Fundamentals of Finance Final Test Solutions
Course Introduction
Fundamentals of Finance introduces students to the essential principles and concepts that underpin financial decision-making in individuals, businesses, and organizations.
Topics include the time value of money, risk and return, valuation of stocks and bonds, capital budgeting, and the role of financial markets. Students will learn how to analyze financial statements, understand the basics of portfolio management, and apply quantitative methods to financial problems. The course provides a solid foundation for further studies in finance and equips students with practical tools to make informed financial decisions.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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16 Chapters
1175 Verified Questions
1175 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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98 Verified Questions
98 Flashcards
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Sample Questions
Q1) The primary goal of a financial manager should be to _____.
A) minimize operating costs
B) minimize interest payments
C) minimize tax payments
D) maximize operating income each year
E) maximize the value of the firm's stock
Answer: E
Q2) A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.
A)True
B)False
Answer: False
Q3) The accounting and tax departments are the responsibility of the _____.
A) treasurer
B) inventory manager
C) director of capital budgeting
D) vice president of finance
E) controller
Answer: E
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Chapter 2: Analysis of Financial Statements
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) A firm's net income is the most appropriate measure to determine whether the management is maximizing the firm's stock price.
A)True
B)False
Answer: False
Q2) Which of the following was created to develop and approve a set of common International Financial Reporting Standards (IFRS)?
A) International Accounting Standards Board (IASB)
B) Securities and Exchange Commission (SEC)
C) Generally Accepted Accounting Principles (GAAP)
D) International Federation of Accountants
E) International Accounting Standards Committee
Answer: A
Q3) Ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm.
A)True
B)False
Answer: True
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) A money market is the market for trading in securities with maturities over one year and includes such financial assets as stocks and long-term corporate bonds.
A)True
B)False
Answer: False
Q2) Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets fiercely competitive.
A)True
B)False
Answer: True
Q3) The international market for bonds has grown at a slower rate as compared to the international stock markets.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Sample Questions
Q1) The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.
A) compounding
B) discounting
C) consolidation
D) amortization
E) annualizing
Q2) Andrea's opportunity cost rate is 12 percent compounded annually. How much must he deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.
A) $10,772
B) $11,625
C) $10,998
D) $11,887
E) $12,564
Q3) Ordinary annuity is an annuity with payments that occur at the beginning of each period.
A)True
B)False
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Assume that the expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent, 8 percent, and 6 percent, respectively. What is the average expected inflation rate over this 5-year period?
A) 6.5%
B) 7.5%
C) 8.0%
D) 6.0%
E) 7.0%
Q2) Bonds with higher liquidity have to offer higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.
A)True
B)False
Q3) Other things constant, the larger the federal deficit,:
A) the lower the level of expenses of a country.
B) the higher the level of income of a country.
C) the lower the level of tax rates.
D) the lower the level of inflation rate.
E) the higher the level of interest rates.
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Page 7
Chapter 6: Bonds Debtcharacteristics and Valuation
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139 Verified Questions
139 Flashcards
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Sample Questions
Q1) In general, long-term unsecured debts are less costly than long-term secured debts for a particular firm.
A)True
B)False
Q2) Revenue bonds are used to:
A) raise funds to repay loans borrowed from the federal government.
B) raise funds for projects that will generate revenues.
C) raise funds to pay interest on T-bills issued by the state government.
D) raise funds to repay loans borrowed by the local government.
E) raise funds for projects that require additional funding by increasing tax rates.
Q3) A bond that can be redeemed for cash at the bondholder's option is called a(n):
A) convertible bond.
B) putable bond.
C) callable bond.
D) debenture.
E) income bond.
Q4) A bond's value will increase with increases in interest rate over time.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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70 Verified Questions
70 Flashcards
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Sample Questions
Q1) The P/E ratio gives an indication of _____.
A) a firm's earnings per share
B) a stock's dividend yield
C) the payback period of a stock
D) market price of a stock
E) the intrinsic value of a stock
Q2) Stock prices move opposite changes in cash flows expected from the stock in the future, but they move in the same direction as changes in rates of return.
A)True
B)False
Q3) If we view P/E ratios as measures of payback, all else equal, higher earnings multipliers are better.
A)True
B)False
Q4) A common stock of a firm will have a maturity period of 10 years.
A)True
B)False
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9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return? (Round off the answer to two decimal places.)
A) 11.56%
B) 10.83%
C) 9.52%
D) 12.25%
E) 8.89%
Q2) Which of the following is a component of systematic risk?
A) Business risk
B) Financial risk
C) Default risk
D) Liquidity risk
E) Stand-alone risk
Q3) The standard deviation is calculated as the weighted average of all the deviations from the expected value, and it indicates how far above or below the expected value the actual value is expected to be.
