Introduction to Finance
Exam Answer Key
Course Introduction
Introduction to Finance provides students with a foundational understanding of financial principles and practices essential for personal and organizational decision-making. The course covers key topics including time value of money, risk and return, financial markets and institutions, basic valuation of stocks and bonds, and an overview of financial statements. Students will develop skills to analyze financial information, understand investment options, explore the role of financial management in businesses, and apply fundamental concepts to real-world scenarios. This course prepares students for further studies in finance and equips them with practical knowledge for managing finances effectively.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
Available Study Resources on Quizplus
21 Chapters
1604 Verified Questions
1604 Flashcards
Source URL: https://quizplus.com/study-set/3721 Page 2
Chapter 1: Introduction to Corporate Finance
Available Study Resources on Quizplus for this Chatper
56 Verified Questions
56 Flashcards
Source URL: https://quizplus.com/quiz/74202
Sample Questions
Q1) Capital structure refers to:
A)the determination of the ideal mix of current versus long-term assets.
B)the methods by which fixed assets are used to produce a tangible product.
C)the mix of current assets and current liabilities.
D)the acquisition or disposition of a building or other long-term asset.
E)decisions related to long-term debt and equity financing.
Answer: E
Q2) The division of profits and losses among the members of a partnership is formalized in the:
A)indemnity clause.
B)partnership agreement.
C)statement of purpose.
D)indenture contract.
E)group charter.
Answer: B
Q3) What should be the primary goal of a financial manager of a corporation? Why?
Answer: The primary goal of financial management is to maximize the current market value of the outstanding stock.This goal focuses on enhancing the returns to current stockholders who are the owners of the firm.
To view all questions and flashcards with answers, click on the resource link above.
Page 3
Chapter 2: Financial Statements and Cash Flow
Available Study Resources on Quizplus for this Chatper
62 Verified Questions
62 Flashcards
Source URL: https://quizplus.com/quiz/74201
Sample Questions
Q1) _____ refers to the cash flow resulting from a firm's ongoing,normal business activities.
A)Cash flow from assets
B)Net working capital
C)Capital spending
D)Cash flow from operating activities
E)Cash flow to creditors
Answer: D
Q2) A firm has $800 in inventory,$1,400 in fixed assets,$500 in accounts receivables,$100 in net working capital,and $50 in cash.What is the amount of the current liabilities?
A)$3,750
B)$1,350
C)$3,950
D)$1,150
E)$1,250
Answer: E
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Financial Statements Analysis and Financial Models
Available Study Resources on Quizplus for this Chatper
77 Verified Questions
77 Flashcards
Source URL: https://quizplus.com/quiz/74200
Sample Questions
Q1) When using the percentage of sales approach to calculate the external financing need,some accounts are assumed to vary in direct proportion to sales while others do not.For each of the following accounts,explain how they are generally expected to change using this approach:
Answer: Current assets
Fixed assets,if operating at full capacity
Fixed assets,if operating at less than full capacity
Accounts payable
Notes payable
Long-term debt
Retained earnings
Current assets,fixed assets when operating at full capacity,and accounts payable are expected to vary in direct proportion to sales.
If operating at less than full capacity,then fixed assets will vary only as needed to support the projected level of sales.
Notes payable and long-term debt are held constant.
Retained earnings with vary with sales but may or may not do so in direct proportion to changes in sales depending upon the dividend payout policy.
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Discounted Cash Flow Valuation
Available Study Resources on Quizplus for this Chatper
100 Verified Questions
100 Flashcards
Source URL: https://quizplus.com/quiz/74199
Sample Questions
Q1) A 4.25 percent preferred stock has a liquidating value of $100 a share.What is one share of this stock currently worth to an investor who desires a 14.5 percent annual rate of return?
A)$31.09
B)$24.25
C)$29.31
D)$34.12
E)$28.16
Q2) Which one of the following will increase the future value of a finite stream of uneven cash flows? Assume a positive rate of return.
