Introduction to Finance Final Exam
Course Introduction
Introduction to Finance provides students with a comprehensive overview of the fundamental principles and practices of financial management. The course covers essential topics such as the time value of money, financial statement analysis, risk and return, valuation of stocks and bonds, and the basics of capital budgeting. Through practical examples and case studies, students develop an understanding of how individuals and organizations make financial decisions and manage resources to achieve their financial goals. This course lays the foundation for further study in finance and equips students with critical skills for personal financial planning and business decision-making.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The secondary market characteristically has had stable prices over the past 20 years.
A)True
B)False Answer: False
Q2) Existing securities are traded in the secondary market. A)True
B)False Answer: True
Q3) Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.
A)True
B)False Answer: True
Q4) Recently, the emphasis of financial management has been on the relationship between risk and return.
A)True
B)False Answer: True
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 classified as a current asset?
A) Marketable securities
B) Plant property and equipment
C) Prepaid expenses
D) Inventory Answer: B
Q2) Marketable securities are short term investments and are valued on the balance sheet at their original purchase price.
A)True
B)False Answer: False
Q3) The income statement shows the amount of profits earned based on any one given day.
A)True
B)False Answer: False
Q4) An increase in assets represents a positive source of funds.
A)True
B)False Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Liquidity ratios indicate how fast a firm can generate cash to pay bills.
A)True
B)False
Answer: True
Q2) All of the following are common examples of possible distortion in reported income except
A) inflation.
B) treatment of nonrecurring items.
C) reporting of cash.
D) reporting of revenue.
Answer: C
Q3) Heavy use of long-term debt can be of benefit to a firm to help expand, although it adds to the firm's overall level of risk.
A)True
B)False
Answer: True
Q4) Ratios are not misleading by inflation.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold, all from the same time frame.
A)True
B)False
Q2) The primary purpose of the cash budget is to forecast income.
A)True
B)False
Q3) A firm has forecasted sales of $4,500 in April, $3,000 in May, and $5,000 in June. All sales are on credit. 30% is collected in the month of the sale, and the remainder in the following month. How much cash is collected in June?
A) $1,500
B) $5,250
C) $4,050
D) $3,600
Q4) An increase in accounts receivable and/or a decrease in accounts payable will usually reduce the amount of new external funds required.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Operating income is not the same thing as earnings before interest and taxes (EBIT).
A)True
B)False
Q2) If a firm has a degree of financial leverage (DFL) of 2.0, earnings per share will change 2% for every 1% change in sales volume.
A)True
B)False
Q3) If a firm with $49,000 in fixed costs breaks even on 7,000 units, how many units must the firm sell to earn $30,000 in operating profit?
A) 30,000 units
B) 11,286 units
C) 15,824 units
D) There is not enough information to determine the unit sales required.
Q4) When a firm employs no debt
A) it has a financial leverage of one.
B) it has a financial leverage of zero.
C) its operating leverage is equal to its financial leverage.
D) it will not be profitable.
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Chapter 6: Working Capital and the Financing Decision
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Q1) Working capital management is primarily concerned with the management and financing of
A) cash and inventory only.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.
Q2) A conservatively financed firm would
A) use long-term financing for all fixed assets and short-term financing for all other assets.
B) finance a portion of permanent assets and short-term assets with short-term debt.
C) use equity to finance fixed assets, use long-term debt to finance permanent assets, and use short-term debt to finance fluctuating current assets.
D) use long-term financing for three items: permanent current assets, fixed assets, and a portion of the short-term fluctuating assets. Then use short-term financing for all other short-term assets.
Q3) Heavy use of long-term financing generally leads to lower financing costs.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) A Just-In-Time (JIT) inventory management program has all but which of the following requirements?
A) Quality production
B) Large safety stocks
C) Close ties between suppliers, manufacturers, and customers
D) Minimizing inventory levels
Q2) When considering risk and popularity, banker's acceptances are ranked behind Treasury bills and commercial paper as a vehicle for short-term investments.
A)True
B)False
Q3) A firm that wishes to minimize risk when investing idle cash would be LEAST likely to buy
A) commercial paper.
