Introduction to Finance Exam Practice Tests
Course Introduction
Introduction to Finance offers students a foundational understanding of the principles and practices underlying financial decision-making within individuals, businesses, and organizations. The course explores core topics such as financial markets, time value of money, risk and return, valuation of assets, and the functions of financial institutions. Through real-world examples, case studies, and practical exercises, students gain insight into budgeting, investment analysis, financial planning, and the mechanisms that drive financial systems, equipping them with essential skills for further study and future careers in finance.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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20 Chapters
2197 Verified Questions
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) The goal of maximize shareholder wealth inevitably conflicts with socially responsible behavior on the part of corporation.
A)True
B)False
Answer: False
Q2) The Sarbane-Oxley Act addresses insider trading by members of Congress.
A)True
B)False
Answer: False
Q3) Why do investors prefer receiving cash sooner rather than later,according to finance theory?
A)Incremental profits are greater than accounting profits.
B)Money received earlier can be reinvested and returns can be increased.
C)Tax considerations are important when investing.
D)Diversification leads to increased value.
Answer: B
Q4) Limited partners may actively manage the business.
A)True
B)False
Answer: False
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) The purpose of financial markets is to bring borrowers and savers together.
A)True
B)False Answer: True
Q2) Organized security exchanges do not physically occupy space.
A)True
B)False Answer: False
Q3) Banks that are financial intermediaries generate earnings when they facilitate the transfer of money from savers to borrowers by paying savers a smaller return than they demand from borrowers.
A)True
B)False Answer: True
Q4) A security is a written instrument that represents a financial claim.
A)True
B)False Answer: True
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Page 4
Chapter 3: Understanding Financial
Cash Flows
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Sample Questions
Q1) Patriot Corporation purchased manufacturing equipment with an expected useful life of five years.The purchase of the machinery would be shown as
A)an expense on the balance sheet.
B)an expense on the income statement.
C)an asset on the balance sheet.
D)both an expense and an asset.
Answer: C
Q2) The cash flow statement shows amounts that the company has earned but for which it has not yet received cash.
A)True
B)False
Answer: False
Q3) The income statement shows a company's earnings since it has been in business. A)True
B)False
Answer: False
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Page 5
Chapter 4: Financial Analysis-Sizing up Firm Performance
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127 Verified Questions
127 Flashcards
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Sample Questions
Q1) A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?
A)Liquidity
B)Leverage
C)Efficiency
D)Profitability
Q2) Which of the following statements is true?
A)Current assets consist of cash,accounts receivable,inventory,and net plant,property,and equipment.
B)The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
C)For the average firm,inventory is considered to be more "liquid" than accounts receivable.
D)A successful firm's current liabilities should always be greater than its current assets.
Q3) Ratios are used to standardize financial information.
A)True
B)False
Q4) Discuss the limitations of ratio analysis.
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6
Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) What will the dollar amount be in four years,assuming that interest is paid annually?
A)$2,800
B)$3,100
C)$3,111
D)$3,148
Q2) Using a financial calculator,which of the following would be a correct way to find how long it would take for a sum to triple at a rate of 3%?
A)i=5,PV=-1,PMT = 0,FV=3,solve for N
B)i=5,PV=1,PMT = 0,FV=3,solve for N
C)i=.05,PV=-1,PMT = 0,FV=3,solve for N
D)Financial calculators cannot be used to solve this problem.
Q3) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.Her cash flow at time period 0 is
A)$1,000
B)-$1,000
C)$-990
D)$1,010
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts?
Year End of Year Deposit
1 $350
2 $500
3 $725
4 $400
A)$1,622
B)$2,207
C)$2,384
D)$2,687
Q2) If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years,how much will be in the account at the end of the 20th year? Assume that the account earns 10%,and round to the nearest $10.
A)$8,300
B)$9,100
C)$8,900
D)$9,700
8
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) You have invested in a project that has the following payoff schedule: Probability of Payoff Occurrence
$40 .15
$50 .20
$60 .30
$70 .30
$80 .05
What is the expected value of the investment's payoff? (Round to the nearest $1. )
A)$60
B)$65
C)$58
D)$70
Q2) Which of the following sequences is arranged in the correct order,from highest long-term returns to lowest?
A)Small stocks,government bonds,large stocks
B)Large stocks,treasury bills,small stocks
C)Small stocks,large stocks,treasury bills
D)Government bonds,large stocks,treasury bills
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The risk-return relationship for each financial asset is shown on A)the capital market line.
B)the New York Stock Exchange market line.
C)the security market line.
D)none of the above.
Q2) Beta is a statistical measure of
A)hyperbolic.
B)total risk.
C)the standard deviation.
D)the relationship between an investment's returns and the market return.
Q3) Which of the following statements is true?
A)Systematic,or market,risk can be reduced through diversification.
