Introduction to Finance Exam Practice Tests
Course Introduction
Introduction to Finance offers a comprehensive overview of the fundamental principles and concepts that underpin the financial world. Students will explore topics such as financial markets and institutions, time value of money, risk and return, valuation of assets, and the basics of financial decision-making for individuals and organizations. The course emphasizes practical applications of these concepts, equipping learners with the analytical tools necessary to understand financial statements, evaluate investment opportunities, and make informed personal and professional financial decisions.
Recommended Textbook
Foundations of Finance 8th Edition by Arthur J. Keown
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17 Chapters
2473 Verified Questions
2473 Flashcards
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Chapter 1: An Introduction to the Foundations of Financial Management
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137 Verified Questions
137 Flashcards
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Sample Questions
Q1) Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.
A)True
B)False
Answer: True
Q2) The "perfect storm" of factors that contributed to the economic crisis of 2007 include
A)increases in the minimum wage rate,unchecked illegal immigration,and state government deficits.
B)financial deregulation,unchecked commodity prices,floating currency exchange rates.
C)poorly chosen mortgage loans,falling housing prices,and a contracting economy.
D)agency costs,inefficient markets,and perfect capital markets.
Answer: C
Q3) Cash flows and profits are synonymous; in other words,higher cash flows equal higher profits.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Financial Markets and Interest Rates
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152 Verified Questions
152 Flashcards
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Sample Questions
Q1) The one-year interest rate is 4%.The interest rate for a two-year security is 6%.The one-year interest rate one year from now is 8.34%.According to the liquidity preference theory,the risk premium for the second one-year investment is
A)0.50%.
B)0.34%.
C)0.30%.
D)1.66%.
Answer: C
Q2) One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of pricing information.
A)True
B)False
Answer: False
Q3) A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded.
A)True
B)False
Answer: True
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Chapter 3: Understanding Financial Statements and Cash Flows
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) The accounting book value of an asset represents the historical cost of the asset rather than its current market value or replacement cost.
A)True
B)False
Answer: True
Q2) What information does a firm's statement of cash flows provide to the viewing public?
A)a report of investments made and their cost for a specific period of time
B)a report documenting a firm's cash inflows and cash outflows from operating,financing,and investing activities for a defined period of time
C)a report of revenues and expenses for a defined period of time
D)an itemization of all of a firm's assets,liabilities,and equity for a defined period of time Answer: B
Q3) The balance sheet equation is Total Assets = Total Revenues - Total Liabilities.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Evaluating a Firms Financial Performance
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147 Flashcards
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Sample Questions
Q1) Based on the information in Table 4-2,the debt ratio is
A)28.12%.
B)34.74%.
C)45.69%.
D)42.03%.
Q2) Based on the information in Table 4-1,the acid-test ratio is
A)1.71.
B)1.67.
C)1.02.
D)0.98.
Q3) Standard Inc.has an annual interest expense of $40,000.If Standard's times-interest-earned ratio is 3.0,what is Standard's Earnings Before Taxes (EBT)?
A)$47,000
B)$80,000
C)$120,000
D)$160,000
Q4) Lower asset turnover ratios are generally indicative of more efficient asset management.
A)True
B)False
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Chapter 5: The Time Value of Money
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) You bought a racehorse that has had a winning streak for six years,bringing in $250,000 at the end of each year before dying of a heart attack.If you paid $1,155,720 for the horse 4 years ago,what was your annual return over this 4-year period?
A)8%
B)33%
C)18%
D)12%
Q2) When using a financial calculator,cash outflows generally have to be entered as negative numbers,because a financial calculator sees money "leaving your hands."
A)True
B)False
Q3) If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.
A)True
B)False
Q4) The present value of an annuity increases as the discount rate increases.
A)True
B)False
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Chapter 6: The Meaning and Measurement of Risk and Return
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147 Flashcards
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Sample Questions
Q1) The characteristic line for any well-diversified portfolio is horizontal. A)True
B)False
Q2) You are considering an investment in Citizens Bank Corp.The firm has a beta of 1.6.Currently,U.S.Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%.What rate of return should you expect for your investment in Citizens Bank?
A)11.15%
B)15.39%
C)16.75%
D)20.75%
Q3) Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B. A)True B)False
Q4) The T-bill return is used in the CAPM model as the risk free rate. A)True B)False
Page 8
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Chapter 7: The Valuation and Characteristics of Bonds
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145 Flashcards
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Sample Questions
Q1) Bart's Moving Company bonds have a 11% coupon rate.Interest is paid semiannually.The bonds have a par value of $1,000 and will mature 8 years from now.Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%.
A)$1,197.27
B)$1,133.05
C)$1,098.99
D)$1,082.75
Q2) Both investor A and investor B are considering the purchase of Corporation FJR bonds.The bonds are selling at a price of $1,100 each.Investor A decides to buy the bonds and Investor B does not buy the bonds.
A)Investor A must have a required return lower than the required return for Investor B.
B)The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
C)The yield to maturity for Investor A must be less than the yield to maturity for Investor B.
D)The yield to maturity for this bond must be higher than the coupon rate.
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Page 9
Chapter 8: The Valuation and Characteristics of Stock
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) Preferred stock is similar to a bond in the following way
A)preferred stock always contains a maturity date.
B)both investments provide a stated income stream.
C)both contain a growth factor similar to common stock.
D)both provide interest payments.
Q2) Because most preferred stocks are perpetuities,their value can be determined by dividing the annual dividend by an investor's required return.
A)True
B)False
Q3) Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm's cash flows is the same for both securities.
A)True
B)False
Q4) In theory,shareholders select the board of directors,but in reality,management effectively selects the directors.
