Introduction to Finance
Exam Answer Key
Course Introduction
Introduction to Finance offers a comprehensive overview of the fundamental principles and practices that govern financial decision-making in personal, corporate, and public sectors. The course covers essential topics such as time value of money, risk and return, financial markets and institutions, investment analysis, and basic valuation of securities. Students will develop a foundational understanding of the role of finance in economic systems, learn how to analyze financial statements, and gain insights into budgeting, savings, and investment strategies. Emphasis is placed on practical applications and real-world examples to prepare students for further study and future careers in finance-related fields.
Recommended Textbook
Financial Management for Decision Makers 2nd Canadian Edition by Peter Atrill
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Satisfying the needs of shareholders, instead of other stakeholders, must be paramount to a business because
A) This objective is always consistent with those of other stakeholders
B) Government will put pressure on a business to do so
C) Other stakeholders do not have an impact on the success of the business
D) Shareholders will always ensure that the needs of other stakeholders will be met
E) If the management team does not pursue this goal, they will be replaced
Answer: E
Q2) An example of putting the short term considerations ahead of the long term planning is
A) locking in a higher interest rate on debt when rates are expected to rise
B) using more expensive but higher quality parts to manufacture a product
C) reducing the warranty period from 1 year to six months to save money
D) manufacturing large vehicles when gas prices are expected to rise
E) increasing sales commissions for the sale of energy inefficent products
Answer: D
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Chapter 2: Accounting - the Language of Business
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Q1) Midday Ltd. received cash of $4,000 from a sale to Sirius Ltd., $50,000 from a sale of a used machine to Foolish Inc., and $70,000 dividends on shares it owns in of Gong Ltd. How would these items appear on the cash flow statement?
A) Operating activities $4,000; investing activities $50,000; financing activities $70,000.
B) Operating activities $70,000; investing activities $4,000; financing activities $50,000.
C) Operating activities $50,000; investing activities $70,000; financing activities $4,000.
D) Operating activities $(4,000); investing activities $(50,000); financing activities $(70,000).
E) Operating activities $(70,000); investing activities $(4,000); financing activities $(50,000).
Answer: A
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4
Chapter 3: Financial Planning and Pro Forma Financial Statements
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Q1) Dressler Antiques Ltd. reported retained earnings of ($125,000) on the balance sheet for the year just ended. The company is projecting a net income after tax of $1,620,000 for the coming year. Dressler has 500,000 preferred shares outstanding and 3 million common shares outstanding Both pay a dividend of $.35 per share. What is the projected balance of the Company's retained earnings at the end of the coming year?
A) $270,000
B) $345,000
C) $395,000
D) $1,320,000
E) $1,495,000
Answer: A
Q2) A financing gap refers to
A) The undisclosed project for which a portion of retained earnings is reserved
B) Estimates included in pro forma statements which have no basis in hard data
C) Financing requirements not identified in the pro forma statements
D) A value added to liabilities to balance the pro forma balance sheet
E) A reserve for bad debt
Answer: D
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Chapter 4: Analyzing and Interpreting Financial Statements
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Q1) Tuscarora Transportation Limited currently trades for $70 with a P/E ratio of 16.4. Python Logistics trades for $54 with a P/E ratio of 38.6. A conclusion that could be drawn from these numbers, is that the market believes
A) Tuscarora Transportation is less risky than Python Logistics
B) Python Logistics earnings will overtake Tuscarora Transportation
C) Tuscarora Transportation's assets are undervalued relative to its share price
D) Python Logistics is no longer a good investment
E) Python Logistics has higher earnings than Tuscarora Transportation
Q2) Which of the following ratio patterns over the past five years would predict the bankruptcy of a company?
A) The ratios are consistently about the same over the five years.
B) The ratios start to get smaller over the five years.
C) The ratios start to get larger over the five years.
D) The ratios start to somewhat worse over the five years.
E) The ratios start to have large changes over the five years.
