Introduction to Finance Exam Solutions
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and concepts that drive the world of finance. The course covers essential topics such as time value of money, risk and return, financial statements analysis, budgeting, interest rates, and the functioning of financial markets and institutions. Students will explore the basics of investment, capital structure, and corporate finance decisions, gaining practical skills to analyze financial information and make informed decisions. By the end of the course, learners will be equipped with the knowledge necessary to navigate personal and corporate financial environments.
Recommended Textbook
Foundations of Financial Management 15th Edition by Stanley B. Block
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21 Chapters
2215 Verified Questions
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income.
A)True
B)False
Answer: False
Q2) In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States.
A)True
B)False
Answer: True
Q3) In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.
A)True
B)False
Answer: True
Q4) Maximizing the earnings of the firm is the goal of financial management.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Which of the following would not be included in the balance sheet investment account?
A)Stocks of other corporations
B)Long-term government bonds
C)Marketable securities
D)Investments in other corporations
Answer: C
Q2) It is not possible for a company with a high gross profit margin to have a low operating profit.
A)True
B)False
Answer: False
Q3) Free cash flow is equal to cash flow from operating activities
A)plus capital expenditures, minus dividends.
B)minus capital expenditures, plus dividends.
C)plus capital expenditures, plus dividends.
D)minus capital expenditures, minus dividends.
Answer: D
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Chapter 3: Financial Analysis
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90 Flashcards
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Sample Questions
Q1) If the company's accounts receivable turnover is increasing, the average collection period
A)is going up slightly.
B)is going down.
C)could be moving in either direction.
D)is going up by a significant amount.
Answer: B
Q2) Asset utilization ratios describe how capital is being utilized to buy assets.
A)True
B)False
Answer: False
Q3) Intangible assets are becoming an important part of the assets in a company's financial statements because accountants are recognizing the growing impact of brand names.
A)True
B)False
Answer: False
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) A cash budget is unnecessary under level production since we know how much will be produced every month.
A)True
B)False
Q2) Pro forma statements are generally prepared six months to a year into the future.
A)True
B)False
Q3) The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds.
A)True
B)False
Q4) A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased.
A)True
B)False
Q5) Lower profit margins resulting from increased competition would mean a lower need for external funds.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) In break-even analysis, the contribution margin is defined as
A)price minus variable cost.
B)price minus fixed cost.
C)variable cost minus fixed cost.
D)fixed cost minus variable cost.
Q2) Heavy use of long-term debt may be beneficial in an inflationary economy because
A)the debt may be repaid in more "expensive" dollars.
B)nominal interest rates exceed real interest rates.
C)inflation is associated with the peak of a business cycle.
D)the debt may be repaid in "cheaper" dollars.
Q3) Green Co. has total assets $400,000, a cost of borrowed funds of 6%, and an EBIT of $42,500. From a financial break-even perspective, Green Co. is
A)breaking even.
B)lower than the breakeven point.
C)higher than the break-even point.
D)in need of new financing.
Q4) Property taxes and depreciation expense are examples of variable costs.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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120 Flashcards
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Sample Questions
Q1) Cash, accounts receivables, and inventory all move monthly in the same direction under level production.
A)True
B)False
Q2) A "normal" term structure of interest rates would depict
A)short-term rates higher than long-term rates.
B)long-term rates higher than short-term rates.
C)no general relationship between short- and long-term rates.
D)intermediate rates (one to five years) lower than both short-term and long-term rates.
Q3) Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of 6 percent and a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.
A)No external financing will be needed.
B)Less than $1,000,000 of external financing is needed.
C)Between $1,000,000 and $5,000,000 of external financing is needed.
D)More than $5,000,000 of external financing is needed.
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Page 8
Chapter 7: Current Asset Management
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Sample Questions
Q1) Generally, the safest and most marketable instrument for short-term investment is A)commercial paper.
B)a large denomination certificate.
C)Treasury notes.
D)Treasury bills.
Q2) Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.
A)True
B)False
Q3) The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit.
A)True
B)False
Q4) Stretching out the maturity of marketable securities can rarely result in a loss.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) The most common form of short-term financing is a bank loan.
A)True
B)False
Q2) Myrdal Boots can borrow from its bank at 12% to take a cash discount. The terms of the cash discount are 3/10, net 90. Myrdal Boots should borrow from the bank to take the discount.
A)True
B)False
Q3) Accounts payable is a spontaneous source of funds that grows as the business expands.
