Introduction to Finance
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Introduction
Introduction to Finance provides students with a foundational understanding of the financial principles and concepts that guide individuals and organizations in decision-making. The course covers key topics such as the time value of money, risk and return, financial markets and institutions, valuation of securities, capital budgeting, and financial statement analysis. Throughout the course, students will gain insight into how financial data is used to evaluate investment opportunities and manage resources effectively, setting a solid groundwork for further studies in corporate finance, investment, and financial management.
Recommended Textbook Finance Applications and Theory 4th Edition by Marcia Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) An angel investor differs from a venture capitalist because of the A)type of investment.
B)investment time frame.
C)size of investment.
D)voting rights.
Answer: C
Q2) Which of the following do not ensure firm viability over the long run?
A)maximizing employment
B)market share
C)profits
D)all of these choices are correct.
Answer: D
Q3) Which statement is incorrect regarding hybrid organizations?
A)They offer single taxation.
B)They offer limited risk to the owners.
C)They offer the same type of control as a sole proprietorship.
D)All of these choices are correct.
Answer: C
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3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Reed's Birdie Shot, Inc.'s 2018 income statement lists the following income and expenses: EBIT = $550,000, interest expense = $43,000, and net income = $300,000.
Calculate the 2018 taxes reported on the income statement.
A)$85,000
B)$107,000
C)$309,000
D)$207,000
Answer: D
Q2) Which financial statement reports a firm's assets, liabilities, and equity at a particular point in time?
A)balance sheet
B)income statement
C)statement of retained earnings
D)statement of cash flows
Answer: A
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Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Last year Mocha Java, Inc. had an ROA of 10 percent, a profit margin of 5 percent, and sales of $25 million. What is Mocha Java's total assets?
A)$0.125m.
B)$1.25m.
C)$12.5m.
D)$12m.
Answer: D
Q2) Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm?
A)liquidity
B)coverage
C)financial
D)profitability
Answer: D
Q3) Which of the following activities will increase a firm's current ratio?
A)sale of inventory for a profit
B)buy equipment with a long-term bank loan
C)pay the current month's rent
Answer: A
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Page 5
Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) Moving cash flows from one point in time to another requires us to use
A) only present value equations.
B) only future value equations.
C) both present value and future value equations.
D) the Rule of 72.
Q2) You deposit $20,000 in an account that doubles in seven years. How many years will it take the account to double again if it earns 14 percent per year?
A) 4.92 years
B) 5.29 years
C) 6.62 years
D) 8.22 years
Q3) Consider a $1,000 deposit earning 7 percent interest per year for four years. How much total interest is earned on the original deposit (excluding interest earned on interest)?
A) $28.00
B) $30.00
C) $280.00
D) $310.00
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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Sample Questions
Q1) Phoebe realizes that she has charged too much on her credit card and has racked up $10,000 in debt. If she can pay $300 each month and the card charges 18 percent APR (compounded monthly), how long will it take her to pay off the debt?
A)27.23 months
B)33.33 months
C)46.56 months
D)69.70 months
Q2) Your company borrows $75,000 today to fund its growth initiatives. It must repay the bank in four annual payments of $26,600 at the end of each year. What annual interest rate is your firm paying?
A)15.62 percent
B)17.18 percent
C)14.74 percent
D)16.97 percent
Q3) People refinance their home mortgages
A)when rates fall.
B)when rates rise.
C)when rates fall and rise.
D)whenever they need to, independent of rates.
Page 7
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) Which of the following is the risk that an asset's sale price will be lower than its purchase price?
A)default risk
B)liquidity risk
C)price risk
D)trading risk
Q2) The Wall Street Journal reports that the rate on four-year Treasury securities is 7.50 percent and the rate on five-year Treasury securities is 9.15 percent. According to the unbiased expectations hypothesis, what does the market expect the one-year Treasury rate to be four years from today, E(<sub>5</sub>r<sub>1</sub>)?
A)16.0 percent
B)18.4 percent
C)15.9 percent
D)13.7 percent
Q3) All of the following are types of financial institutions EXCEPT
A)insurance companies.
B)pension funds.
C)thrifts.
D)Federal reserve
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semiannually and par value is $1,000.