B) long-term corporate bonds.
C) certificates of deposit.
D) Treasury bills of the U.S. government.
Q4) A lock-box system is a method of extending disbursements.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) A cash discount calls for a reduction in price if payment cannot be made within a specified time period.
A)True
B)False
Q2) In times of tight credit in the United States, Eurodollar loans become difficult to obtain.
A)True
B)False
Q3) General Rent-All's officers arrange a $50,000 loan for the company. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called
A) an installment loan.
B) a compensating balance.
C) a discounted loan.
D) a balloon payment.
Q4) A term loan is less risky to the bank, thus they provide a fixed rate to the customer. A)True B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Jeff believes he will need a $60,000 annual income during retirement. If he can achieve a 6% return during retirement and believes he will live 20 years after retirement, how much does he need to save by the time he retires? Assume he'll start drawing his money out one year after his retirement.
A) $724,055
B) $1,600,000
C) $688,200
D) $209,320
Q2) The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering multiple periods of time.
A)True
B)False
Q3) The farther into the future any given amount is received, the larger its present value. Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that you can start with less.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Most bonds promise both a periodic return and a lump-sum payment.
A)True
B)False
Q2) The discount rate depends on the market's perceived level of risk associated with an individual security.
A)True
B)False
Q3) The variable growth dividend model can be used for both constant and variable growth stocks.
A)True
B)False
Q4) The required return by investors is directly influenced by all of the following except:
A) Inflation
B) U.S. Treasury rates
C) Dividends
D) Risk
Q5) As time to maturity increases, bond price sensitivity decreases.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Debreu Beverages has an optimal capital structure that is 70% common equity, 10% preferred stock, and 20% debt. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighted average cost of capital?
A) 8.74%
B) 8%
C) 5.2%
D) 7.65%;
Q2) Each project should be judged against
A) the specific means of financing used to support its implementation. B) the exiting interest rate at that point in time.
C) the cost of new common stock equity.
D) None of these options are true.
Q3) The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock.
A)True B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) With non-mutually exclusive projects,
A) the payback method will select the best project.
B) only one project can be accepted.
C) the IRR, NPV, and payback methods are all treated equally in the decision making process.
D) the net present value and the internal rate of return methods will usually accept or reject the same project.
Q2) The internal rate of return is the interest rate that equates the cash outflows of an investment with the subsequent cash inflows.
A)True
B)False
Q3) It is the difference in the reinvestment assumptions that can be significant in determining when to use the net present value or internal rate of return methods.
A)True
B)False
Q4) Capital budgeting is only a concern of finance and accounting personnel.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The coefficient of correlation
A) takes on values anywhere from 0 to +1.
B) takes on values anywhere from -1 to 0.
C) takes on values anywhere from -1 to +1
D) takes on values of 0 or larger.
Q2) The coefficient of correlation represents the standard deviation divided by the expected value.
This is actually the definition of the "coefficient of variation."
A)True
B)False
Q3) A "what if" simulation using a computer helps to
A) reduce the risk associated with a particular investment.
B) determine the effects of changes in certain variables.
C) increase the accuracy of the inputs.
D) make data entry more complicated.
Q4) A correlation coefficient of _____ provides no risk reduction.
A) 0
B) -1
C) +1
D) +.5
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Chapter 14: Capital Markets
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Sample Questions
Q1) The Federal National Mortgage Association buys mortgage loans from local lenders, bundles them together, and resells them as securities.
A)True
B)False
Q2) Middle- to small-sized companies that are centered in one city or state would most likely be found on the
A) NASDAQ National Market.
B) NASDAQ Small Cap Market.
C) Supplemental list.
D) New York Stock Exchange.
Q3) Households and the government are mainly considered to be suppliers of funds, while corporations are generally considered users of funds.
A)True
B)False
Q4) The highest suppliers of funds to the U.S. credit markets are foreign investors.
A)True
B)False
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Chapter 15: Investment Banking
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Sample Questions
Q1) Which of the following activities is not a service provided by investment bankers?
A) Underwriting initial public offerings
B) Raising capital via mutual fund offerings
C) Advising in mergers
D) Advising on restructurings
Q2) Shelf registration
A) allows firms to file with the SEC 20 days before the issue date.
