Fundamentals of Finance
Textbook Exam Questions
Course Introduction
Fundamentals of Finance introduces students to the core concepts and tools of financial management within organizations. The course covers the time value of money, risk and return analysis, valuation of securities, capital budgeting, financial statement analysis, and the fundamentals of capital markets. Emphasizing both theoretical frameworks and practical applications, students learn how financial decisions impact business performance and value creation, preparing them for further studies and careers in finance, business, and related fields.
Recommended Textbook Essentials of Corporate Finance 8th Edition by Stephen A. Ross
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) The goal of financial management is to increase the:
A)future value of the firm's total equity.
B)book value of equity.
C)dividends paid per share.
D)current market value per share.
E)number of shares outstanding.
Answer: D
Q2) Which one of the following is most apt to align management's priorities with shareholders' interests?
A)Increasing employee retirement benefits
B)Compensating managers with shares of stock that must be held for three years before the shares can be sold
C)Allowing a manager to decorate his or her own office once he or she has been in that office for a period of three years or more
D)Increasing the number of paid holidays that long-term employees are entitled to receive
E)Allowing employees to retire early with full retirement benefits
Answer: B
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) An increase in which one of the following will increase net income?
A)Fixed costs
B)Depreciation
C)Marginal tax rate
D)Revenue
E)Dividends
Answer: D
Q2) Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?
A)Positive operating cash flow
B)Negative cash flow to creditors
C)Positive cash flow to stockholders
D)Negative net capital spending
E)Positive cash flow from assets
Answer: E
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) The ratios that are based on financial statement values and used for comparison purposes are called:
A)financial ratios.
B)industrial statistics.
C)equity standards.
D)accounting returns.
E)analytical standards.
Answer: A
Q2) Larry's Gun Shop has sales of $189,000,a profit margin of 5.6 percent,and a capital intensity ratio of 0.79.What is the return on assets?
A)4.42 percent
B)6.08 percent
C)6.39 percent
D)6.92 percent
E)7.09 percent
Answer: E
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) Lisa has $1,000 in cash today.Which one of the following investment options is most apt to double her money?
A)6 percent interest for 3 years
B)12 percent interest for 5 years
C)7 percent interest for 9 years
D)8 percent interest for 9 years
E)6 percent interest for 10 years
Q2) Sixty years ago,your grandparents opened two savings accounts and deposited $200 in each account.The first account was with City Bank at 3 percent,compounded annually.The second account was with Country Bank at 3.5 percent,compounded annually.Which one of the following statements is true concerning these accounts?
A)The City Bank account is currently worth $1,201.54.
B)The City Bank account has earned $211.19 more in interest than the Country Bank account.
C)The Country Bank account is currently worth $1,526.08.
D)The Country Bank account has paid $367.48 more in interest than the City Bank account.
E)The Country Bank account has paid $397.30 more in interest than the City Bank account.
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) A local magazine is offering a $2,500 grand prize to one lucky winner.The prize will be paid in four annual payments of $625 each,starting one year after the drawing.How much would this prize be worth to you if you can earn 9 percent on your money?
A)$1,848.18
B)$1,934.24
C)$2,024.82
D)$2,450.14
E)$2,545.54
Q2) You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today.What is the interest rate on the annuity option?
A)5.56 percent
B)5.68 percent
C)6.20 percent
D)6.39 percent
E)6.50 percent
Q3) Identify four ways that you can use annuity computations in your everyday life.
Q4) Explain the similarities and differences among an ordinary annuity,an annuity due,and a perpetuity.
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Chapter 6: Interest Rates and Bond Valuation
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Q1) A 5.5 percent $1,000 bond matures in seven years,pays interest semiannually,and has a yield to maturity of 6.23 percent.What is the current market price of the bond?
A)$945.08
B)$947.21
C)$959.09
D)$959.60
E)$962.40
Q2) Explain how a zero coupon bond can create taxable income during a year in which the bond pays no interest payments.Also,explain how the annual taxable amount can be computed.
Q3) A 12-year,semiannual coupon bond is priced at $1,102.60.The bond has a $1,000 face value and a yield to maturity of 5.33 percent.What is the coupon rate?
A)5.00 percent
B)5.25 percent
C)5.50 percent
D)6.00 percent
E)6.50 percent
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Graphic Designs has 120,000 shares of cumulative preferred stock outstanding.Preferred shareholders are supposed to be paid $1.50 per quarter per share in dividends.However,the firm has encountered financial problems and has not paid any dividends for the past three quarters.How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend?