A)$19.73
B)$81.87
C)$41.20
D)$66.03
Q2) Junk bonds are those bonds with a credit rating of A)BB and lower.
B)B and lower.
C)BBB and lower.
D)None of these choices are correct.
Q3) Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars?
A)$5,089.06
B)$5,050.19
C)$5,062.50
D)$5,109.75
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Page 9
Chapter 8: Valuing Stocks
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Sample Questions
Q1) You would like to sell 100 shares of Pfizer, Inc. (PFE). The current bid and ask quotes are $27.22 and $27.25, respectively. You place a limit sell-order at $27.24. If the trade executes, how much money do you receive from the buyer?
A)$2,722.00
B)$2,724.00
C)$2,725.00
D)$5,446.00
Q2) Investors buy stock at the A)dealer price.
B)bid price.
C)quoted ask price.
D)broker price.
Q3) The NASDAQ Composite includes
A)all of the stocks listed on the NASDAQ Stock Exchange.
B)30 of the largest (market capitalization) and most active companies in the U.S. economy.
C)500 firms that are the largest in their respective economic sectors.
D)500 firms that are the largest as ranked by Fortune Magazine.
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Which of the following statements is correct?
A)Uncorrelated assets have a correlation of -1.0.
B)Most common stocks are positively correlated with each other because they are impacted by the economic factors.
C)We can typically add many stocks together to fully eliminate the market risk in a portfolio.
D)None of these choices are correct.
Q2) Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?
A)Nasdaq
B)Fortune 500
C)S&P 500
D)Wall Street Journal
Q3) Which of these is the portion of total risk that is attributable to overall economic factors?
A)firm specific risk
B)market risk
C)modern portfolio risk
D)total risk
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Page 11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?
A)11.64 percent
B)12.00 percent
C)22.91 percent
D)34.92 percent
Q2) Which of these is the reward for taking systematic stock market risk?
A)required return
B)risk-free rate
C)risk premium
D)market risk premium
Q3) Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?
A)11.44 percent
B)12.44 percent
C)14.96 percent
D)16.40 percent
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) An average of which of the following will give a fairly accurate estimate of what a project's beta will be?
A)flotation beta
B)proxy beta
C)pure-play proxies
D)weighted average beta
Q2) FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $12 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 98 percent of par ($1,000), what weight should you use for preferred stock in the computation of FarCry's WACC?
A)28.52 percent
B)27.51 percent
C)26.24 percent
D)25.01 percent
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) Your firm needs a machine which costs $500,000, and requires $10,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 35 percent and a discount rate of 15 percent. What is the depreciation tax shield for this project in year 3?
A)$7,219.88
B)$24,500.00
C)$25,917.50
D)$48,132.50
Q2) All of the following are incremental cash flows attributable to the project EXCEPT: A)opportunity costs.
B)financing costs.
C)substitutionary effects.
D)complementary effects.
Q3) A decrease in net working capital (NWC) is treated as a:
A)cash inflow.
B)cash outflow.
C)sunk cost.
D)historical cost.
Page 14
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years. At what rate is the NPV equal to zero?
A)30.10 percent
B)29.83 percent
C)22.47 percent
D)31.38 percent
Q2) All of the following capital budgeting tools are suitable for non-normal cash flows
EXCEPT:
A)MIRR.
B)profitability index.
C)discounted payback.
D)NPV.
Q3) A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:
A)NPV.
B)profitability index.
C)MIRR.
D)discounted payback.
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) If a firm starts selling its accounts receivable to a factor, how will the firm's cash cycle change?
A)The firm will increase its cash cycle since it will now have to wait longer for payment.
B)The firm will decrease its cash cycle since accounts receivable is reduced.
C)Depending on conditions, the cash cycle could either increase or decrease.
D)There will be no change.
Q2) The optimal cash replenishment level will decrease with all of the following changes EXCEPT:
A)the transaction cost decreases.
B)the annual demand for cash decreases.
C)the interest rate decreases.
D)All of the options will decrease the optimal cash replenishment level.
Q3) Why do firms offer customers discounts for paying early?
A)If customers pay early, the firm increases the likelihood of being paid.
B)If customers pay early, the firm's cash cycle is shortened.
C)If customers pay early, the firm improves its credit policy.
D)All of the options are reasons firms offer customers discounts for paying early.
