a limited partnership, the liability of the limited partners generally is restricted to the amount of funds that they have invested in the company but the general partners have unlimited liability.
A)True
B)False
Q2) By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized, hence shareholders' wealth also will be maximized.
A)True
B)False
Q3) The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.
A)True
B)False
Q4) Which of the following are important in determining the value of the firm?
A) Expected future cash flows.
B) Timing of future cash flows.
C) Riskiness of future cash flows.
D) All of the above.
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Analysis of Financial Statements
Available Study Resources on Quizplus for this Chatper
123 Verified Questions
123 Flashcards
Source URL: https://quizplus.com/quiz/69779
Sample Questions
Q1) If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.
A)True
B)False
Q2) Current cash flow from existing assets is highly relevant to the investor.However, the value of the firm depends primarily upon its growth opportunities.As a result, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Q3) The book value of an asset is the market value less any accumulated depreciation.
A)True
B)False
Q4) If a positive change in gross fixed assets is greater than the change in accumulated depreciation for a particular year, net fixed assets increase and this constitutes a source of funds.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Financial Planning and Control
Available Study Resources on Quizplus for this Chatper
122 Verified Questions
122 Flashcards
Source URL: https://quizplus.com/quiz/69778
Sample Questions
Q1) Other things held constant, the greater the firm's use of debt, the greater the change in EPS that will result from a change in sales volume.
A)True
B)False
Q2) One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.
A)True
B)False
Q3) Operating costs include variable costs, depreciation and interest charges.
A)True
B)False
Q4) Underestimating the sales in your forecast could have which of the following effects on the firm?
A) The firm could acquire too many fixed assets.
B) The firm would have higher costs for depreciation and storage.
C) The firm could lose market share to their competitors.
D) The firm would have too high of a total asset turnover.
To view all questions and flashcards with answers, click on the resource link above.
Page 10
Chapter 9: Time Value of Money
Available Study Resources on Quizplus for this Chatper
132 Verified Questions
132 Flashcards
Source URL: https://quizplus.com/quiz/69777
Sample Questions
Q1) Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated, or simple, rate that Bank B would have to offer to make you indifferent between the two investments?
A) 9.67%
B) 9.76%
C) 9.83%
D) 9.87%
E) 9.93%
Q2) The savings rate of individuals in the U.S.has trended higher since the 1980s and it is now higher than the savings rate of most other developed countries.
A)True
B)False
Q3) The process of discounting or finding the present value of a cash flow to be received in the future is really the reverse of compounding.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: Valuation Concepts
Available Study Resources on Quizplus for this Chatper
126 Verified Questions
126 Flashcards
Source URL: https://quizplus.com/quiz/69776
Sample Questions
Q1) A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent.If you require a 14 percent rate of return, what is the current dividend on this stock?
A) $3.00
B) $3.81
C) $4.29
D) $4.75
E) $6.13
Q2) Your client has been offered a 5-year, $1,000 par value bond with a 10 percent coupon.Interest on this bond is paid quarterly.If your client is to earn a simple rate of return of 12 percent, compounded quarterly, how much should she pay for the bond?
A) $800
B) $926
C) $1,025
D) $1,216
E) $981
Q3) A newly issued bond generally sells at, or very close to, its par value.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: Risk and Rates of Return
Available Study Resources on Quizplus for this Chatper
104 Verified Questions
104 Flashcards
Source URL: https://quizplus.com/quiz/69775
Sample Questions
Q1) Which of the following statements is most correct?
A) The expected return on a portfolio of financial assets is equal to the summation of the products of the expected returns of the individual assets multiplied by the probability of each return being realized.
B) When adding new securities to a portfolio, the higher or more positive the degree of correlation between the new securities and those already in the portfolio, the greater the benefits of the additional portfolio diversification.
C) In portfolio analysis, we rarely use ex post (historical) returns and standard deviations, because we are interested in ex ante (future) data.
D) Portfolio diversification reduces the variability of returns on each security held in the portfolio.
E) All of the above statements are false.
Q2) In a market dominated by risk-averse investors, riskier securities must have higher expected returns, as estimated by the average investor, than less risky securities.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: The Cost of Capital
Available Study Resources on Quizplus for this Chatper
115 Verified Questions
115 Flashcards
Source URL: https://quizplus.com/quiz/69774
Sample Questions
Q1) Which of the following statements is most correct?
