Introduction to Finance Test Preparation
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and practices of financial management. The course covers key concepts such as the time value of money, risk and return, financial statement analysis, and the basics of financial markets and institutions. Students will explore the objectives of corporate finance, investment decision-making, capital budgeting, and strategies for managing both corporate and personal finances. Emphasis is placed on developing analytical skills and applying financial concepts to real-world scenarios, preparing students for more advanced coursework or careers in finance-related fields.
Recommended Textbook
Financial Management Theory and Practice 15th Edition by Eugene F. Brigham
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30 Chapters
1595 Verified Questions
1595 Flashcards
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Jane Doe,who has substantial personal wealth and income,is considering the possibility of starting a new business in the chemical waste management field.She will be the sole owner,and she has enough funds to finance the operation.The business will have a relatively high degree of risk,and it is expected that the firm will incur losses for the first few years.However,the prospects for growth and positive future income look good,and Jane plans to have the firm pay out all of its income as dividends to her once it is well established.Which of the legal forms of business organization would probably best suit her needs?
A) Proprietorship,because of ease of entry.
B) S corporation,to gain some tax advantages and also to obtain limited liability.
C) Partnership,but only if she needs additional capital.
D) Regular corporation,because of the limited liability.
E) In this situation,the various forms of organization seem equally desirable.
Answer: B
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Sample Questions
Q1) HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation).The company had $18,750 of investor-supplied operating assets (or capital),the weighted average cost of that capital (the WACC)was 9.5%,and the federal-plus-state income tax rate was 40%.What was HHH's Economic Value Added (EVA),i.e. ,how much value did management add to stockholders' wealth during the year?
A) $1,357.13
B) $1,428.56
C) $1,503.75
D) $1,578.94
E) $1,657.88
Answer: C
Q2) Which of the following items cannot be found on a firm's balance sheet under current liabilities?
A) Accrued payroll taxes.
B) Accounts payable.
C) Short-term notes payable to the bank.
D) Accrued wages.
E) Cost of goods sold.
Answer: E
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Page 4
Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Companies Heidee and Leaudy have the same sales,tax rate,interest rate on their debt,total assets,and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and,therefore,a higher interest expense.Which of the following statements is CORRECT?
A) Company Heidee has more net income.
B) Company Heidee pays less in taxes.
C) Company Heidee has a lower equity multiplier.
D) Company Heidee has a higher ROA.
E) Company Heidee has a higher times interest earned (TIE)ratio.
Answer: B
Q2) Lincoln Industries' current ratio is 0.5.Considered alone,which of the following actions would increase the company's current ratio?
A) Use cash to reduce long-term bonds outstanding.
B) Borrow using short-term notes payable and use the cash to increase inventories.
C) Use cash to reduce accruals.
D) Use cash to reduce accounts payable.
E) Use cash to reduce short-term notes payable.
Answer: B
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Page 5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?
A) 20,701
B) $21,791
C) $22,938
D) $24,085
E) $25,289
Q2) Your uncle just won the weekly lottery,receiving $375,000,which he invested at a 7.5% annual rate.He now has decided to retire,and he wants to withdraw $35,000 at the end of each year,starting at the end of this year.What is the maximum number of whole payments that can be withdrawn before the account is exhausted,i.e. ,before the account balance would become negative? (Hint: Round down to the nearest whole number. )
A) 22
B) 23
C) 24
D) 25
E) 26
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Page 6
Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If their maturities and other characteristics were the same,a 5% coupon bond would have more interest rate price risk than a 10% coupon bond.
B) A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond,but all 10-year coupon bonds have the same amount of reinvestment rate risk.
C) A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond,but all 10-year coupon bonds have the same amount of interest rate price risk.
D) If their maturities and other characteristics were the same,a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.
E) A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond,even a perpetuity.
Q2) For bonds,price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
A)True
B)False
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Chapter 6: Risk and Return
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Sample Questions
Q1) Dixon Food's stock has a beta of 1.4,while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate,r<sub>RF</sub>,is 5.5% and the market risk premium, (r<sub>M</sub> r<sub>RF</sub>),equals 4%.Which of the following statements is CORRECT?
A) If the market risk premium increases but the risk-free rate remains unchanged,Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0.
B) Since Dixon's beta is twice that of Clark's,its required rate of return will also be twice that of Clark's.
C) If the risk-free rate increases while the market risk premium remains constant,then the required return on an average stock will increase.
D) If the market risk premium decreases but the risk-free rate remains unchanged,Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease,but by more than Dixon's because it has a beta less than 1.0.
