Introduction to Finance Exam Questions
Course Introduction
Introduction to Finance offers a comprehensive overview of the fundamental concepts and principles in finance. The course covers topics such as time value of money, financial markets and instruments, risk and return, valuation of stocks and bonds, and the basics of corporate financial decision-making. Students will develop an understanding of how individuals, corporations, and organizations make financial decisions, and learn the analytical tools used to assess financial options. The course also introduces key financial statements and explores the role of finance in both personal and business contexts, providing a solid foundation for further study in the field.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.
A)True
B)False
Answer: False
Q2) Which of the following functions deals with the management of money?
A) Marketing
B) Investment
C) Financial services
D) Information systems
E) Managerial finance
Answer: C
Q3) A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits his losses to what he has invested in the company.
A)True
B)False
Answer: False
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3
Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) Assume that Meyer Corporation is 100 percent equity financed, and has the following information: (1) Earnings before taxes = $1,500;
(2) Sales = $5,000;
(3) Dividend payout ratio = 60%;
(4) Total assets turnover = 2.0;
(5) Applicable tax rate = 30%
The firm's return on equity is:
A) 25%.
B) 30%.
C) 35%.
D) 42%.
E) 50%.
Answer: D
Q2) A firm's net income is the most appropriate measure to determine whether the management is maximizing the firm's stock price.
A)True
B)False
Answer: False
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) Which of the following is true about the process of setting the offering price of an issue?
A) The offering price of the initial public offering of the stock of a privately held company is determined by a financial intermediary, whereas the offering price of the seasoned offering of a public company is determined by an investment bank.
B) An investment banker has an easier job of selling the issue if it carries a relatively high price.
C) An investment bank finds it easier to set the offering price of an initial public offering as compared to that of a seasoned offering.
D) An investment bank finds it easier to set the offering price of a seasoned offering of a private company as compared to a seasoned offering of a public company.
E) If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.
Answer: E
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5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? Use a financial calculator to make the calculation.
A) 12.36 years
B) 16.25 years
C) 15.19 years
D) 13.52 years
E) 14.12 years
Q2) Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n)
A) immediate annuity
B) annuity due
C) uneven cash flow stream
D) ordinary annuity
E) deferred annuity
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Assume that the real risk-free rate, r*, is 4 percent, and that inflation is expected to be 9% in Year 1, 6% in Year 2, and 4% thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12%, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5 - MRP2?
A) 2.1%
B) 1.8%
C) 5.0%
D) 3.0%
E) 2.5%
Q2) Assume that the current yield curve is upward sloping or normal. This implies that
A) short-term interest rates are more volatile than long-term rates.
B) inflation is expected to subside in the future.
C) the economy is at the trough of a business cycle.
D) long-term bonds are less attractive to investors than short-term bonds.
E) short-term interest rates are lower than the long-term interest rates.
Q3) The higher the perceived risk, the higher the required rate of return.
A)True
B)False
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Page 7
Chapter 6: Bonds Debtcharacteristics and Valuation
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Sample Questions
Q1) Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will be sold at net $937.79. What is the yield to maturity (YTM) of the issue as a broker would quote it to an investor? (Round the answer to the nearest whole number.)
A) 11%
B) 10%
C) 9%
D) 8%
E) 7%
Q2) A bond that only pays interest if the firm has sufficient earnings to cover the interest payments is called a(n):
A) callable bond.
B) putable bond.
C) convertible bond.
D) income bond.
E) indexed bond.
Q3) A bond's value will increase with increases in interest rate over time.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) Which of the following is true about the change in a stock price?
A) If investors demand higher returns to invest in stocks, then prices should increase.
B) If investors demand lower returns to invest in stocks, then prices should fall.
C) If investors demand higher returns to invest in stocks, then prices should fall.
D) If investors expect their investments to generate lower future cash flows, then prices should increase.
E) If investors expect their investments to generate higher future cash flows, then prices should fall.
Q2) The common stockholders have the right to _____.
A) vote for the changes in the firm's charter
B) convert their stock into a bond
C) receive the cash distributions before the preferred stockholders
D) determine the market value of their share
E) receive cumulative dividends
Q3) A common stock of a firm will have a maturity period of 10 years.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The total risk associated with an investment can be divided into _____.
A) systematic and nondiversifiable risk
B) firm-specific and unsystematic risk
C) market and firm specific risk
D) market and nondiversifiable risk
E) firm-specific and diversifiable risk
Q2) Which of the following statements about risk-return relationship is correct?
A) An increase in the expected inflation would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant.
B) A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
C) As a result of change in investors' risk aversion, the required rate of return on low-beta stocks is impacted more when compared to the required rate of return on high-beta stocks.
D) If investors became more averse to risk, then the slope of the SML would become less steep.
E) The market risk premium is lower for higher beta stocks and higher for lower beta stocks.
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Page 10
Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) The primary function of the capital budget is to forecast _____.