A)$3.00
B)$4.50
C)$6.00
D)$7.50
E)$9.00
Q2) Gamma Corp.is expected to pay the following dividends over the next four years: $5,$12,$18,and $1.80.Afterward,the company pledges to maintain a constant 4 percent growth rate in dividends,forever.If the required return on the stock is 14 percent,what is the current share price?
A)$37.92
B)$41.06
C)$43.18
D)$46.09
E)$49.31
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?
A)Payback
B)Profitability index
C)Accounting rate of return
D)Internal rate of return
E)Net present value
Q2) Which one of the following methods of analysis ignores cash flows?
A)Profitability index
B)Net present value
C)Average accounting return
D)Modified internal rate of return
E)Internal rate of return
Q3) The profitability index reflects the value created per dollar:
A)invested.
B)of sales.
C)of net income.
D)of taxable income.
E)of shareholders' equity.
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) Which of the following have the potential to increase the net present value of a proposed investment?
I.Ability to immediately shut down a project should the project become unprofitable
II.Ability to wait until the economy improves before making the investment
III.Option to place the investment on hold until a more favorable discount rate becomes available
IV.Option to increase production beyond that initially projected
A)I only
B)I and IV only
C)II and III only
D)I, II, and IV only
E)I, II, III, and IV
Q2) Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?
A)Sales price that is most likely to occur
B)Lowest expected level of sales quantity
C)Lowest expected salvage value
D)Highest expected need for net working capital
E)Lowest expected value for fixed costs
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11
Chapter 10: Some Lessons From Capital Market History
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Q1) The common stock of Hillshire Farms has yielded 16.3 percent,7.2 percent,11.8 percent,-3.6 percent,and 9.7 percent over the past five years,respectively.What is the geometric average return?
A)7.91 percent
B)8.03 percent
C)8.07 percent
D)8.27 percent
E)9.64 percent
Q2) Rocky Top pays a constant annual dividend.One year ago,when you purchased shares of that stock at $12 a share,the dividend yield was 2 percent.Over this past year,the inflation rate has been 2.6 percent.Today,the required return on this stock is 9 percent and you just sold all of your shares.What is your total nominal return on this investment? Round your answer to the nearest whole percentage.
A)-77 percent
B)-75 percent
C)-76 percent
D)70 percent
E)76 percent
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Page 12
Chapter 11: Risk and Return
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Q1) Which of the following terms can be used to describe unsystematic risk?
I.Asset-specific risk
II.Diversifiable risk
III.Market risk
IV.Unique risk
A)I and IV only
B)II and III only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV
Q2) World United stock currently plots on the security market line and has a beta of 1.04.Which one of the following will increase that stock's rate of return without affecting the risk level of the stock,all else constant?
A)An increase in the risk-free rate
B)Decrease in the security's beta
C)Overpricing of the stock in the marketplace
D)Increase in the market risk-to-reward ratio
E)Decrease in the market rate of return
Q3) What is the significance of the slope of the security market line? Should investors prefer a steeper slope or a flatter slope?
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Chapter 12: Cost of Capital
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Sample Questions
Q1) Derek's is a brick-and-mortar toy store.The firm is considering expanding its operations to include Internet sales.Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?
A)Another brick-and-mortar store that also sells online
B)A wholesale toy distributor
C)A toy store that sells online only
D)The oldest online retailer of any product
E)Derek's own store
Q2) Ted is trying to decide what cost of capital he should assign to a project.Which one of the following should be his primary consideration in this decision?
A)Amount of debt used to finance the project
B)Use, or lack, of preferred stock to finance the project
C)Mix of funds used to finance the project
D)Risk level of the project
E)Length of the project's life
Q3) Explain the concept of the subjective approach to assigning a required return to a project.
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Chapter 13: Leverage and Capital Structure
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Q1) Which one of the following is minimized when the value of a firm is maximized?
A)Return on equity
B)WACC
C)Debt
D)Taxes
E)Bankruptcy costs
Q2) Which one of the following statements is correct?
A)A prepack is a plan of liquidation used to distribute a firm's assets.
B)Bankruptcy courts have "cram-down" powers.
C)The absolute priority rule must be strictly followed in all bankruptcy proceedings.
D)Creditors cannot force a firm into bankruptcy even though they might like to do so.
E)A reorganization plan can be approved only if the firm's creditors all agree with the plan.
Q3) Explain the primary difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy.
Q4) Explain why the capital structure of a firm is irrelevant to equity investors.