A)Moving every cash flow one time period further into the future
B)Decreasing the amount of each cash flow
C)Increasing the first cash flow by $100 and lowering the last cash flow by $100
D)Moving the Time 0 cash inflow to Time 1
E)Decreasing the total number of cash flows
Q3) What circumstances are required for an APR to equal an EAR?
Q4) There are three factors that affect the present value of an annuity.Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Interest Rates and Bond Valuation
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74198
Sample Questions
Q1) Which one of these bonds is subject to the greatest interest rate risk?
A)5-year,zero coupon bond
B)5-year bond with a 4.5 percent coupon rate
C)5-year bond with a 5 percent coupon rate
D)10-year,zero coupon bond
E)10-year,5 percent coupon bond
Q2) Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:
A)interest rate risk and time value of money.
B)time value of money and inflation.
C)taxes and potential default.
D)taxes and inflation.
E)inflation and interest rate risk.
Q3) Which one of the following statements concerning bonds is correct?
A)Bondholders are generally granted voting rights.
B)Zero coupon bonds are sold at par.
C)The repayment of bond principal is tax-deductible.
D)A "bellwether" bond is the yield on the shortest outstanding Treasury security.
E)Both corporate and Treasury bonds are quoted as a percentage of par.
To view all questions and flashcards with answers, click on the resource link above.
Page 7
Chapter 6: Stock Valuation
Available Study Resources on Quizplus for this Chatper
90 Verified Questions
90 Flashcards
Source URL: https://quizplus.com/quiz/74197
Sample Questions
Q1) Which one of these formulas is used to estimate a firm's growth rate?
A)Annual dividend/Current stock price
B)(1 - Dividend payout ratio)× g
C)Retention ratio × ROE
D)Retention ratio × ROA
E)1 - Dividend payout ratio
Q2) Dille Inc.pays no dividend at the present time.In Years 2 and 3,the firm will pay annual dividends of $3 a share.After that,it will pay a constant $1 a share dividend indefinitely.What is this stock worth at a required return of 15 percent?
A)$9.91
B)$7.81
C)$8.62
D)$7.50
E)$11.40
Q3) In general,would you expect more stocks to fit the constant growth or the differential growth model? Explain your reasoning.
Q4) Identify three factors that are likely to affect the value of a firm's PE ratio and explain the relative value that each factor must assume to produce a higher PE.
To view all questions and flashcards with answers, click on the resource link above.
Page 8
Chapter 7: Net Present Value and Other Investment Rules
Available Study Resources on Quizplus for this Chatper
83 Verified Questions
83 Flashcards
Source URL: https://quizplus.com/quiz/74196
Sample Questions
Q1) The internal rate of return:
A)is more reliable as a decision making tool than net present value when considering mutually exclusive projects.
B)is the discount rate that makes the net present value of a project equal to one.
C)is easier to apply than net present value when cash flows are unconventional.
D)will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent.
E)is influenced by daily changes in the market rate of interest.
Q2) What is the key reason why a positive NPV project should be accepted?
A)The project is expected to increase shareholder value.
B)The present value of the expected cash flows equal the project's cost.
C)The firm will earn a return equal to the NPV value at the end of the project.
D)The project will have a payback period equal to its life.
E)The project's PI will be less than 1,which also indicates acceptance.
Q3) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
Q4) What are the limitations of the IRR rule? Given these limitations,why is IRR so commonly used?
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Making Capital Investment Decisions
Available Study Resources on Quizplus for this Chatper
87 Verified Questions
87 Flashcards
Source URL: https://quizplus.com/quiz/74195
Sample Questions
Q1) Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000.The lot was recently appraised at $1,070,000.At the time of the purchase,the company spent $80,000 to grade the lot and another $120,000 to pave the lot for commuter parking.The company now wants to build a new retail store on the site.The building cost is estimated at $1.8 million.What amount should be used as the initial cash flow for this building project?
A)$3,070,000
B)$1,070,000
C)$1,800,000
D)$2,870,000
E)$2,890,000
Q2) Which one of these is a requirement when computing the net present value of a capital project?
A)The discount rate used must be a nominal rate.
B)The discount rate must be stated in real terms.