B) is advantageous primarily to smaller investment banking firms.
C) allows firms to issue securities faster when market conditions are more favorable.
D) more than one of the options are true.
Q3) One purpose of an underwriting syndicate is to distribute securities to the public.
A)True
B)False
Q4) Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Zero-coupon bonds
A) provide no annual interest payments.
B) have highly stable prices even with changing interest rates.
C) provide an investor with tax-free income until maturity.
D) Two of the options are correct.
Q2) Which of the following is not a financial advantage to companies using debt?
A) Debt is paid back in "cheaper" dollars during inflationary periods.
B) Bond holders have no control over the actions of management.
C) The cost of debt can lower the weighted overall cost of capital.
D) Interest payments are tax deductible.
Q3) Floating rate bonds provide which one of the following advantages?
A) A lower risk for the issuing corporation
B) A higher initial rate received by the investor
C) Higher tax advantages for the investor than a conventional bond
D) A fixed market value for the investor
Q4) A capital (or "financing") lease usually calls for an annual expense deduction equal to the lease payment.
This is more indicative of an "operating" lease.
A)True
B)False
Page 18
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Chapter 17: Common and Preferred Stock Financing
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Q1) The par value on a preferred stock entitles the holder to A) priority on all cumulative dividends.
B) an established amount of money if the company is liquidated.
C) a minimum amount of convertible common stock.
D) none of these options are true.
Q2) North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are required to purchase one share. The value of a right is ________.
A) $0.11
B) $1.11
C) $1.00
D) $1.50
Q3) Under normal operating conditions, the board of directors is elected by
A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the options are true.
Q4) Investors are usually in favor of poison pills because they prevent takeovers.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) Stock splits increase the amount of shares, decreases the par value per share, and decreases the overall value of common stock in the equity section of the balance sheet.
A)True
B)False
Q2) Lucas Inc. earned $15 million last year and retained $6 million. Lucas has 5 million shares outstanding, and the current price of Lucas shares is $30 per share. What is the dividend payout ratio?
A) 2.67%
B) 4%
C) 40%
D) 60%
Q3) A stock split involves a reduction in the firm's retained earnings account.
A)True
B)False
Q4) In the growth stage (Stage III) of the life cycle, the company focuses on growth of the stock and usually doesn't pay any cash dividends.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Which contract is an option?
A) A call
B) A put
C) A futures contract
D) Both a call and a put
Q2) Options contracts are different than futures contracts because
A) options are not traded on organized exchanges.
B) options do not create an obligation for the owner of the instrument.
C) options are derivatives.
D) options allow exchanges happen today while futures are only in the future.
Q3) The conversion value is equal to the conversion ratio times the conversion price.
A)True
B)False
Q4) "Diluted earnings per share" must assume the conversion of all convertible securities, even if they haven't been converted.
A)True
B)False
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21
Chapter 20: External Growth Through Mergers
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Q1) Under the Financial Accounting Standards Board's SFAS 141 and 142, which of the following occurred?
A) Goodwill is now amortized.
B) At least four times per year, goodwill must be tested to determine if it is impaired.
C) It allowed a one-time write-down of all past goodwill impairment.
D) It created pooling of interests accounting.
Q2) Which of the following terms is not specifically related to an unfriendly buyout?
A) Takeover tender offer
B) White knight
C) Saturday night special
D) Synergy
Q3) The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as
A) horizontal integration.
B) vertical integration.
C) synergy.
D) the portfolio effect.
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Chapter 21: International Financial Management
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Sample Questions
Q1) The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.
A)True
B)False
Q2) The possibility of political risk may be excluded when an investor considers maximizing expected returns.
A)True
B)False
Q3) An example of comparing cross rates for countries is like comparing the U.S. dollar to the Japanese yen.
A)True
B)False
Q4) Eurobond issues are sold simultaneously in several national capital markets, but denominated in a currency different from that of the nation in which the bonds are issued.
A)True B)False
Q5) One benefit in joining the "Eurozone" was to have easy access to borrowing. A)True
B)False
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