A)True
B)False
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Chapter 9: The Cost of Capital
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130 Flashcards
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Sample Questions
Q1) The after-tax cost of debt is equal to one minus the marginal tax rate times the yield to maturity on the firm's outstanding debt.
A)True
B)False
Q2) XRT,Inc.is issuing a $1,000 par value bond that pays 8.5% interest annually.Investors are expected to pay $1,100 for the 12-year bond.The firm will pay $50 per bond in flotation costs.What is the after-tax cost of new debt if the firm is in the 35% tax bracket?
A)8.23%
B)4.55%
C)4.70%
D)7.45%
Q3) The firm's best financial structure is determined by finding the capital structure that minimizes the firm's cost of capital.
A)True
B)False
Q4) Alarm Systems Corporation's preferred stock pays a dividend of $3.60 and sells for $28.00.Alarm Systems Corporation has a marginal tax rate of 35%.What is the cost of preferred financing?
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Page 11
Chapter 10: Capital-Budgeting Techniques and Practice
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153 Verified Questions
153 Flashcards
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Sample Questions
Q1) One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.
A)True
B)False
Q2) Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.
A)True
B)False
Q3) The internal rate of return is
A)the discount rate that makes the NPV positive.
B)the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
C)the discount rate that makes NPV negative and the PI greater than one.
D)the rate of return that makes the NPV positive.
Q4) Positive NPV projects may be rejected when capital must be rationed.
A)True
B)False
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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154 Verified Questions
154 Flashcards
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Sample Questions
Q1) AFB Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.)The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.AFB's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life.What is the project's terminal cash flow?
A)$3,000
B)$5,000
C)$6,000
D)$8,000
Q2) According to the CAPM,systematic risk is the only relevant risk for capital budgeting purposes.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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150 Flashcards
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Sample Questions
Q1) Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.
A)True
B)False
Q2) If a firm has no operating leverage and no financial leverage,then a 10% increase in sales will have what effect on EPS?
A)EPS will remain the same.
B)EPS will increase by 10%.
C)EPS will decrease by 10%.
D)EPS will increase by less than 10%.
Q3) The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.
A)True
B)False
Q4) A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.
A)True
B)False
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14
Chapter 13: Dividend Policy and Internal Financing
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164 Flashcards
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Sample Questions
Q1) EveningFall,Inc.pays a quarterly dividend of $3.40 per share.Which of the following statements is most accurate concerning which shareholders will receive the dividend payment?
A)The shareholders who own the stock on the date the dividend is declared will receive the dividend,even if they sell their stock before the dividend checks are mailed. B)The shareholders who are identified as owning the stock on the record date will receive the dividend,even if they sell their stock before the dividend checks are mailed. C)The shareholders who own the stock the day the dividend is paid will receive the dividend.
D)All shareholders who own the stock on the record date,but sell the stock before the dividend checks are mailed,forfeit their right to receive the dividend and the money reverts back to the corporation.
Q2) According to the "bird-in-the-hand" dividend theory,the required return for a stock that pays its entire return from dividends is higher than the required return for a high-growth stock that pays no dividend.
A)True B)False
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Page 15
Chapter 14: Short-Term Financial Planning
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141 Flashcards
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Sample Questions
Q1) Which of the following will most likely result in an increase in discretionary funding needed?
A)The company's profit margin increases.
B)The company's dividend payout ratio increases.
C)The company's assets are only operating at 50% of capacity.
D)The company pays its accounts payable in 50 days,up from 45 days.
Q2) The percent of sales method does not provide a reasonable prediction of asset levels for instances when there are economies of scale in the use of the asset being forecast and when asset purchases are lumpy.
A)True
B)False
Q3) Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.
A)True
B)False
Q4) Financial forecasting is the process of attempting to estimate a firm's future financing requirements.
A)True
B)False
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Chapter 15: Working-Capital Management
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158 Verified Questions
158 Flashcards
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Sample Questions
Q1) The risk of illiquidity is increased if either cash and marketable securities are decreased,or if the firm relies more heavily of long-term debt.
A)True
B)False
Q2) Blastdale Corp.is considering borrowing $15,000 for a 60-day period.The firm will repay the $15,000 principal amount plus $200 in interest.What is the effective annual rate of interest? Use a 360-day year.
A)7.2%
B)8.0%
C)8.2%
D)10.5%
Q3) Floating lien agreements are the least secure form of inventory collateral. A)True B)False
Q4) The hedging principle is also called the principle of self-liquidating inventory. A)True B)False
Q5) Discuss the risk-return tradeoff experienced in working-capital management.
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Chapter 16: International Business Finance
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) Exchange rate changes tend to reflect international differences in inflation rates.What is the name of this theory?
A)the purchasing power parity theory
B)the IMF effect
C)interest rate parity theory
D)the law of one price
Q2) The spot exchange rate is 1.57 dollars per pound.The 30-day forward exchange rate is .6211 pounds per dollar.The percent-per-year discount on the 30-day pound is
A)32.77%.
B)30.57%.
C)48.00%.
D)45.93%.
Q3) A wide bid/ask spread could indicate which of the following?
A)the presence of arbitrageurs
B)large volume transactions are taking place
C)frequent trading of a currency
D)an inefficient market
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) Generally,the least important motive for holding liquid assets for a typical company is the speculative motive.
A)True
B)False
Q2) Which of the following would be an example of the "transactions motive" for a firm holding cash balances?
A)investing "excess cash balances"
B)anticipating a downturn in the economy
C)purchase of inventory
D)take advantage of an anticipated decline in the price of raw materials
Q3) Which of the following would be an example of the "speculative motive" for a firm holding cash balances?
A)make dividend payments
B)anticipating a strike
C)purchase of inventory
D)take advantage of an anticipated decline in the price of raw materials
Q4) Near-cash assets consist of marketable securities and accounts receivable.
A)True
B)False
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