A)True
B)False
Q4) The London Interbank Offered Rate (LIBOR)
A)competes with the U.S.Prime Rate for those companies with an international presence.
B)has been lower than the U.S.Prime Rate for at least the last decade.
C)is an estimate of the interbank lending rate for London banks.
D)All of these options are correct.
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement, you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be? Present value of $1 PV<sub>IF</sub> = .178
Future value of $1 FV<sub>IF</sub> = 5.604
Present value of annuity PV<sub>IFA</sub> = 9.129
Future value of annuity FV<sub>IFA</sub> = 51.16
A)$1,435
B)$13,070
C)$8,043
D)$13,102
Q2) Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.
A)True B)False
Q3) The formula PV = FV(1 + n)<sup>i</sup> will determine the present value of $1. A)True B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Madison Corporation has a $1,000 par value bond outstanding paying annual interest of 7%. The bond matures in 20 years. If the present yield to maturity for this bond is 8%, calculate the current price of the bond using annual compounding.
Q2) The fact that small businesses are usually illiquid does not affect their valuation process.
A)True
B)False
Q3) An issue of common stock is expected to pay a dividend of $3 at the end of the year. Its growth rate is equal to 3%, and the current share price is $40. What is the required rate of return on the stock?
A)Between 7% and 10%
B)Between 10% and 12%
C)Between 12% and 14%
D)Between 14% and 17%
Q4) Stock valuation models are dependent upon
A)expected dividends, future dividend growth, and an appropriate discount rate.
B)past dividends, flotation costs, and bond yields.
C)historical dividends, historical growth, and an appropriate discount rate.
D)All of these options
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Chapter 11: Cost of Capital
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Sample Questions
Q1) The optimal capital structure for firms in cyclical industries should contain ________________ than firms in stable industries.
A)more debt
B)less debt
C)an equal amount of debt
D)None of these options is valid.There is no relationship between the cyclical nature of an industry and optimal capital structure.
Q2) The financial managers of the firm decide on its cost of capital for financing projects.
Managers will consistently analyze alternatives and select the optimum, but they cannot dictate the actual cost itself.
A)True
B)False
Q3) The use of common stock equity in the weighted average cost of capital is always (K<sub>e</sub>) and not (K<sub>n</sub>), the cost of new common stock. Either or both may be used; it is situation-dependent.
A)True
B)False
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) A characteristic of capital budgeting is that
A)a large amount of money is always involved.
B)the internal rate of return must be less than the cost of capital.
C)the internal rate of return must be greater than the cost of capital.
D)the time horizon is at least five years.
Q2) A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset) would
A)go up.
B)go down.
C)remain the same.
D)More information is required to determine an answer.
Q3) Using the payback method can be appropriate when the time value of money is very low.
A)True
B)False
Q4) Non-mutually exclusive alternatives can be accepted at the same time.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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90 Flashcards
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Sample Questions
Q1) As the time horizon becomes shorter, more uncertainty enters the forecast. The level of uncertainty increases with time.
A)True
B)False
Q2) Regardless of risk, no projects should be accepted unless they earn more than the firm's weighted average cost of capital.
Additional information is needed about the risk of an investment to supplement a capital decision's quantitative analysis.
A)True
B)False
Q3) Risk may be integrated into capital budgeting decisions by
A)adjusting the standard deviation of possible outcomes.
B)determining the expected value.
C)adjusting the discount rate.
D)adjusting the time horizon.
Q4) Investment A may have a higher standard deviation than investment B and still have less risk.
A)True B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The efficient market hypothesis has several forms. The weak form states that
A)past price data is unrelated to future prices.
B)prices reflect all public information.
C)all information both public and private is immediately reflected in stock prices.
D)None of these options
Q2) Municipal securities are called "tax-exempt" because no federal taxes must be paid on interest received.
A)True
B)False
Q3) During the next several years, the major threat to the dominance of the U.S. money and capital markets is expected to come from
A)Russia's difficulty in transforming its economy into a capitalistic one.
B)Japan's prolonged recession and banking crisis.
C)the Eurozone countries comprising the European Monetary Union and a single currency.
D)the huge Chinese economy and its billion-plus people.
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) IPOs generally underperform compared to the general market in the immediate aftermarket.
A)True B)False
Q2) When a firm sells a new issue through an investment banker, the costs incurred
A)are the "give up" expense of the spread, plus the legal and accounting fees, printing expense, and other small fees.
B)are the spread to the underwriter, which includes all the costs of legal and accounting fees, printing expense, and other small fees.
