Introduction to Finance Question
Bank
Course Introduction
Introduction to Finance provides students with a foundational understanding of financial principles and practices essential for personal and professional decision-making. The course explores key topics such as time value of money, risk and return, financial markets and institutions, investment strategies, and the basics of corporate finance. Emphasis is placed on financial analysis, budgeting, and resource allocation, enabling students to comprehend the role of finance in both corporate settings and everyday life. Through real-world examples and problem-solving exercises, students will develop the analytical and quantitative skills necessary to interpret financial information and make informed fiscal decisions.
Recommended Textbook Fundamentals of Corporate Finance 3rd Australian Edition by Berk DeMarzo
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Chapter 1: Corporate Finance and the Financial Manager
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Q1) What are the main differences between a 'partnership' and 'sole trader'?
Answer: While a sole trader has the same identity as its single owner, a partnership of general partners has the same identity as its partners. Each general partner is responsible for the decisions taken by that partner as well as any other general partner.
Q2) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A)capital budgeting
B)making investment decisions
C)overseeing accounting and tax functions
D)managing credit
Answer: C
Q3) What is the term for the applicable price that I will pay, if I have to buy a share?
Answer: The buyer of a share pays the ask price when he buys the share.
Q4) Financial decisions require that you weigh alternatives in strictly monetary terms.
A)True
B)False
Answer: False
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) A small company has current assets of $1 112 000 and current liabilities of $717 000. Which of the following statements about that company is most likely to be true?
A)Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.
B)Since net working capital is negative, the company will not have enough funds to meet its obligations.
C)Since net working capital is high, the company will likely have little difficulty meeting its obligations.
D)Since net working capital is very high, the company will have ample money to invest after it meets its obligations.
Answer: C
Q2) What is the need for the notes to the financial statements when the firm's operations are already documented in the financial statements?
Answer: Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off-balance sheet transactions, which have to be reported through notes to the financial statements.
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4
Chapter 3: Time Value of Money: an Introduction
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Q1) Which of the following statements is FALSE?
A)Finding the present value (PV)and compounding are the same.
B)The equivalent value of two cash flows at two different points in time is sometimes referred to as the 'time value' of money.
C)A dollar today and a dollar in one year are not equivalent.
D)If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time.
Answer: A
Q2) What is a competitive market?
A)a market in which a good is bought for a lower price than that for which it can be sold
B)a market in which a good is sold at a lower price than that for which it can be bought
C)a market in which a good can be bought and sold at the same price
D)a market in which goods can be bought at the ask price and sold at bid price
Answer: C
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) How do the growing perpetuity results differ with negative and positive growths of similar magnitude assuming everything else remains unchanged?
Q2) Define the following terms:
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
Q3) In terms of present value (PV), how much will Joe receive for selling the family business?
Q4) The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.
A)True
B)False
Q5) Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.
A)True
B)False
Q6) Can we apply the growing perpetuity equation for negative growth as well?
Page 6
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Chapter 5: Interest Rates
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Q1) The term 'opportunity' in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.
A)True
B)False
Q2) Inflation is calculated as the rate of change in the Consumer Price Index.
A)True
B)False
Q3) An 7% APR with quarterly compounding is closest to which of the following?
A)an EAR of 7.19%
B)an EAR of 7.09%
C)an EAR of 7.00%
D)an EAR of 7.12%
Q4) Assuming you pay the points and borrow from the mortgage lender at 6.00%, then your monthly mortgage payment (with payments made at the end of the month)will be closest to:
A)$1 570
B)$1 540
C)$1 530
D)$1 500
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Chapter 6: Bond Valuation
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Q1) A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $100 of face value that the bond will trade at if the YTM is 7%?
A)$38.78
B)$36.24
C)$32.68
D)$29.55
Q2) How much will each semi-annual coupon payment be?
A)$120
B)$80
C)$60
D)$40
Q3) By convention, the coupon rate is expressed as an effective annual rate.
A)True
B)False
Q4) How much will each coupon payment be of a 20-year $500 bond with a 10% coupon rate and quarterly payments?
A)$40.00
B)$50.00
C)$33.33
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Chapter 7: Share Valuation: the Dividend-Discount Model
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Q1) NoGrowth Industries presently pays an annual dividend of $1.70 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 14%, then the value of a share of NoGrowth is closest to:
A)$12.00
B)$11.33
C)$11.55
D)$11.00
Q2) Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of next year. It is expected that the price of Valorous' stock will be $44 per share after two years. If Valorous has an equity cost of capital of 8%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?
A)$39.27
B)$41.45
C)$40.22
D)$42.40
Q3) A company can increase its dividend payments by issuing more shares. A)True B)False
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Page 9
Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A farmer sows a certain crop. It costs $250 000 to buy the seed, prepare the ground and sow the crop. In one year's time it will cost $110 000 to harvest the crop. If the crop will be worth $380 000, and the interest rate is 7.5%, what is the net present value (NPV)of this investment?