C)Nominal cash flows must be discounted using a real rate.
D)Real cash flows must be converted to nominal cash flows.
E)Real cash flows must be discounted using a real rate.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74194
Sample Questions
Q1) Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?
A)$14,520
B)$16,520
C)$22,000
D)$44,520
E)$52,000
Q2) What type of situations might indicate that sensitivity analysis should be performed on a variable?
Q3) Explain the significance of the financial break-even point.
Page 11
To view all questions and flashcards with answers, click on the resource link above.
Chapter 10: Risk and Return Lessons From Market History
Available Study Resources on Quizplus for this Chatper
84 Verified Questions
84 Flashcards
Source URL: https://quizplus.com/quiz/74193
Sample Questions
Q1) Assume you purchased 400 shares of stock for $20 a share,sold the stock for $8,392 and received a total of $550 in dividends.What was total dollar capital gain and total dollar return?
A)$392;$942
B)$392;$158
C)$550;$942
D)$550;$158
E)$392;$550
Q2) Which one of these statements correctly reflects historical history from 1926 through 2012?
A)Large-company stocks have never returned more than 40 percent in a single year.
B)In 2012,the rate of inflation was slightly higher than the average inflation rate for the period of 1926 through 2012.
C)U.S.Treasury bills have had a positive rate of return every single year.
D)The return on U.S.Treasury bills has exceeded the rate of inflation every single year.
E)The rate of inflation as measured by the consumer price index has been positive every single year.
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
Available Study Resources on Quizplus for this Chatper
78 Verified Questions
78 Flashcards
Source URL: https://quizplus.com/quiz/74192
Sample Questions
Q1) The expected return on HiLo stock is 12.04 percent while the expected return on the market is 10.52 percent.The beta of HiLo is 1.28.What is the risk-free rate of return?
A)5.09%
B)3.2%
C)3.7%
D)4.2%
E)4.87%
Q2) A portfolio is comprised of five securities that have individual betas of 1.38,.87,1.02,1.49,and .67.You do not know the portfolio weight of each security.What do you know with certainty?
A)The portfolio beta will not be affected by any change in the portfolio weights.
B)The portfolio beta will not change if an additional security with a beta of 1 is added to the portfolio.
C)The portfolio beta will be greater than the market beta.
D)The portfolio beta will be less than 1.49 and greater than .67.
E)The optimal portfolio beta for any investor must be greater than 0 and less than 1.
To view all questions and flashcards with answers, click on the resource link above.
Page 13
Chapter 12: Risk, Cost of Capital, and Valuation
Available Study Resources on Quizplus for this Chatper
86 Verified Questions
86 Flashcards
Source URL: https://quizplus.com/quiz/74191
Sample Questions
Q1) Wilson's is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42.The market risk premium is 8.1 percent,the tax rate is 35 percent,and the risk-free rate is 2.9 percent.The firm's WACC is 12.68 percent.Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM,and why or why not?
A)Yes;No;The CAPM return of 14.40 percent exceeds the IRR of 13.09 percent.
B)Yes;Yes;The project plots above the security market line.
C)Yes;Yes;The CAPM of 10.28 percent is less than the IRR of 13.09 percent.
D)No;Yes;The project plots above the security market line.
E)No;No;The project plots below the security market line.
Q2) International Products is a conglomerate with operations worldwide.The firm uses its firm-wide WACC as the discount rate for all of its products.In five words or less,identify the key flaw in this procedure.
Q3) The discount rate for a project should equal the:
A)cost of equity of the firm.
B)expected return on a financial asset of comparable risk.
C)discount rate used on the firm's last profitable project.
D)firm's weighted average cost of capital.
E)market rate of return.
To view all questions and flashcards with answers, click on the resource link above.
Page 14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
Available Study Resources on Quizplus for this Chatper
48 Verified Questions
48 Flashcards
Source URL: https://quizplus.com/quiz/74190
Sample Questions
Q1) Stock prices fluctuate daily.In relation to the efficient market hypothesis,these fluctuations are:
A)inconsistent with the semistrong form of efficiency because prices should be stable.
