Introduction to Finance
Mock Exam
Course Introduction
Introduction to Finance provides a comprehensive overview of the fundamental concepts and principles underpinning the financial system, including the time value of money, risk and return, financial markets and institutions, and basic valuation techniques. The course equips students with essential skills in financial decision-making, exploring topics such as capital budgeting, financial statement analysis, and asset management. Through case studies and real-world applications, students gain an understanding of how individuals, businesses, and governments allocate resources and manage financial risks in a dynamic economic environment.
Recommended Textbook
Finance Applications and Theory 3rd Edition by Marcia Millon Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Restricted stock is:
A)a special type of stock that is not transferable from the current holder to others until specific conditions are satisfied.
B)a special type of stock that can be converted into corporate bonds after a specific amount of time has elapsed.
C)a special type of stock that is a result of offering an employee stock ownership plan.
D)None of these answers is correct.
Answer: A
Q2) Which of the following statements is correct?
A)Sole proprietorships are easy to start.
B)If the sole proprietorship gets sued, the owner is not liable.
C)It is relatively easy for sole proprietorships to raise money.
D)Profits from the sole proprietorship are subject to double taxation.
Answer: A
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Chapter 2: Reviewing Financial Statements
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Q1) Statement of Cash Flows Full Moon Productions Inc.has net cash flow from financing activities for the last year of $105 million.The company paid $15 million in dividends last year.During the year,the change in notes payable on the balance sheet was an increase of $40 million,and change in common and preferred stock was an increase of $50 million.The end of year balance for long-term debt was $50 million.What was their beginning of year balance for long-term debt?
A)$5 million
B)$20 million
C)$30 million
D)$35 million
Answer: B
Q2) This is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.
A)Average tax rate
B)Marginal tax rate
C)Progressive tax system
D)Earnings before tax
Answer: B
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Chapter 3: Analyzing Financial Statements
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Q1) DuPont Analysis Last year,K9 WebbWear,Inc.,reported an ROE of 30 percent.The firm's debt ratio was 45 percent,sales were $20 million,and the capital intensity was 1.50 times.Calculate the net income and profit margin for K9 WebbWear last year.This year,K9 WebbWear plans to increase its debt ratio to 60 percent.The change will not affect sales or total assets,however,it will reduce the firm's profit margin to 10 percent.By how much will the change in K9 WebbWear's debt ratio affect its ROE?
Answer: Last year: Capital intensity = 1.5 = Total assets/$20m => Total assets = 1.5 × $20m = $30m
=> Debt ratio = 0.45 = Total debt/$30m => Total debt = 0.45 × $30m = $13.5m
=> Total equity = $30m - $13.5m = $16.5m
=> ROE = 0.30 = Net income/$16.5m => Net income = 0.30 × $16.5m = $4.95m
=> Profit margin = $4.95m/$20m = 25 percent
This year: Profit margin = 10 percent = Net income/$20m => Net income = 0.1 × $20m = $2m
and Total debt = $30m × 0.60 = $18m
=> Total equity = $30m - $18m = $12m
=> ROE = $2m/$12m = 17 percent,an decrease of 13 percent
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Chapter 4: Time Value of Money
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Sample Questions
Q1) How many years (and months)will it take $1 million to grow to $3 million with an annual interest rate of 7.5 percent?
A)15 years and 2.29 month
B)17 years and 5.6 months
C)18 years and 3.8 months
D)19 years and 2.4 months
Q2) Five years ago,sales were $4 million.Today your company's sales are $10 million.What annual rate have sales been growing?
A)1.5 percent
B)12.65 percent
C)16.65 percent
D)20.11 percent
Q3) You deposit $20,000 in an account that doubles in 7 years.How many years will it take the account to be reduced to its original value if it loses 12 percent per year?
A)4.92 years
B)5.42 years
C)6.62 years
D)8.22 years
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Chapter 5: Time Value of Money
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Q1) Annuity Interest Rate What is the interest rate of a 6-year,annual $3,000 annuity with present value of $14,000?