C)are dependent upon the number of underwriters in the syndicate.
D)are the "give up" expense of the spread, plus the legal and accounting fees, printing expense, and other small fees, and are dependent upon the number of underwriters in the syndicate.
Q3) Only the stronger investment bankers are in a position to benefit from the shelf registration process.
A)True
B)False
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Page 17
Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) The higher the tax rate, the ______ the net underwriting cost on the new bond issue, from a cash flow point of view.
A)higher
B)lower
C)higher or lower
D)substantially higher
Q2) What discount rate is used in the net present value of the refunding decision?
A)The before-tax cost of the new debt
B)The after-tax cost of new debt
C)The weighted average cost of capital
D)The after-tax cost of total firm capital
Q3) Zero-coupon bonds are sold at a deep discount primarily because investors are not interested in owning them.
"Zeroes" are sold at a deep discount with the strategy in mind that they will grow to maturity, providing the investor with income equal to the spread.
A)True
B)False
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18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Which of the following statements about floating rate preferred stock is true?
A)The dividend rate changes quarterly.
B)The price of the stock fluctuates with the market.
C)The dividend rate is tied to the inflation rate.
D)More than one of the options.
Q2) If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes more attractive relative to a debt issuance.
A)True
B)False
Q3) Which of the following is not true about preferred stock?
A)70% of dividends are nontaxable to other corporations that hold preferred stock.
B)The after-tax cost is higher than debt with the same yield.
C)Dividends are legal obligations of the firm.
D)Preferred stocks are typically cumulative with respect to dividends.
Q4) Stockholders always have preemptive rights when new issues of stock are offered.
A)True
B)False
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19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.
A)True
B)False
Q2) Which of the following is NOT true about the life-cycle growth and dividend policy?
A)In the maturity stage, a firm usually pays moderate to high dividends.
B)In the development stage, a firm usually pays stock dividends and some low cash dividends.
C)In the expansion stage, a firm pays low to moderate cash dividends and occasionally may have stock splits.
D)In the growth stage, a firm pays stock dividends.
Q3) The Internal Revenue Service generally places a higher tax rate on long-term capital gains than it does upon ordinary or "qualified" dividends.
A)True
B)False
Q4) A stock split involves a reduction in the firm's retained earnings account.
A)True
B)False
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Chapter 19: Convertibles, Warrants and Derivatives
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Sample Questions
Q1) If the price of common stock associated with a convertible bond is less than the conversion price
A)the bond will sell at its pure bond value.
B)the bond will sell at its par value.
C)the bond will sell at its conversion value.
D)There is not enough information to tell what the bond price will be.
Q2) The "floor" or pure bond value of a convertible bond is found by
A)multiplying the price of the firm's common stock by the conversion ratio.
B)multiplying the bond's conversion premium by the price of the firm's common stock.
C)multiplying the price of the firm's common stock by the conversion ratio and adding the present value of the bond's face value.
D)finding the present value of the bond's interest payments and adding the present value of the bond's face value.
Q3) The principle device used by the corporation to force conversion
A)is setting the conversion price above the current market price.
B)is reducing the amount of interest payments.
C)is buying bonds back at below par value.
D)is a call provision.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) "Poison pills" are strategies that reduce the value of a firm if it is taken over by a corporate raider.
A)True
B)False
Q2) The rising ratio of divestitures to new acquisitions that occurred in the past suggests that
A)poison pills are no longer effective as a defense against takeovers.
B)too much diversification strained the operating capabilities of many firms.
C)the portfolio effect has been a highly successful method of reducing risk.
D)multinational firms are increasingly considered high risky investments.
Q3) Stockholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.
A)True
B)False
Q4) Most mergers are horizontal in nature in order to avoid the potential antitrust complications involved with the elimination of competition.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) The possibility of political risk may be excluded when an investor considers maximizing expected returns.
A)True
B)False
Q2) A portfolio of international stocks in comparison to purely U.S. stocks generally shows
A)a lower percentage risk for a given number of stocks.
B)higher percentage risk for a given number of stocks.
C)the same percentage risk for a given number of stocks.
D)a lower percentage return for a given number of stocks.
Q3) Legal, political, and economic factors are most conducive to which form of multinational corporation (MNC) organization?
A)Exporter/importer
B)Licensing agreements
C)Joint ventures
D)Fully owned foreign subsidiaries
Q4) Translation exposure occurs because of changes in foreign exchange rates.
A)True
B)False
Q5) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
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