B)inconsistent with all forms of market efficiency.
C)consistent with the semistrong form because new information arrives daily.
D)consistent with the strong form because prices and information are controlled by insiders.
E)consistent with all forms of market efficiency provided the prices do fluctuate on a daily basis.
Q2) Market prices can be efficiently priced if:
A)brokerage commissions are zero.
B)a number of interested traders use the publicly available information.
C)securities always offer a positive rate of return to investors.
D)the prices are guaranteed by the U.S.Securities and Exchange Commission.
E)taxes are irrelevant.
Q3) What key item should managers look for when considering an acquisition?
Q4) Explain why in an efficient market investments have an expected net present value (NPV)of zero.
Q5) What are the basic principles behind behavioral finance?
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Capital Structure: Basic Concepts
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74189
Sample Questions
Q1) The Border Crossing has no debt and a cost of capital of 11.2 percent.Assume the firm switches to a debt-to-equity ratio of .25 and issues bonds at par with a 6.3 percent coupon.What will be its cost of equity after the switch? Ignore taxes.
A)11.71%
B)12.33%
C)11.54%
D)9.98%
E)12.43%
Q2) BL Plastics is an all equity firm that has 27,000 shares of stock outstanding.The company has decided to borrow $46,080 to buy out the shares of a deceased stockholder who holds 600 shares.What is the total value of this firm if you ignore taxes?
A)$2,122,560
B)$2,008,400
C)$2,073,600
D)$2,091,000
E)$2,103,440
Q3) Explain the basic principle of MM Proposition I without taxes along with the assumptions upon which the proposition is based.
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Capital Structure: Limits to the Use of Debt
Available Study Resources on Quizplus for this Chatper
56 Verified Questions
56 Flashcards
Source URL: https://quizplus.com/quiz/74188
Sample Questions
Q1) Which of these represent a payment of a nonmarketed claim on a firm's cash flows?
I.Payment of a customer's liability claim
II.Principal repayment of a bond
III.Federal corporate tax payment
IV.Dividend payment
A)II only
B)I only
C)II and IV only
D)I and III only
E)I,II,and III only
Q2) Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.
A)Repaying a bond that matured
B)Paying the semiannual bond interest
C)Paying an extra dividend
D)Cutting a regular dividend
E)Paying a regular dividend
Q3) Explain a Section 363 bankruptcy and identify its primary benefit over a traditional bankruptcy.
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Dividends and Other Payouts
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74187
Sample Questions
Q1) Luis owns 800 shares of a stock that announced it will pay a special $3.30 per share dividend one year from today and a regular $.30 per share dividend two years from today.He does not desire any dividend income this year but does want the maximum available to him next year.He can earn 12 percent on his funds.Ignoring taxes,what will be his total homemade dividend in two years?
A)$3,580.42
B)$2,880.00
C)$3,208.15
D)$3,196.80
E)$2,845.15
Q2) A common stock is selling for $63 a share.The par value per share is $1 and the total market value of the firm is $94,500.How many shares of stock will be outstanding if the firm does a 3-for-1 stock split?
A)500 shares
B)1,000 shares
C)3,000 shares
D)3,500 shares
E)4,500 shares
Q3) Identify at least four pros of paying dividends.
To view all questions and flashcards with answers, click on the resource link above.
Page 18
Chapter 17: Options and Corporate Finance
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74186
Sample Questions
Q1) The intrinsic value of a put is equal to the:
A)lesser of the stock price minus the exercise price or zero.
B)greater of the strike price minus the stock price or zero.
C)lesser of the stock price or zero.
D)lesser of the strike price or the stock price.
E)greater of the stock price minus the exercise price or zero.
Q2) The intrinsic value of a call is:
I.the value of the call if it were to expire today.
II.equal to the lower bound of a call's value.
III.another name for the market price of a call.
IV.always equal to zero if the call is currently out of the money.
A)I and III only
B)II and IV only
C)I and II only
D)II,III,and IV only
E)I,II,and IV only
Q3) What is the difference between an American and a European option? All else equal,which type of option will have more value and why?