A)5.64 percent
B)7.69 percent
C)10.17 percent
D)11.32 percent
Q2) Annuity Payments and Amortization Schedule Consider Carrie asks Miranda to help with her 20 percent down payment on her apartment.Miranda is willing to loan Carrie $30,000,but she is requiring 6.5 percent interest and semi-annual payments over three years to repay the loan.Carrie wants to deduct the loan's interest from her taxes,and Miranda must show the interest income on her taxes,so they need to know how much interest is included each year in the payments.Compute the semi-annual payments and create an amortization schedule to determine the interest paid each year.
Q3) The interest on your home mortgage is tax deductible.Why are the early years of the mortgage more helpful in reducing taxes than the later years?
Q4) How might credit card companies keep their cardholders in debt for a long time?
Q5) What is the difference between an annuity due and an ordinary annuity?
Q6) Describe how compounding affects the future value computation of an annuity.
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Chapter 7: Valuing Bonds
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Q1) Which of the following is an important advantage to the issuer of a bond with a call provision?
A)They are able to avoid interest rate risk.
B)They are able to avoid reinvestment rate risk.
C)They are able to reduce their credit risk.
D)They allow for refinancing opportunities.
Q2) Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%.(Assume interest rates are semiannual and par value is $1,000.)Is this a discount or premium bond?
A)$685.93; discount
B)$791.03; discount
C)$1,051.83; premium
D)$1,176.31; premium
Q3) Which of these statements is false?
A)Bonds are more important capital sources than stocks for companies and governments.
B)Some bonds offer high potential for rewards and, consequently, higher risk.
C)The bond market is larger than the stock market.
D)Bonds are always less risky than stocks.
Q4) What does a call provision allow the issuer to do,and why would they do it?
Page 8
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Chapter 8: Valuing Stockspart
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Sample Questions
Q1) When residual cash flows are high,stock values will be:
A)unchanged.
B)low.
C)high.
D)unpredictable.
Q2) Changes in Growth and Stock Valuation Consider a firm that had been priced using a 6 percent growth rate and a 9 percent required rate.The firm recently paid a $0.50 dividend.The firm has just announced that because of a new joint venture,it will likely grow at an 8 percent rate.How much should the stock price change (in dollars and percentage)?
A)$33.33, 67 percent
B)$33.33, 198 percent
C)$36.33, 67 percent
D)$36.33, 206 percent
Q3) Why might the Standard & Poor's 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the DJIA more popular than the S&P 500?
Q4) When will a limit order be executed?
Q5) Explain how important a firm's growth is by creating an example of a growth and no-growth stock.
Page 9
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Chapter 9: Characterizing Risk and Return
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Q1) Portfolio Return At the beginning of the month,you owned $8,000 of Company
G,$8,000 of Company S,and $3,000 of Company N.The monthly returns for Company
G,Company S,and Company N were 7.80 percent,1.50 percent,and -0.75 percent.What is your portfolio return?
A)2.85 percent
B)3.80 percent
C)4.03 percent
D)8.55 percent
Q2) Which of the following describes what will occur as you randomly add stocks to your portfolio?
A)The nondiversifiable risk will decrease.
B)Both the diversifiable and nondiversifiable risk will decrease.
C)The portfolio return will increase.
D)The diversifiable risk will decrease.
Q3) Why is the percentage return a more useful measure than the dollar return?
Q4) Which of the following statements is correct with regards to diversification?
A)Diversifying reduces the return of the portfolio.
B)Diversifying reduces the market risk of the portfolio.
C)Diversifying reduces the dollar return of the portfolio.
D)None of these statements is correct.
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Chapter 10: Estimating Risk and Return
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Q1) Which of the following is the asset pricing theory based on a beta,a measure of market risk?
A)Behavioral asset pricing model
B)Capital asset pricing model
C)Efficient markets asset pricing model
D)Efficient market hypothesis
Q2) Portfolio Beta You have a portfolio with a beta of 1.25.What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?
A)1.00
B)1.35
C)1.50
D)3.00
Q3) Which of these is a theory that describes the types of information that are reflected in current stock prices?
A)Asset pricing
B)Behavioral finance
C)Efficient market hypothesis
D)Public information
Q4) Explain the risk premiums of stock.
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Chapter 11: Calculating the Cost of Capital
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Q1) Which of the following statements is correct?