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Page 16
Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) Which statement is most correct regarding how pro forma financial statements can be used to estimate additional funds needed?
A)Pro forma statements can be used to iteratively refine the amount of additional funds needed.
B)Pro forma statements are less precise than other methods for determining additional funds needed.
C)Pro forma statements take into account changes in cost of goods sold that other methods of determining additional funds needed ignore.
D)Pro forma statements take into account dividend payments that other methods of determining additional funds needed ignore.
Q2) Which of the following defines MAPE?
A)Median absolute percentage error, a measure of a financial statement's accuracy
B)Median absolute percentage error, a measure of a forecast's accuracy
C)Mean absolute percentage error, a measurement of a forecast's accuracy
D)Mean absolute percentage error, a measure of a financial statement's accuracy
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17
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
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Sample Questions
Q1) Which of the following statements is correct?
A)The effect of increasing a firm's use of financial leverage is to decrease the volatility of the firm's earnings.
B)The effect of increasing a firm's use of financial leverage could be either to increase or decrease the volatility of the firm's earnings depending on how much leverage is utilized.
C)The effect of increasing a firm's use of financial leverage is to increase the volatility of the firm's earnings.
D)None of the statements are correct.
Q2) An all-equity financed firm has $500 in assets and the stock price is $20. If the firm restructures with 15 percent debt which creates interest expense of $30 per year and the firm's tax rate is 40 percent, what is the break-even EBIT?
A)$20
B)$150
C)$200
D)$500
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18
Chapter 17: Sharing Firm Wealth: Dividends, Share
Repurchases, and Other Payouts
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Sample Questions
Q1) Balloons, Inc. normally pays a quarterly dividend. The last such dividend paid was $0.80, all future quarterly dividends are expected to grow at 8 percent, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $2.00 per share that is not expected to affect any other future dividends, what should the stock price be?
A)$16.00
B)$17.01
C)$17.28
D)$18.29
Q2) If a firm has retained earnings of $40 million, a common shares account of $50 million, and additional paid-in-capital of $25 million, how much would be transferred in (or out) of these accounts in response to a 40 percent stock dividend, respectively?
A)- 40 percent, 0 percent, + 40 percent
B)- 40 percent, + 40 percent, 0 percent
C)- 75 percent, + 37.5 percent, + 37.5 percent
D)- 75 percent, + 40 percent, + 40 percent
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Chapter 18: Issuing Capital and the Investment Banking
Process
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Sample Questions
Q1) River Valley Corp. recently went public with an initial public offering in which they received a total of $40 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $10 and the underwriter's spread was $0.50. River Valley also paid legal and other administrative costs of $750,000 for the IPO. What is the number of shares issued through this IPO?
A)3,925,000
B)4,131,579
C)4,075,000
D)4,289,474
Q2) Your company needs to raise $4 million to finance plant expansion. In discussions with its investment bank, you learn that the bankers recommend a gross price of $50 per share and that 90,000 shares of stock be sold. If the net proceeds on the stock sale leaves your company with $4 million, what is the underwriter's spread on the stock issue?
A)$2.78
B)$5.55
C)$44.44
D)$38.89
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Page 20
Chapter 19: International Corporate Finance
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Sample Questions
Q1) Which of these is defined as an exchange rate regime where a currency's price is fixed to the value of another currency or to a basket of other currencies?
A)Fixed peg arrangement
B)Freely floating regime
C)Currency market regime
D)Managed-floating regime
Q2) A financial manager has determined that the appropriate discount rate for a foreign project is 15 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rates in the United States and in the foreign country are expected to be 8 percent and 4 percent, respectively.
A)11 percent
B)19 percent
C)21 percent
D)12 percent
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21
Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) Which of the following is the type of financial distress in which a firm's operating cash flows are not sufficient to pay its liabilities as they come due?
A)Business failure
B)Economic failure
C)Technical insolvency
D)Business extension
Q2) Crib World is considering a merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000 for a sales volume (JP) of $900,000.
Calculate the average cost of production for the Crib and Tots firms, respectively.
A)20 percent, 23.33 percent
B)23.33 percent, 20 percent
C)27.78 percent, 16.8 percent
D)21.4 percent, 21.4 percent
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