A) The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant component that makes up the firm's target capital structure.
B) The weighted average cost of capital is calculated on a before-tax basis.
C) An increase in the risk-free rate is likely to increase the marginal cost of both debt and equity financing.
D) Answers a and c are both correct.
E) All of the above answers are correct.
Q2) Refer to J.Ross and Sons.What is the firm's cost of newly issued preferred stock?
A) 10.0%
B) 12.5%
C) 15.5%
D) 16.5%
E) 18.0%
Q3) Only long-term debt should be used to compute the component cost of debt used in the WACC.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 14
Chapter 13: Capital Budgeting
Available Study Resources on Quizplus for this Chatper
201 Verified Questions
201 Flashcards
Source URL: https://quizplus.com/quiz/69773
Sample Questions
Q1) Which of the following statements is correct?
A) If a firm's stockholders are well diversified, we know from theory and from studies of market behavior that corporate risk is not important.
B) Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk.
C) Empirical studies of the determinants of required rates of return (r) have found that only market risk affects stock prices.
D) Market risk is important but does not have a direct effect on stock price because it only affects beta.
Q2) Normal Projects Q and R have the same NPV when the discount rate is zero.However, Project Q has larger early cash flows than R.Therefore, we know that at all discount rates greater than zero, Project R will have a greater NPV than Q.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
15
Chapter 14: Capital Structure and Dividend Policy Decisions
Available Study Resources on Quizplus for this Chatper
120 Verified Questions
120 Flashcards
Source URL: https://quizplus.com/quiz/69772
Sample Questions
Q1) Once a target capital structure for a firm is determined the firm ____.
A) does not allow the target to change.
B) uses it as guide for raising capital.
C) issues debt to lower leverage.
D) none of the above.
Q2) Business risk, which is the risk inherent in a firm's assets if it uses less than its optimal amount of debt, is one important influence in the capital structure decision.
A)True
B)False
Q3) What is the single most important determinant of capital structure for a company?
A) Business risk
B) Financial risk
C) Exchange rate risk
D) Interest rate risk
Q4) According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Working Capital Management
Available Study Resources on Quizplus for this Chatper
174 Verified Questions
174 Flashcards
Source URL: https://quizplus.com/quiz/69771
Sample Questions
Q1) Small, undercapitalized firms
A) Are generally users of net trade credit.
B) Are major users of banker's acceptances.
C) Generally do not issue commercial paper.
D) Typically have a high cost of debt capital.
E) Are described by all of the above statements.
Q2) Determining the appropriate amount of total current assets and the amount in specific asset accounts, as well as their financing, are basic elements of working capital policy.
A)True
B)False
Q3) Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.
A)True
B)False
Q4) Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Investment Concepts
Available Study Resources on Quizplus for this Chatper
103 Verified Questions
103 Flashcards
Source URL: https://quizplus.com/quiz/69770
Sample Questions
Q1) An investor who trades on margin generally will receive a margin call when the stock price increases significantly because the broker needs to determine whether the investor wants to liquidate the position to take advantage of the profits that are available.
A)True
B)False
Q2) Income securities are used primarily to
A) Invest in retirement planning.
B) Supplement current income.
C) Shelter current income from taxes.
D) Defer interest income to a later date.
E) None of the above.
Q3) The simple arithmetic average return and the geometric average return will be equal only if the annual returns are increasing over time.
A)True
B)False
Q4) The primary reason people invest is to supplement current income.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 17: Security Valuation and Selection
Available Study Resources on Quizplus for this Chatper
110 Verified Questions
110 Flashcards
Source URL: https://quizplus.com/quiz/69769
Sample Questions
Q1) Technical analysts often are called chartists because they depend solely on charts and graphs to determine stock market trends.
A)True B)False
Q2) When economists measure the aggregate economy and say that it is either expanding or contracting, they are indicating the direction of the current business cycle.
A)True B)False
Q3) The monetary policy of the United States is formulated and carried out by the Federal Reserve.
A)True B)False
Q4) The fiscal policy of the United States is formulated and carried out by the Federal Reserve.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 19