A)If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a higher cost of capital than the firm's overall WACC.
B)If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a lower cost of capital than the firm's overall WACC.
C)The project's risk and the cost of capital to which it is compared are independent.
D)None of these answers is correct.
Q2) A firm uses only debt and equity in its capital structure.The firm's weight of debt is 45 percent.The firm could issue new bonds at a yield to maturity of 10 percent and the firm has a tax rate of 30 percent.If the firm's WACC is 12 percent,what is the firm's cost of equity?
A)16.09 percent
B)15.63 percent
C)15.21 percent
D)14.57 percent
Q3) What might happen when managers use a single,firmwide WACC for all projects?
Q4) Denote the impact that flotation costs have on capital budgeting decisions.
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Q1) KADS,Inc.,has spent $400,000 on research to develop a new computer game.The firm is planning to spend $250,000 on a machine to produce the new game.Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000.The machine has an expected life of three years,a $75,000 estimated resale value,and falls under the MACRS seven-year class life.Revenue from the new game is expected to be $600,000 per year,with costs of $250,000 per year.The firm has a tax rate of 35 percent,an opportunity cost of capital of 15 percent,and it expects net working capital to increase by $100,000 at the beginning of the project.What will the year 0 free cash flow for this project be?
A)-$400,000
B)-$350,000
C)-$250,000
D)-$300,000
Q2) Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?
A)Incremental cash flows
B)Cash flow analysis
C)Pro forma analysis
D)Substitutionary analysis
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting
Criteria
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Q1) A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:
A)PI.
B)IRR.
C)NPV.
D)MIRR.
Q2) How does profitability index differ from the other statistics discussed in this chapter?
Q3) Use NPV profiles to reconcile sources of conflict between NPV and IRR methods.
Q4) The MIRR statistic is different from the IRR statistic in that:
A)the MIRR assumes that the cash inflows can be reinvested at the cost of capital.
B)the MIRR assumes that the cash inflows can be reinvested at the IRR.
C)the MIRR uses weighted-average dollars.
D)the MIRR uses input from the NPV whereas the IRR does not.
Q5) Contrast the use of the internal rate of return (IRR)versus the modified internal rate of return (MIRR)methods for evaluating capital investment opportunities.
Q6) Explain what a PI of 35.23 percent would signify.
Page 14
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Chapter 14: Working Capital and Policies
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Q1) Suppose that Mack Industries has annual sales of $10 million,cost of goods sold of $6.5 million,average inventories of $1 million,and average accounts receivable of $600,000.Assuming that all of Mack's sales are on credit,what will be the firm's operating cycle?
A)34.25
B)21.9
C)56.15
D)78.05
Q2) When a firm is determining which current asset policy would work best for them,what factors must they consider?
Q3) Which of the following is a short-term promissory note issued by a corporation,bearing the unconditional guarantee of a major bank?
A)Banker's paper
B)Commercial paper
C)Banker's acceptance
D)Commercial acceptance
Q4) Detail the major differences between the three inventory loan types.
Q5) A firm may keep part of its capital tied up in cash for three primary reasons.List the reasons and explain each.
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Chapter 15: Financial Planning and Forecasting
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Q1) Which of the following will increase the additional funds needed from external sources?
A)The firm's profit margin increases
B)The firm's sales forecast is decreased
C)The firm reduces its usage of trade credit
D)The firm's retention ratio is increased
Q2) If a firm has excess capacity when calculating AFN (Additional Funds Needed),A* will most likely equal which of the following?
A)Total assets
B)Current assets
C)Fixed assets
D)Lumpy assets
Q3) Explain when it is appropriate to use the na ve,average,and seasonality- and trend-adjusted approaches to forecasting sales.
Q4) Which liabilities would tend to spontaneously increase with sales? Why?
Q5) Is forecasting more important for small firms or large firms? Why?
Q6) What are two issues that are not addressed regarding fixed assets if one simply uses the AFN formula in its simplest form? How would they impact the AFN calculation?
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Chapter 16: Assessing Long-Term Debt, equity, and Capital Structure
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Q1) Explain why utility firms tend to have fairly high debt ratios.
Q2) Which of these is the assumption that decisions about which projects to fund are separate from the decisions about how to fund them?