B)Both systematic and unsystematic risk can be reduced through diversification.
C)Unsystematic,or company,risk can be reduced through diversification.
D)Neither systematic nor unsystematic risk can be reduced through diversification.
Q4) The S&P 500 Index is commonly used to estimate the market rate of return.
A)True
B)False
Q5) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) If the market price of a bond increases,then
A)the yield to maturity decreases.
B)the coupon rate increases.
C)the yield to maturity increases.
D)none of the above.
Q2) Maturity risk and liquidity risk are equivalent terms.
A)True
B)False
Q3) Explain why an increase in the inflation rate will cause the yield to maturity on a bond to increase.
Q4) Quirk Drugs sold an issue of 30-year,$1,000 par value bonds to the public that carry a 10.85% coupon rate,payable semiannually.It is now 10 years later,and the current market rate of interest is 9.00%.If interest rates remain at 9.00% until Quirk's bonds mature,what will happen to the value of the bonds over time?
A)The bonds will sell at a premium and decline in value until maturity.
B)The bonds will sell at a discount and rise in value until maturity.
C)The bonds will sell at a premium and rise in value until maturity.
D)The bonds will sell at a discount and fall in value until maturity.
Q5) Compare and contrast current yield and yield to maturity.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Which investor incurs the greatest risk?
A)Mortgage bondholder
B)Preferred stockholder
C)Common stockholder
D)Debenture bondholder
Q2) WSU Inc.is a young company that does not yet pay a dividend.You believe that the company will begin to pay dividends 5 years from now,and that the company will then be worth $50 per share.If your required rate of return on this risky stock is 20%,what is the stock worth today?
A)$40
B)$10
C)$20.09
D)$0.00
Q3) In the event of bankruptcy,preferred stockholders and common stockholders have the same claim on the firm's assets.
A)True
B)False
Q4) Common stock represents a claim on residual income.
A)True
B)False
Page 12
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) With respect to the capital budgeting practices of large U.S.corporations
A)the profitability index has been gaining in popularity.
B)IRR and NPV have been gaining in popularity.
C)payback and discounted payback have been gaining in popularity.
D)IRR and NPV have declined in popularity.
Q2) Analysis of a machine indicates that it has a cost of $5,375,000.The machine is expected to produce cash inflows of $1,825,000 in Year 1;$1,775,000 in Year 2;$1,630,000 in Year 3;$1,585,000 in Year 4;and $1,650,000 in Year 5.What is the machine's IRR?
A)12.16%
B)17.81%
C)23.00%
D)11.11%
Q3) The equivalent annual cost (EAC)method is appropriate for evaluating accessibility projects mandated by the Americans With Disabilities Act.
A)True
B)False
Q4) The required rate of return represents the cost of capital for a project.
A)True
B)False
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Schiller Construction Inc.has estimated the following revenues and expenses related to phase I of a proposed new housing development.Incremental sales= $5,000,000,total cash operating expenses $3,500,000,depreciation $500,000,taxes 35%,interest expense,$200,000.Operating cash flow equals
A)$650,000
B)$1,000,000
C)$1,150,000
D)$975,000
Q2) Incremental cash flows include all of the following EXCEPT
A)research and development costs.
B)increased labor costs from the project.
C)advertising costs.
D)both B and C.
Q3) Taxes may have a significant effect on the cost of replacing an old asset with a new asset.
A)True
B)False
Q4) The initial outlay of an asset does not include installation costs. A)True B)False
Page 14
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) A would be entrepreneur is considering buying a franchise from a national chain of fitness centers.Identify some of the risks she might face.
Q2) If the worst case scenario for a project results in an NPV of zero,the project should be accepted.
A)True
B)False
Q3) Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology research in sets of 1,000 tubes.Fixed costs including depreciation associated with the project are $2,000,000,variable cost per set is $16.Excom expects to sell 250,000 sets.What is the minimum price it can charge and reach the accounting break-even point?
A)$8
B)$12
C)$24
D)$20
Q4) List at least four typical value drivers that could seriously impact the outcome of a project.
Q5) Briefly explain what is meant by a real option in capital budgeting.Give 2 concrete examples.
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) A firm can estimate its cost of debt by finding the yield on bonds issued by other firms with similar ratings and maturities.
A)True
B)False
Q2) Plimoth Plantation's overall WACC is 11%.It has an opportunity to accept a project that involves nearly riskless cash flows,but will earn only 7%.This project will require a significant portion of the firm's capital.If Plimoth accepts this project
A)the value of the company will fall because it's WACC will fall.
B)the value of the company will fall because it's average rate of return on investments will fall.
C)the value of the company will rise because its WACC will fall.
D)both it's average rate of return and its WACC should fall.
Q3) Most firms use Treasury securities with maturities of ________ to determine the appropriate risk-free rate to use in the CAPM.