A)-$220
B)$1 163
C)$2 310
D)-$2 100
Q2) A delivery service is buying 600 tyres for its fleet of vehicles. One supplier offers to supply the tyres for $85 per tyre, payable in one year. Another supplier will supply the tyres for $20 000 down today, then $50 per tyre, payable in one year. What is the difference in PV between the first and the second offer, assuming interest rates are 8.5%?
A)-$1 000
B)$645
C)$276
D)$1 000
Q3) What can you comment about the shape of the net present value (NPV)profile of a multiple IRR project?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) Which of the following statements is FALSE?
A)We can use scenario analysis to evaluate alternative pricing strategies for our project.
B)Scenario analysis breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as each one of the underlying assumptions changes.
C)Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters.
D)The difference between the internal rate of return (IRR)of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision.
Q2) A decrease in the sales of a current project because of the launching of a new project is
A)an overhead expense.
B)irrelevant to the investment decision.
C)a sunk cost.
D)cannibalisation.
Q3) What is 'break-even analysis'?
Q4) What are 'sunk costs'?
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Page 11
Chapter 10: Share Valuation: a Second Look
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Q1) On a particular date, the above information was obtained concerning Nick Scali Ltd. Its competitor, Harvey Norman Holdings Limited, had a stock price of $24.72. Which of the following is closest to the EPS of Harvey Norman Holdings Limited if it is estimated using valuation multiples based on price-earnings ratios?
A)$1.65
B)$2.67
C)$14.37
D)$1.83
Q2) Bonza Corporation generated free cash flow of $80 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 7.5%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 3% per year. If the weighted average cost of capital is 15% and Bonza Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Bonza Corporation's expected current share price?
A)$6.42
B)$5.45
C)$3.85
D)$8.42
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Page 12
Chapter 11: Risk and Return in Capital Markets
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Sample Questions
Q1) The standard deviation for the return on a portfolio of 20 type S firms is closest to:
A)5.25%
B)15.0%
C)23.0%
D)5.10%
Q2) You purchase a 30-year, zero-coupon bond for a price of $20. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return)on this investment is
A)5.51%.
B)5.31%.
C)4.78%.
D)6.54%.
Q3) When investing for a long horizon, investors care about the volatility of ________ returns and not the volatility of ________ returns.
A)mean, average
B)cumulative, average
C)average, cumulative
D)mean, cumulative
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) A share market comprises 5 000 shares of company A and 2 000 shares of company B. Assume the share prices for companies A and B are $20 and $35, respectively. What is the capitalisation of the market portfolio?
A)$165 000
B)$170 000
C)$150 000
D)$185 000
Q2) The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money.
A)lower than B)similar to C)higher than D)none of the above
Q3) Assume that the ETF you invested in returns -10%. Then the realised return on your investment is closest to: A)-26%. B)-10%.
C)-20%. D)-24%.
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Page 14
Chapter 13: The Cost of Capital
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Q1) A firm's cost of debt is the rate of interest it would have to pay to refinance its existing debt.
A)True
B)False
Q2) Sirtex Medical has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 7% and the risk-free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 30%.
A)13.52%
B)14.21%
C)13.76%
D)13.16%
Q3) Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are different.
A)True
B)False
Q4) The WACC depends on the risk of a company's line of business.
A)True
B)False
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Chapter 14: Raising Capital
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Q1) In Australia, AMP is a leading provider of retail and corporate superannuation and retirement income products. It has a large and diverse portfolio of investments, and as of 31 December 2016 it had net assets under management/advice of $110.6 billion. Which of the following best describes AMP?
A)A family investor
B)A venture capitalist
C)An angel investor
D)An institutional investor
Q2) What are some of the advantages of going public?
Q3) Newly listed firms tend to perform exceptionally well in the three to five years after their IPOs.
A)True
B)False
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Chapter 15: Debt Financing
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Sample Questions
Q1) Which of the following would be most likely to have the lowest price?
A)A convertible senior bond
B)A straight subordinated bond
C)A callable subordinated bond
D)A straight senior bond
Q2) A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.
A)True
B)False
Q3) A company issues a callable (at par)five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to call of this bond when it is released?
A)2.73%
B)4.71%
C)1.40%
D)5.66%
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17
Chapter 16: Capital Structure
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Sample Questions
Q1) A firm that has trouble meeting its debt obligations is said to be in 'financial distress'.
A)True
B)False
Q2) A project will give a one-time cash flow of $20 000 after one year. If the project risk requires a return of 8%, what is the levered value of the firm with perfect capital markets?
A)$18 519
B)$19 882
C)$19 915
D)More information is needed
Q3) A firm has a market value of assets of $50 000. It borrows $10 000 at 7%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?