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6
Chapter 5: The Time Value of Money
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Q1) What is the maximum price XL Satellites can pay for a machine that is expected to produce marginal revenues of $20,000, $25,000, $30,000, $35,000, and $40,000 at the end of each year for five years if the interest rate is 10%?
A) $100,111
B) $110,122
C) $113,724
D) $121,137
E) $150,000
Q2) CapiCal Industries is issuing bonds at 7% interest but would be willing to buy back the debt at any time after the first 12 months. CapiCal Industries is looking to issue
A) A Retractable bond
B) A Debenture
C) A Redeemable bond
D) An Open bond
E) A convertible debenture
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Chapter 6: Making Capital Investment Decisions
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Q1) Machine A is bought for $200,000 and has a residual value of $80,000 after six years of use. The amortization is straight-line and the annual profit before depreciation generated by the machine is $30,000. What is the ARR?
A) 2.4%
B) 4.3%
C) 7.1%
D) 16.7% E) 17.9%
Q2) Aviation Cargo Ltd. (ACL) wants to spend $5 million to expand a runway at its air field to accommodate a new larger cargo jet. It estimates additional cash inflows of $1 million for the next ten years. What should ACL do?
A) Accept the project because the payback period is six years.
B) Accept the project because the ARR is 20%.
C) Accept the project because the IRR is 15%.
D) Accept the project because the NPV is $1, 710,000.
E) Accept the project because the the profits will increase.
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Chapter 7: Making Capital Investment Decisions: Further Issues
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Q1) Kendle Knitting Mills is looking to purchase additional weaving looms of different sizes. One supplier has offered an appropriate configuration of machines valued at $175,000. Kendle projects incremental income from these looms before depreciation at $40,000 a year over an eight year period. Kendle can purchase similar used machines for $85,000 but the equipment is less efficient and will only last four years. Income from these is projected at $40,000, $37,000, $33,000, and $28,000 respectively. Both used and new machines will have no salvage value at the end of their useful lives. If Kendle is looking for a 14% return, determine if Kendle should buy new or used looms using common-shortest period of time approach. What should Kendle buy?
A) Neither new looms nor old as the NPV for both is negative.
B) Used looms as they have a NPV that is $17,164 higher than new.
C) Used looms as they have a NPV that is $67,494 higher than new.
D) New looms as they have a NPV that is $90,568 higher than old.
E) New looms as they have a NPV that is $3,324 higher than old.
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Chapter 8: Financing a Business 1: Sources of Funds
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Q1) On April 15, with the Canadian dollar (CAN) trading at $1.016 to one US dollar (USD), Lethbridge Saddlery Ltd. took delivery of $250,000(USD) worth of saddles and tack from a Montana supplier which Lethbridge paid through an operating loan at 5% in US currency. Lethbridge planned to repay the loan out of sales revenue 90 days later. If the exchange rate went to $0.980 CAN to one USD when the loan matured, how much did Lethbridge Saddlery Ltd. pay in interest in Canadian dollars?
A) $3,034
B) $3,131
C) $3,020
D) $12,303
E) $12,700
Q2) Which of the following is an internal source of financing?
A) Retained earnings
B) Preferred shares
C) Debentures
D) Accounts receivable
E) Common shares
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Chapter 9: Financing a Business 2: Raising Long-Term Funds
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Q1) Assuming the market takes on the characteristics of a weak form of efficiency, which of the following would be the worst investment strategy to practice?
A) Technical Analysis.
B) Fundamental Analysis.
C) A comparison of price/earnings ratios.
D) A comparison of the EPS.
E) Diversification.
Q2) RAJ Inc. would like to issue one million common shares and has an unpublished reserve price of $4.75. The company's investment dealer received the following response to its tender offer. 200,000 shares could be sold at $5.45, 350,000 at $5.25, 350,000 at $5.05, 600,000 at $4.90, 525,000 at $4.75, 725,000 at $4.50 and 700,000 at $4.25. What is the resulting striking price and the distribution of shares to each shareholder?
A) $5.45 with the one investor taking all that are available.