A)90 days
B)180 days
C)10 years
D)30 years
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Page 16
Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Which of the following factors favors the use of more debt in a company's financial structure?
A)High levels of taxable income
B)Low levels of taxable income
C)The business is basically risky with unpredictable cash flows.
D)Risk of bankruptcy would make customers reluctant to buy the company's products.
Q2) Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.
A)True
B)False
Q3) The inclusion of bankruptcy costs and taxes in firm valuation
A)causes the cost of capital curve to be umbrella shaped.
B)is consistent with a saucer-shaped cost of capital curve.
C)is consistent with a cost of capital curve that slopes downward.
D)causes the cost of capital to rise in a linear fashion as more debt is added to the capital structure.
Q4) Under what conditions are shareholders likely to incur agency costs when managers make capital budgeting decisions?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) When a firm begins to pay dividends,it is signalling that it always expects to have enough cash flow to maintain and increase its dividend payout.
A)True
B)False
Q2) Unexpected dividend changes would cause investors to reassess their perceptions about a firm's stock.
A)True
B)False
Q3) Apple Computers decided to raise a large amount of money by selling bonds (previously the company had little or no debt)and use the proceeds to repurchase billions of dollars worth of the company's stock.The decision was made after Apple stock lost more than 40% of its value in a six month period when most stock prices were rising.
A)Apple wanted to lower its cost of capital by substituting debt for equity.
B)Apple wanted to appease disappointed investors by offering them cash for their stock.
C)Apple wanted to increase earning per share by reducing the number of shares outstanding.
D)All of the above are reasonable explanations for Apple's decision.
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Typical steps in the financial planning process include
A)preparing a sales forecast.
B)analyzing cost data.
C)estimating tax expense.
D)all of the above.
Q2) Based on the information in Table 3,what is Thompson's projected cumulative borrowing as of March 1,2014?
A)$85,000
B)$45,000
C)$70,000
D)- 0 -
Q3) Which of the following are considered to be spontaneous sources of financing (i.e. ,they arise naturally during the course of doing business)?
A)Notes payable and common stock
B)Accounts receivable and bonds
C)Fixed assets and inventory
D)Accounts payable and accrued expenses
Q4) What is meant by spontaneous financing?
Q5) Discuss the basic functions that budgets perform for a firm.
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Clark Corporation has an average collection period of 7 days,an inventory conversion period of 30 days,and a payables deferrable period of 60 days.What is Clark's cash conversion cycle?
A)97 days
B)37 days
C)23 days
D)-23 days
Q2) Smith Enterprises has a line of credit with Fidelity National Bank that allows Smith to borrow up to $350,000 at an interest rate of 5%.However,Smith must keep a compensating balance of 10% of any amount borrowed on deposit at Fidelity.Smith does not normally keep a cash balance account with Fidelity.What is the effective annual cost of credit (round to nearest .01 percent)?
A)5.93%
B)5.84%
C)5.64%
D)5.56%
Q3) Lines of credit involve fixed rates of interest.
A)True
B)False
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Page 20
Chapter 19: International Business Finance
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Sample Questions
Q1) Participants in foreign exchange trading include
A)importers and exporters.
B)investors and portfolio managers.
C)currency traders.
D)all of the above.
Q2) The difference between the asked price and the bid price is known as the spread.
A)True
B)False
Q3) Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux for 700,000 euros.Further assume that the quoted exchange rates are as follows: spot rate = .770 euros to the U.S.dollar;30-day forward rate = .775 euros to the U.S.dollar;and 90-day forward rate = .778 euros to the U.S.dollar.If the actual currency exchange rate at the time payment is due in 90 days is equal to the forward rate of .778 euros to the U.S.dollar,how much would the wine cost the importer in U.S.dollars if payment is made in 90 days? Round to the nearest dollar.
A)$89,743
B)$909,091
C)$544,600
D)$899,743
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Page 21
Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Self-insurance would not provide adequate protection in which of the following circumstances?
A)Unemployment insurance for a firm that rarely lays off employees.
B)Damage to the company's own vehicles.
C)Major ecological disasters resulting from oil spills.
D)Revenue lost because of bad weather during the peak shopping season.
Q2) What are some of the means by which firms can transfer risk to other parties? Should firms always transfer risks when it is possible to do so?
Q3) Assume that the current price of FGX stock is $33,that a 6 month call option on the stock has a strike or exercise price of $35.00,the risk free rate is 4%,and that you have calculated N(d<sub>1</sub>)as .65 and N(d2)as .55.Use the Black-Scholes model to calculate the price of the option.
Q4) A ________ is a contract that requires the holder to buy or sell a stated commodity at a specified price at a specified time in the future.
A)warrant
B)option
C)future
D)convertible contract
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Page 22