A)18%
B)19%
C)16%
D)17%
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18
Chapter 17: Payout Policy
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Q1) Which of the following statements is FALSE in relation to using the distribution rate to estimate a firm-specific gamma for dividend imputation?
A)The distribution of taxable profits is dependent upon management's surplus cash needs.
B)A firm can pay fully franked dividends, even in periods in which it does not pay corporate income tax.
C)The known distribution rate of a particular firm should not be used; instead, an average of all firms in the economy should be substituted.
D)If undistributed, excess franking credits are not lost, but rather can accumulate.
Q2) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.
A)True
B)False
Q3) The 'ex-dividend date' is three business days before the company's 'record date'.
A)True
B)False
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Chapter 18: Financial Modelling and Pro-Forma Analysis
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Q1) A firm has $80 million in equity and $40 million of debt, it pays dividends of 20% of net income, and has a net income of $10 million. What is the firm's 'sustainable growth rate'?
A)7%
B)9%
C)10%
D)8%
Q2) Based upon the average price-earnings ratio of the comparable firms, Loop's target market value of equity is closest to:
A)$191 million
B)$157 million
C)$155 million
D)$193 million
E)$165 million
Q3) 'Net new financing' is computed as the difference between projected assets and projected equity.
A)True
B)False
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Chapter 19: Working Capital Management
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Q1) Which of the following is a firm's 'cash cycle?
A)the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the product produced from that inventory
B)the average length of time between when a firm pays cash to purchase its initial inventory and when it sells that product
C)the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product
D)the average length of time between when a firm originally purchases its inventory and when it sells the product produced from that inventory
Q2) Which of the following best describes the availability float?
A)how long it takes before payments to suppliers actually result in a cash outflow for the firm
B)how long it takes before the bank gives the firm credit for the funds
C)how long it takes the firm to process the check and deposit it in the bank
D)how long it takes for a firm to be able to use funds after a customer has paid for its goods
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Page 21
Chapter 20: Option Applications and Corporate Finance
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Q1) The value of an otherwise identical call option is ________ if the exercise price the holder must pay to buy the share is ________.
A)lower, lower
B)higher, lower
C)higher, higher
D)None of the above.
Q2) Which of the following will NOT increase the value of a put option?
A)an increase in the time to maturity
B)a decrease in the share price
C)an increase in the exercise price
D)a decrease in the share's volatility
Q3) The payoff to the holder of a put option is given by
A)P = max(K - S, 0).
B)P = min(S - K, 0).
C)P= max(S - K, 0).
D)P = max(K, 0).
Q4) In practice, option prices are not very sensitive to changes in the risk-free rate.
A)True
B)False
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Chapter 21: Mergers and Acquisitions
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Q1) In practice, most acquirers pay a substantial acquisition premium, which is the percentage difference between the acquisition price and the premerger price of the target firm.
A)True
B)False
Q2) The merger of two companies in the same industry that makes products required at different stages of the production cycle is called
A)economies of scope.
B)economies of scale.
C)vertical integration.
D)horizontal integration.
Q3) Consider the following equation: The term T in this equation refers to
A)the pre-merger (standalone)value of the target.
B)new shares to pay for the target.
C)the pre-merger, or standalone, value of the acquirer.
D)the value of the synergies created by the merger.
Q4) On average, when a bid is announced, the share price of the target rises.
A)True
B)False
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Chapter 22: International Corporate Finance
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Q1) Luther Industries, an Australian firm, is considering an investment in Japan. The dollar cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r<sub>$</sub> = 5.5% and r<sub>¥</sub> = 1.5%, respectively. Luther Industries is willing to assume that capital markets are internationally integrated. Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates. The yen cost of equity for Luther Industries is closest to:
A)14.0%
B)7.8%
C)12.3%
D)18.5%
Q2) Consider the following equation: The term in this equation refers to
A)the cost of capital in terms of dollars.
B)the cost of capital for the firm in terms of yen.
C)the risk-free rate of interest on the dollar.
D)the risk-free rate of interest on the yen.
Q3) The stock market is where currencies are traded 24 hours a day and with a large turnover.
A)True
B)False
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Chapter 23: Insurance and Risk Management
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Q1) To insure their assets against hazards such as fire, storm damage, vandalism, earthquakes and other natural and environmental risks, firms commonly purchase
A)key personnel insurance.
B)business interruption insurance.
C)business liability insurance.
D)property insurance.
Q2) Firms use all of the following for reducing their exposure to commodity price movements EXCEPT:
A)long-term storage of inventory
B)futures contracts
C)vertical integration
D)horizontal integration
Q3) If your firm is fully insured, the NPV of implementing the new safety policies is closest to:
A)$2.15 million
B)$-2.25 million
C)$2.5 million
D)-$.35 million
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