Q5) Explain how taxes affect the value of a firm based on M&M Proposition I.
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Chapter 14: Dividends and Dividend Policy
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Q1) Which one of the following statements is correct?
A)Dividends are irrelevant.
B)Flotation costs are a good reason to support a high-dividend payout.
C)Current tax laws favor high current dividends for individual investors.
D)Dividend policy is the time pattern of dividend payout.
E)Corporate investors tend to prefer low-dividend payouts on securities they own.
Q2) Assume that clienteles exist.Given this assumption,which one of the following statements is correct?
A)A firm can increase its share price by increasing its dividend payout.
B)Dividend policy is irrelevant as long as each clientele group is currently satisfied.
C)All firms will adopt a high-dividend-payout policy.
D)All dividends become irrelevant.
E)All firms should adopt a low-dividend-payout policy.
Q3) What are the differences between a regular cash dividend,a liquidating dividend,a special dividend,and an extra cash dividend?
Q4) Explain how the process of dividend smoothing affects the dividend growth rate as compared to the earnings growth rate.
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Chapter 15: Raising Capital
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Q1) Kate is the sole founder of the exclusive retail store,Kate's Interiors.Kate identified additional locations that she believed offered profitable opportunities for expansion so decided to take her firm public in order to finance her expansion plans.Bob is an investor who purchased shares of Kate's Interiors stock at the offer price.After one month as a public firm,Kate realized that Bob had earned $1.1 million in profit on his investment and had already cashed out and moved on.Kate,on the other hand,had made no profit and still owns her shares.Explain how this could happen.
Q2) Which one of the following statements related to IPO underpricing is correct?
A)The IPOs of larger-sized firms tend to be more underpriced than the IPOs of smaller-sized firms.
B)IPO underpricing is limited to the U.S. markets.
C)The percentage of underpricing remains stable over time in the U.S.
D)The only period in the U.S. when underpricing produced first day returns of 50 percent or more was during the tech bubble of 1999-2000.
E)Some of the greatest IPO underpricing has occurred in China.
Q3) What are some of the key factors an individual should consider before selecting a first-stage venture capitalist?
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Chapter 16: Short-Term Financial Planning
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Q1) Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?
A)Inventory period
B)Accounts receivable period
C)Accounts payable period
D)Operating cycle
E)Cash cycle
Q2) Which one of the following industries is most apt to have the shortest operating cycle?
A)Toy store
B)Car manufacturer
C)Local restaurant
D)Furniture store
E)Plastics manufacturer
Q3) Which one of the following actions will decrease the operating cycle?
A)Increasing inventory
B)Paying suppliers faster
C)Buying more inventory with cash rather than with credit
D)Granting customers more time to pay for their credit purchases
E)Lessening the production time needed to manufacture a good for sale
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Chapter 17: Working Capital Management
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Q1) Which one of the following characteristics generally applies to commercial paper?
A)Issued only by financial institutions
B)Issued only by corporations
C)Maturities limited to 90 days or less
D)Unsecured
E)Secured by accounts receivable
Q2) Which one of the following statements is correct?
A)Firms cannot use lockboxes if they use cash concentration accounts.
B)Firms prefer to increase processing delay on disbursements.
C)Firms prefer to eliminate all types of float.
D)Firms open regional offices so their employees can pick up lockbox payments throughout the day.
E)The Check Clearing Act for the 21<sup>st</sup> Century is designed to reduce the collection time to one day.
Q3) Explain the basic structure and workings of a disbursement system that utilizes zero-balance accounts.
Q4) Identify some of the specific costs firms incur if their current asset levels are either too high or too low.
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Chapter 18: International Aspects of Financial Management
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Q1) Explain how a firm can structure its operations such that it creates its own internal hedge to long-run exposure to exchange rate risk.
Q2) Which one of the following is the best universal definition of an exchange rate?
A)Price of one country's currency expressed in terms of another country's currency
B)Number of foreign dollars that can be purchased for every one U.S. dollar paid
C)Price of a country's currency expressed in terms of that country's currency unit
D)Number of units of a currency that were originally required to obtain one euro when a country adopted the euro as its official currency
E)Price that must be paid to obtain a good or service from another country
Q3) The market where euros,pesos,dollars,and pounds are traded is referred to as which one of the following?
A)ADR market
B)LIBOR market
C)Gilt market
D)Euromarket
E)Foreign exchange market
Q4) What is LIBOR and what role does it play in international finance?
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