Fundamentals of Finance Pre-Test Questions
Course Introduction
Fundamentals of Finance introduces students to the basic principles and concepts of financial management, including the time value of money, risk and return, financial statement analysis, and valuation of financial assets. The course covers essential topics such as capital budgeting, cost of capital, working capital management, and financial markets and institutions. Through case studies and practical examples, students gain insights into decision-making processes in corporate finance, personal finance, and investment analysis, laying a strong foundation for advanced studies in financial theory and practice.
Recommended Textbook
Principles of Managerial Finance 14th Edition by Lawrence J. Gitman
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3256 Verified Questions
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Institutional investors are professional investors who work on behalf of individuals, business, and government.
A)True
B)False
Answer: True
Q2) The Sarbanes-Oxley Act of 2002 resulted in ________.
A) tightened audit regulations and controls
B) toughened penalties against overcompensated executives
C) lenient penalties against executives who commit corporate fraud
D) delayed disclosure of stock sales by corporate executives
Answer: A
Q3) Which of the following is an example of agency cost?
A) costs incurred for setting up an agency
B) failure of making the best investment decision
C) payment of income tax
D) payment of interest
Answer: B
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Money markets involve the trading of securities with maturities of one year or less.
A)True
B)False
Answer: True
Q2) Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to ________.
A) encourage corporations to invest in each other
B) avoid double taxation on dividends
C) eliminate most of the potential tax liability from the dividends received by the second and any subsequent corporations
D) lower the cost of equity financing for corporations
Answer: C
Q3) Government can obtain funds ________.
A) by trading in equity market
B) by issuing financial instruments such as futures and options
C) through forex market
D) by selling debt securities
Answer: D
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Chapter 3: Financial Statements and Ratio Analysis
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208 Flashcards
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Sample Questions
Q1) Retained earnings on the balance sheet represents the ________.
A) net profit after taxes
B) amount of proceeds in excess of the par value received from the original sale of common stock
C) net profit after taxes minus preferred dividends
D) cumulative total of all earnings reinvested in the firm
Answer: D
Q2) ________ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.
A) Employees
B) Stockholders
C) Lenders and suppliers
D) Auditors
Answer: C
Q3) When assessing the fixed-payment coverage ratio, ________.
A) the lower its value the more risky is the firm
B) the lower its value, the higher is the firm's financial leverage
C) preferred stock dividend payments can be disregarded
D) the higher its value, lesser is its reliability to pay up the debts
Answer: A
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement-called the external financing required-of $230,000. The firm should prepare to ________.
A) repurchase common stock totaling $230,000
B) arrange for a loan of $230,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $230,000
Q2) The key input to the short-term financial planning process is ________.
A) the audit report
B) the pro forma balance sheet
C) the sales forecast
D) the pro forma income statement
Q3) Key inputs to short-term financial planning are ________.
A) cash flow statements and income statement
B) pro forma financial statements
C) sales forecasts, and operating and financial data
D) leverage analysis and pro forma income statement
Q4) Depreciation is considered to be an outflow of cash.
A)True
B)False
Page 6
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Chapter 5: Time Value of Money
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Sample Questions
Q1) An annuity due is an amount that occur at the beginning of each period.
A)True
B)False
Q2) Mr. Jackson has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr. Jackson choose if his opportunity cost is 9 percent?
Q3) The time value concept/calculation used in amortizing a loan is ________.
A) future value of a dollar
B) future value of an annuity
C) present value of a dollar
D) present value of an annuity
Q4) In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion of each payment grows over the life of the loan.
A)True
B)False
Q5) Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A corporate financial analyst must calculate the value of an asset which produces year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?
Q2) A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.
A)True
B)False
Q3) In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders. A)True
B)False
Q4) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?
Q5) Explain liquidity, default risk, and maturity risk premiums.
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Page 8
Chapter 7: Stock Valuation
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Sample Questions
Q1) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?
A) $8,000
B) $16,000
C) $24,000
D) $25,000
Q2) A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.
A) $64
B) $16
C) $25
D) $50
Q3) Xiao Xin owns stock in a company which has paid the annual dividends shown in Table 7.1. Calculate the growth rate of these dividends.
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Chapter 8: Risk and Return
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Sample Questions
Q1) A firm produces goods which has high sales when the economy is expanding and low sales during a recession. This firm's overall risk will be higher if it invests in another product which is counter cyclical.
A)True
B)False
Q2) An approach for assessing risk that uses a number of possible return estimates to obtain a sense of the variability among outcomes is called scenario analysis.
A)True
B)False
Q3) Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?
Q4) Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent?
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders.
A)True
B)False
Q2) A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.
A)True
B)False
Q3) From a bond issuer's perspective, the IRR on a bond's cash flows is its cost to maturity; from the investor's perspective, the IRR on a bond's cash flows is the yield to maturity (YTM).
A)True
B)False
Q4) One major expense associated with issuing new shares of common stock is
A) coupon payment
B) sunk cost
C) overvaluation
D) underpricing
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If a firm has limited funds to invest, all the mutually exclusive projects that meet its minimum investment criteria should be implemented.
A)True
B)False
Q2) On a purely theoretical basis, NPV is a better approach when selecting among two mutually exclusive projects.
A)True
B)False
Q3) The payback period is the amount of time required for a firm to dispose a replaced asset.
A)True
B)False
Q4) ________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth.