A) the target payback periods of the projects undertaken by a firm
B) the funds required for future projects
C) the discounted cash inflow from various projects
D) the terminal value of the cash flows from different projects
E) the projects' multiple internal rates of return
Q2) If a project's net benefit computed on a present value basis-that is, NPV-is positive, then:
A) its internal rate of return is equal to the required rate of return.
B) it is considered a risk-free project.
C) it is considered an acceptable investment.
D) the required rate of return is not attainable.
E) its payback period is more than the maximum cost-recovery time established by the firm.
Q3) The two main purposes of post-audit are to improve forecasts, and to improve operations.
A)True
B)False
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Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) Risk in a revenue-producing project can best be adjusted for by:
A) ignoring it.
B) adjusting the discount rate upward for increasing risk.
C) adjusting the discount rate downward for increasing risk.
D) Picking a risk factor equal to the average discount rate.
E) reducing the NPV by 10 percent for risky projects.
Q2) Ziker Golf Company evaluated a project as a risky project. Ziker generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent. If Ziker expects 12% return on average risk projects, then it should expect a return of _____ for a risky project.
A) 8%
B) 12%
C) 16%
D) 10%
E) 48%
Q3) If an asset being considered for acquisition has a beta of zero, its expected return will be equal to the risk-free rate.
A)True
B)False
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Page 12
Chapter 11: The Cost of Capital
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Sample Questions
Q1) Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. Which of the following is Rollins' component cost of debt? (Round off the answer to one decimal place.)
A) 8.4 percent
B) 7.2 percent
C) 6.8 percent
D) 5.3 percent
E) 9.5 percent
Q2) The firm's cost of capital represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm increases.
A)True
B)False
Q3) The component costs of capital are market-determined variables in as much as they are based on investors' required returns.
A)True
B)False
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Chapter 12: Capital Structure
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Sample Questions
Q1) What is the formula for calculating the times-interest earned (TIE) ratio?
A) TIE ratio = Interest charges ÷ Total liabilities
B) TIE ratio = Earnings per share ÷ Interest charges
C) TIE ratio = Sales ÷ Interest charges
D) TIE ratio = EBIT ÷ Interest charges
E) TIE ratio = Interest charges ÷ Net income
Q2) In 2015, a company had a total debt of $7 million. In 2016, the debt increased to $9 million. The change in earnings per share (EPS) of the company will be a direct result of change in its:
A) level of operations.
B) net operating income.
C) coefficient of variation.
D) capital structure
E) standard deviation.
Q3) Which of the following is an advantage of debt financing?
A) Interest charges on debt is very minimal.
B) Interest charges on debt are tax deductible.
C) Interest charges on debt are based on the net income of the firm.
D) The higher the interest charges, the lower the bankruptcy costs.
E) Firms that are entirely debt financed have to pay very minimal taxes.
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) A_____ is an action taken by a firm to decrease the per-share price of its stock.
A) stock appreciation
B) stock split
C) stock issue
D) stock repurchase
E) stock redemption
Q2) Which of the following policies represents a compromise between a stable, predictable dividend and a constant payout ratio?
A) The Free cash flow policy
B) The Residual dividend policy
C) The Dividend reinvestment policy
D) The Constant payout ratio policy
E) The Low regular dividend plus extras policy
Q3) The information content hypothesis proposes that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization.
A)True
B)False
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Page 15
Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) A type of unsecured promissory note issued by large, financially strong firms is called:
A) trade credit.
B) commercial paper.
C) a compensating balance.
D) revolving credit.
E) a promissory note.
Q2) The three main working capital strategies, namely aggressive, conservative, and moderate, differ primarily in the:
A) relative amounts of short-term debt used.
B) minimum level of permanent current assets.
C) relative amount of long-term debt versus equity used to finance permanent current assets.
D) average level of temporary current assets.
E) amount of trade credit used.
Q3) Net working capital represents the amount of current assets that is financed with long-term funds.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) A moderate current asset investment policy is one:
A) under which the level of accounts receivable is always greater than the level of accounts payable.
B) which emphasizes on holding equal amount of current assets and current liabilities.
C) that calls for relatively large amounts of current assets to be carried.
D) under which holdings of cash and marketable securities, inventories, and receivables are minimized.
E) that lies between the relaxed and restrictive current asset investment policies.
Q2) Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year and has calculated its economic order quantity as 3000 units. If the cost per order is $5, the total ordering cost incurred by Aberwald is:
A) $500.
B) $425.
C) $210.
D) $310.
E) $620.
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17
Chapter 16: Financial Planning and Control
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Sample Questions
Q1) Lumpy assets are assets that cannot be acquired in small increments; they must be obtained in large, discrete amounts.
A)True
B)False
Q2) Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30% of sales, and its fixed operating costs amount to 50% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. Which of the following is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?
A) 1.0×
B) 2.2×
C) 3.5×
D) 4.0×
E) 5.0×
Q3) Any deviation from projections must be dealt with to improve future forecasts.
A)True
B)False
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