Q4) What is a protective put and what does it protect?
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Short-Term Finance and Planning
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74185
Sample Questions
Q1) Assume you are the new financial officer of a manufacturing firm.What should you consider when deciding which type of financing policy- restrictive,flexible,or compromise - you should pursue?
Q2) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of financing are there that the firm could use as an alternative?
Q3) True Blue Stores had a beginning accounts payable balance of $56,900 and an ending accounts payable balance of $62,800.Sales for the period were $675,000 and costs of goods sold were $448,000.What is the payables turnover rate?
A)6.98 times
B)7.49 times
C)8.23 times
D)11.28 times
E)12.01 times
Q4) Is it possible to have a negative cash cycle? If not,why not? If so,how can this occur?
To view all questions and flashcards with answers, click on the resource link above.
Page 20
Chapter 19: Raising Capital
Available Study Resources on Quizplus for this Chatper
71 Verified Questions
71 Flashcards
Source URL: https://quizplus.com/quiz/74184
Sample Questions
Q1) Which one of these conditions must exist if a rights offering is to be successful?
A)The rights cannot be resold.
B)The market price must be less than the subscription price.
C)Shareholders must be able to obtain one new share for every right they receive.
D)The issuer must guarantee to repurchase the rights at the offer price if the market price declines.
E)The subscription price must be less than the market price.
Q2) Wholesale Foods would like to sell 1,600 shares of stock using a Dutch auction.The bids received are as follows: Bidder A: 300 shares at $23;Bidder B: 500 shares at $22;Bidder C: 700 shares at $21;Bidder D: 900 shares at $20;and Bidder E: 200 shares at $18.Bidder D will be able to purchase _____ shares at a price per share of ____.
A)533;$20
B)600;$20
C)533;$23
D)553;$18
E)553;$23
Q3) Why might an eligible firm choose a Rule 415 registration of securities?
To view all questions and flashcards with answers, click on the resource link above. Page 21
Chapter 20: International Corporate Finance
Available Study Resources on Quizplus for this Chatper
85 Verified Questions
85 Flashcards
Source URL: https://quizplus.com/quiz/74183
Sample Questions
Q1) Do you feel the various forms of parity will be more or less likely to exist in the markets five years from now? Explain the logic behind your "more" or "less" answer.
Q2) The home currency approach:
A)requires an applicable exchange rate for every time period for which there is a cash flow.
B)stresses the use of the real rate of return to compute the net present value (NPV)of a project.
C)uses the current risk-free nominal rate to discount all of the cash flows related to a project.
D)generally produces more reliable results than those found using the foreign currency approach.
E)provides a net project value in both the home and the foreign currency.
Q3) The forward rate market is dependent upon:
A)current forward rates exceeding current spot rates.
B)current spot rates exceeding current forward rates over time.
C)current spot rates equaling current forward rates on average over time.
D)current spot rates equaling the actual future spot rates on average over time.
E)forward rates equaling the actual future spot rates on average over time.
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: Mergers and Acquisitions Web Only
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/74182
Sample Questions
Q1) Does diversification achieved through a merger create value? Why or why not?
A)Yes;Diversification lowers the volatility of a firm's earnings which increases the firm's value to shareholders.
B)Yes;Diversification lowers the total risk of a firm which provides a compensable benefit.
C)Yes;Diversification increases a firm's earnings which creates value for the firm.
D)No;Diversification lowers unsystematic risk but has no real value to shareholders.
E)No;Diversification lowers a firm's earnings and thus destroys value.
Q2) Carlisle's Market has a market value of $429,000 while Food World's market value is $191,000.Carlisle's just acquired Food World for $200,000 cash.What is the net present value of the acquisition if the merger creates $28,000 of synergy from cost efficiencies?
A)$19,000
B)$17,000
C)-$9,000
D)$37,000
E)$219,000
Q3) Explain the pros and cons of a cash acquisition over a stock acquisition.
To view all questions and flashcards with answers, click on the resource link above. Page 23