A) Recapitalizing assets
B) Capital budgeting
C) Ratio analysis
D) Securitization
Q5) Use the NPV approach to select the best group of projects. (See Table 10.5)
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) For Proposal 2, the book value of the existing asset at the end of the fifth year is ________. (See Table 11.2)
A) $13,600
B) $34,400
C) $66,400
D) $80,000
Q2) Incremental cash flows represent the additional cash flows expected as a direct result of the proposed project.
A)True
B)False
Q3) Please explain the difference between a sunk cost and an opportunity cost and give an example of each type of cost.
Q4) The book value of an asset is equal to its installed cost of asset minus the accumulated depreciation.
A)True
B)False
Q5) Calculate the book value of the existing press being replaced. (See Table 11.1)
Q6) Calculate the initial investment of the new asset. (See Table 11.1)
Q7) Calculate the book value of the existing asset being replaced. (See Table 11.4)
Page 13
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Which project would be preferable if both projects were of average risk as the overall firm and Tangshan Mining has a beta of 1.0? (See Table 12.3)
A) Project M because it has a higher NPV
B) Project N because it has a higher NPV
C) Project N because it has a higher IRR
D) Project M because it has a higher IRR
Q2) The break even cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.
A)True
B)False
Q3) What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between Projects X and Y (See Table 12.5).
Q4) The theoretical basis from which the concept of risk-adjusted discount rates is derived is ________.
A) the Gordon model
B) the capital asset pricing model
C) simulation theory
D) the basic cost of money
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) At the operating breakeven point, ________ equals zero.
A) sales revenue
B) fixed operating costs
C) variable operating costs
D) earnings before interest and taxes
Q2) A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial breakeven point is ________.
A) $ 25,000
B) $170,000
C) $186,667
D) $145,000
Q3) The more fixed cost financing a firm has in its capital structure, the greater is its financial leverage and risk.
A)True
B)False
Q4) Generally, increases in leverage result in increased return and risk.
A)True
B)False
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Chapter 14: Payout Policy
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Sample Questions
Q1) A firm that has a large percentage of ________ investors may pay out a lower percentage of its earnings as dividends.
A) wealthy
B) domestic
C) middle-income
D) international
Q2) After the stock dividend is paid, the per share value of a stockholder's stock will remain the same as the value before the stock dividend and, thus, the market value of his or her total holdings in the firm will remain unchanged.
A)True
B)False
Q3) The dividend payment date is set by a firm's board of directors and represents the actual date on which the firm mails the dividend payment to the holders of record.
A)True
B)False
Q4) A stock split commonly increases the stock's per share par value.
A)True
B)False
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Page 16
Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) A decrease in the production time to manufacture a finished good will result in
A) an increase in the average age of inventory
B) a decrease in the cash conversion cycle
C) an increase in the cash conversion cycle
D) a decrease in the average age of inventory
Q2) Under conservative funding strategy, short-term financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of a firm's current assets.
A)True
B)False
Q3) Which of the following is true of a credit applicant's character?
A) It reflects a credit applicant's ability to repay his debt obligation.
B) It reflects a credit applicant's past payment history.
C) It reflects the level of liquid assets available with a credit applicant.
D) It reflects any unique conditions surrounding a credit applicant's transaction.
Q4) The reorder point is the point at which a firm receives orders.
A)True
B)False
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) A firm purchased goods on January 27 with a purchase price of $1,000 and credit terms of 2/10 net 30 EOM. The firm paid for these goods on February 9. The firm must pay ________ for the goods.
A) $1,000
B) $980
C) $800
D) $900
Q2) An increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.
A)True
B)False
Q3) The interest rate on a line of credit is normally stated as a fixed rate-the prime rate. A)True
B)False
Q4) Exchange rate risk can often be hedged by using currency forward, futures, or options markets.
A)True
B)False
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) ________ is the price at which a bond would sell in the market without the conversion feature.
A) Conversion value
B) Straight bond value
C) Strike price value
D) Market premium
Q2) In their simplest form, bonds are pure ________.
A) debt
B) equity
C) hybrid security
D) current assets
Q3) The market value of a convertible security is likely to be less than its straight value or conversion value.
A)True
B)False
Q4) The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.
A)True
B)False
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) A(n) ________ is an arrangement whereby an insolvent firm's creditors receive full payment, although not immediately.
A) composition
B) creditor control agreement
C) extension
D) liquidation
Q2) A major impetus fueling financial mergers during the 1980s was ________.
A) high interest rates
B) high tax rates
C) high cash balances that could be utilized for takeovers
D) ready availability of junk bond financing
Q3) The ratio of exchange in market price indicates the market price per share of an acquiring firm paid for each dollar of market price per share of the target firm.
A)True
B)False
Q4) The various causes of business failure are mismanagement, poor economic conditions, and corporate maturity.
A)True
B)False
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) In the grossing up procedure, MNCs add the before-tax subsidiary income to their total taxable income, calculate the U.S. tax liability on the grossed -up income, and the related taxes are paid in the foreign country are applied as a credit against the additional U.S. tax liability.
A)True
B)False
Q2) The Mercosur is a major European trading bloc that includes former Soviet bloc countries in Eastern Europe.
A)True
B)False
Q3) In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parent's currency is involved.
A)True
B)False
Q4) National entry control systems are comprehensive rules, regulations, and immigration policies introduced by xenophobic host governments to regulate inflows of foreign workers.
A)True
B)False
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