A)True
B)False
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Page 10
Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) Two firms-Tangerine Inc. and Cyan Inc. analyze the same project for capital budgeting decision. Tangerine Inc. determines that the project's internal rate of return (IRR) is 9 percent. Cyan Inc. uses the net present value (NPV) method and determines that the project is unacceptable. Given this information, which of the following statements is correct?
A) The net present value of the project must be positive for both the firms.
B) Cyan Inc.'s internal rate of return (IRR) from the project is less than 9 percent.
C) Tangerine's CFO should use the traditional payback period method to evaluate the project.
D) Tangerine Inc. should use a discount rate of more than 9 percent for capital budgeting analysis by the net present value (NPV) method.
E) Cyan Inc.'s required rate of return is greater than 9 percent.
Q2) The primary function of the capital budget is to forecast _____.
A) the target payback periods of the projects undertaken by a firm
B) the funds required for future projects
C) the discounted cash inflow from various projects
D) the terminal value of the cash flows from different projects
E) the projects' multiple internal rates of return
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Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year if Stanton's marginal tax rate is 40 percent?
A) $15,000
B) $23,000
C) $40,000
D) $9,800
E) $4,500
Q2) Which of the following is used in analyzing systematic risk?
A) Sensitivity analysis
B) Net present value
C) Beta
D) Monte Carlo simulation
E) Depreciation
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) The firm's cost of capital represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm increases.
A)True
B)False
Q2) Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because:
A) the dividend yield is extremely difficult to estimate.
B) the proper growth rate is difficult to establish.
C) the market price of the common equity is very volatile.
D) the firm grows at a constant rate in perpetuity.
E) the firm's historical data of dividend yield is unavailable.
Q3) The cost of debt to the firm is adjusted for _____.
A) marginal revenue generated
B) taxes
C) interest rate
D) internal rate of return
E) return to investors
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) Assume that a firm has a degree of financial leverage (DFL) of 1.25. If sales increase by 20 percent, the firm will experience a 60 percent increase in earnings per share (EPS) and it will have an earnings before interest and taxes (EBIT) of $100,000. What will be the EBIT for the firm if sales do not increase?
A) $67,568
B) $100,000
C) $113,412
D) $84,375
E) $42,115
Q2) What is the formula for calculating the times-interest earned (TIE) ratio?
A) TIE ratio = Interest charges ÷ Total liabilities
B) TIE ratio = Earnings per share ÷ Interest charges
C) TIE ratio = Sales ÷ Interest charges
D) TIE ratio = EBIT ÷ Interest charges
E) TIE ratio = Interest charges ÷ Net income
Q3) The degree of operating leverage is defined as the percentage change in operating earnings associated with a given percentage change in sales.
A)True
B)False
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Page 14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) If the _____ is correct, there exists no optimal dividend policy, because dividend policy does not affect the value of a firm.
A) value dividend policy
B) dividend irrelevance theory
C) clientele effect
D) signaling hypothesis
E) free cash flow theory
Q2) Which of the following is an important factor that affects dividend policies of companies around the world?
A) Net present values
B) Tax structures
C) Management policies
D) Takeover threats
E) Capital structures
Q3) The information content hypothesis proposes that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization.
A)True
B)False
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Chapter 14: Managing Short-Term Financing Liabilities
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65 Flashcards
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Sample Questions
Q1) Net working capital is equal to:
A) current assets.
B) current liabilities.
C) current assets divided by current liabilities.
D) current assets minus current liabilities.
E) current assets plus current liabilities.
Q2) A revolving credit agreement is:
A) created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations.
B) the credit created when one firm buys on credit from another firm.
C) an outright sale of receivables.
D) an unsecured, short-term promissory note issued by large, financially sound firms to raise funds.
E) a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
Q3) Net working capital represents the amount of current assets that is financed with long-term funds.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) The value of checks that have been written and given to the customers but have not been deducted from the account on which they were written is the _____ float.
A) disbursement
B) net
C) collections
D) balance
E) deposit
Q2) Chovita Marbles' purchases for next month's sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per month. Chovita's total cash disbursements for a month is _____.
A) $1,430
B) $1,500
C) $700
D) $850
E) $2,200
Q3) Money market instruments are held as marketable securities.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) Which of the following is an effect of an over optimistic sales forecast?
A) High inventory turnover ratios
B) High costs for depreciation
C) Low costs for storage
D) High rates of return on equity
E) Low levels of plant and equipment
Q2) The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.
A) net operating income (NOI)
B) retained earnings
C) degree of financial leverage (DFL)
D) net income
E) gross profit
Q3) Which of the following leverages considers the effect on earnings per share (EPS) of the changing operating income (EBIT)?
A) Operating leverage
B) Total leverage
C) Combined leverage
D) Contribution leverage
E) Financial leverage
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