B) $5.05 with each investor allotted 4 for each 5 tendered.
C) $4.88 with each investor allotted 2 shares for each 5 tendered.
D) $4.75 with each investor receiving 4 for every 5 tendered.
E) $4.90 with each investor allotted 2 for each 3 tendered.
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Page 11
Chapter 10: The Cost of Capital and the Capital Structure Decision
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Q1) Manchester Mechanical Ltd. paid a dividend this year of $6.30 on each of its 450,000 common shares outstanding. Current market price is $56.00. Dividends are expected to grow by 1.5% per year. What is the cost of share capital to the business?
A) 11.3%
B) 11.4%
C) 12.8%
D) $2.88 million
E) $25.2 million
Q2) Intelligent Corp. (IC) has paid an annual dividend of $2.00 per share ever since it was formed ten years ago. Today IC announced it will start to grow the dividend by 15% per year from now on. If IC's shareholders require a 20% return on common shares, by what percentage should IC's share price jump according to the dividend-based approach to share valuation?
A) 60%
B) 120%
C) 180%
D) 360%
E) 480%
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Chapter 11: Developing a Dividend Policy
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Q1) Which of the following is the most important factor influencing the level of dividends?
A) Investment opportunities.
B) Residual theory of dividends.
C) Loan covenants.
D) Market expectations.
E) Profit stability.
Q2) Lenders interested in ensuring a large cushion of cash to mitigate the risks of the loan may include restrictions in the contract to preclude the company from paying out dividends to common shareholders. Shareholders may have to vote in a block to oust a Board who has undertaken these loans. What is this situation is consistent with?
A) Theory of competition.
B) Agency Theory.
C) Lender Leverage.
D) Shareholder Activism.
E) Microeconomic transactions theory.
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Chapter 12: Managing Working Capital
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Q1) Which of the following combination of factors may affect a firm's investment in working capital?
A) Interest rates, market demand, executive compensation, and the state of the economy.
B) Interest rates, market demand, the seasons, and the state of the economy.
C) Interest rates, market demand, the weather, and the state of the economy.
D) Interest rates, market demand, the political environment, and the state of the economy.
E) Interest rates, market demand, new high tech inventions, and the state of the economy.
Q2) Coaxial Ltd. has an average collection period for its receivables of 50 days and an average payment period for its payables of 30 days. Depot Inc. has an average collection period for its receivables of 25 days and an average payment period for its payables of 55 days. Which of the following is the best conclusion to draw from this information?
A) Coaxial offers payment terms of more than 50 days to its customers.
B) Depot sells to well-to-do customers who pay early.
C) Coaxial generates strong cash flows from government business.
D) Depot pays cash for most of its purchases because of its long payment period.
E) Neither company is doing a good job managing its cash flow.
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Page 14
Chapter 13: Measuring and Managing for Shareholder Value
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Q1) What is a value driver that a Human Resources manager could impact directly?
A) Working Capital
B) Taxes
C) Operating Costs
D) Fixed Capital
E) Sales.
Q2) Grayson Scaffolding Inc. has a cost of capital of 9% and the following free cash flow projections over their five-year planning horizon: $3.4 million, 3.8 million, $4.5 million, $4.9 million, and $5.2 million. Using free cash flows, what is the total business value?
A) $28.4 million
B) $37.5 million
C) $54.2 million
D) $57.8 million
E) $74.4 million
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Chapter 14: Mergers, Acquisitions, and the Valuation of Shares
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Q1) What type of merger occurs when a company eliminates a competitor by buying it?
A) Vertical
B) Conglomerate
C) Horizontal
D) Unilateral
E) Stratified
Q2) An unlisted company has sales revenue of $456 million and 2 million common shares outstanding. Another company with similar characteristics, sales of $360 million and five million shares, trades on the Toronto Stock exchange for $12.50. Using the information from the question in an appropriate ratio, what is the share price of the unlisted company?
A) $6.33
B) $15.26
C) $30.41
D) $39.58
E) $136.89
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