A)Break-even principle
B)Capital structure principle
C)Separation principle
D)Long position principle
Q3) Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes,managers can:
A)minimize the firm's value by taking on as much debt as possible.
B)maximize the firm's value by taking on as much debt as possible.
C)maximize the firm's value by taking on as much equity as possible.
D)maximize the firm's value by financing only with debt.
Q4) Why is debt often referred to as leverage in finance?
A)Debt magnifies the firm's total asset turnover.
B)Debt magnifies both the potential returns and the risk to bondholders.
C)Debt magnifies both the potential returns and the risk to equity holders.
D)None of these.
Q5) Explain how passive capital structure management works.
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Chapter 17: Sharing Firm Wealth: Dividends, share
Repurchases and Other Payouts
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Q1) Candy Town,Inc.normally pays a quarterly dividend.The last such dividend paid was $2.00,all future quarterly dividends are expected to grow at 10 percent,and the firm faces a required rate of return on equity of 15 percent.If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends,what should the stock price be?
A)$40.00
B)$42.44
C)$44.00
D)$46.44
Q2) Suppose a firm has a retention ratio of 55 percent and net income of $7 million.How much does it pay out in dividends?
A)$3,850,000
B)$3,150,000
C)$3,450,000
D)$3,550,000
Q3) Explain the residual dividend model.
Q4) Why might a firm announce a reverse stock split?
Q5) List and define the definitive set of four dates associated with a firm paying out a dividend.
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Chapter 18: Issuing Capital and the Investment Banking Process
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Q1) Which of these is the type of loan where the firm would receive the funds as soon as the bank approved the loan?
A)Loan commitment agreements
B)Spot loans
C)Take-down loans
D)Back-end loans
Q2) Which of the following is a security issue in which the underwriter does not guarantee a firm price to the issuer and acts more as a placing or distribution agent for a fee?
A)Best efforts underwriting
B)Firm commitment underwriting
C)Underwriter's spread
D)Venture capital
Q3) Explain the different methods for small firms to get funding.
Q4) Which of these is the type of loan where the interest payments change over the life of the loan?
A)Fixed-rate loans
B)Variable-rate loans
C)Take-down loans
D)Spot loans
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Chapter 19: International Corporate Finance
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Q1) If fewer dollars will buy a unit of foreign currency,then the dollar is:
A)strengthening.
B)weakening.
C)violating the law of purchasing power parity.
D)not in equilibrium.
Q2) What are the two methods financial managers can use for resolving the problem of having cash flows from a foreign project in a foreign currency,while the discount rate is usually evaluated from the domestic country perspective?
Q3) The current spot rate between the U.S.dollar and the Swedish krona is $1 = 7.5500 krona.If the inflation rate in the United States is 4 percent and in Sweden is 1 percent,then what is the expected spot rate in one year?
A)$0.1908 per krona
B)$0.2116 per krona
C)$0.1529 per krona
D)$0.1364 per krona
Q4) What is meant by hedging exchange rate risk and what are some ways it is done?
Q5) Explain patterns of increased capital involvement firms might use to seek to expand business internationally.
Q6) What are the advantages of borrowing money in the country you plan to invest in?
Page 20
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Q1) Calculation of Average Costs with Economies of Scope Baby Supplies is considering a merger with Tot Toy Stores.Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million.Tot's total operating costs of producing services are $250,000 for a sales volume (J<sub>P</sub>)of $975,000.Calculate the average cost of production for the Baby and Tot Toy firms,respectively.
A)11.63 percent, 20.93 percent
B)20.93 percent, 25.64 percent
C)46.15 percent, 11.63 percent
D)22.4 percent, 22.4 percent
Q2) List the order for the distribution of the funds from asset liquidation in a bankruptcy.
Q3) Which of the following is NOT a source of value-enhancing synergy in a merger?
A)Cost reduction
B)Revenue enhancement
C)Increased marketing presence
D)Tax considerations
Q4) What is a credit-scoring model?
Q5) The Altman's Z-score model has several weaknesses.What are they?
Page 21
Q6) What is the difference between a Chapter 11 and a Chapter 7 bankruptcy?
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