E) If the risk-free rate increases but the market risk premium remains unchanged,the required return will increase for both stocks but the increase will be larger for Dixon since it has a higher beta.
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Page 8
Chapter 7: Corporate Valuation and Stock Valuation
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Sample Questions
Q1) Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF<sub>0</sub> in millions?
A) $0.95
B) $1.05
C) $1.16
D) $1.27
E) $1.40
Q2) Judd Corporation has a weighted average cost of capital of 10.25%,and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow,FCF<sub>1</sub> in millions?
A) $2.20
B) $2.44
C) $2.69
D) $2.96
E) $3.25
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Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?
A) The options with the $25 strike price will sell for less than the options with the $35 strike price.
B) The options with the $25 strike price have an exercise value greater than $5.
C) The options with the $35 strike price have an exercise value greater than $0.
D) If Cazden's stock price rose by $5,the exercise value of the options with the $25 strike price would also increase by $5.
E) The options with the $25 strike price will sell for $5.
Q2) Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the
A) Variability of the stock price.
B) Option's time to maturity.
C) Strike price.
D) All of the above.
E) None of the above.
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The cost of equity raised by retaining earnings can be less than,equal to,or greater than the cost of external equity raised by selling new issues of common stock,depending on tax rates,flotation costs,the attitude of investors,and other factors.
A)True
B)False
Q2) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
Q3) For capital budgeting and cost of capital purposes,the firm should assume that each dollar of capital is obtained in accordance with its target capital structure,which for many firms means partly as debt,partly as preferred stock,and partly common equity.
A)True
B)False
Q4) For capital budgeting and cost of capital purposes,the firm should always consider reinvested earnings as the first source of capital i.e. ,use these funds first because reinvested earnings have no cost to the firm.
A)True
B)False
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Page 11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?
A) It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
B) The firm will accept too many projects in all economic states because a 4-year payback is too low.
C) The firm will accept too few projects in all economic states because a 4-year payback is too high.
D) If the 4-year payback results in accepting just the right set of projects under average economic conditions,then this payback will result in too few long-term projects when the economy is weak.
E) It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) When evaluating a new project,firms should include in the projected cash flows all of the following EXCEPT:
A) Previous expenditures associated with a market test to determine the feasibility of the project,provided those costs have been expensed for tax purposes.
B) The value of a building owned by the firm that will be used for this project.
C) A decline in the sales of an existing product,provided that decline is directly attributable to this project.
D) The salvage value of assets used for the project that will be recovered at the end of the project's life.
E) Changes in net working capital attributable to the project.
Q2) Erickson Inc.is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%.What is the project's coefficient of variation?
A) 1.20
B) 1.26
C) 1.32
D) 1.39
E) 1.46
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Chapter 12: Financial Planning and Applications to Corporate Valuation
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Sample Questions
Q1) Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital.For example,just-in-time inventory systems,multiple shifts for labor,and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.
A)True
B)False
Q2) F.Marston,Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal,which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?
A) A switch to a just-in-time inventory system and outsourcing production.
B) The company reduces its dividend payout ratio.
C) The company switches its materials purchases to a supplier that offers a longer credit period (with all other terms held equal).
D) The company discovers that it has excess capacity in its fixed assets.
E) A sharp increase in its forecasted sales.
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Chapter 13: Corporate Governance
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Sample Questions
Q1) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q2) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
Q3) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q4) A poison pill is also known as a corporate restructuring. A)True
B)False
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Page 15
Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) The Meltzer Corporation is contemplating a 7-for-3 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?
A) $32.06
B) $33.75
C) $35.44
D) $37.21
E) $39.07
Q2) If management wants to maximize its stock price,and if it believes that the dividend irrelevance theory is correct,then it must adhere to the residual distribution policy.
A)True
B)False
Q3) MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value,it can affect the cost of capital.
A)True
B)False
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Page 16
Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True
B)False
Q2) The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.
A)True
B)False
Q3) A venture capital investment group received a proposal from Wireless Solutions to produce a new smart phone.The variable cost per unit is estimated at $250,the sales price would be set at twice the VC/unit,fixed costs are estimated at $750,000,and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more.What sales volume would be required in order to meet this profit goal?
A) 4,513
B) 4,750
C) 5,000
D) 5,250
E) 5,513
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17
Chapter 16: Supply Chains and Working Capital Management
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Sample Questions
Q1) Accruals are "spontaneous," but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.
A)True
B)False
Q2) A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.
A)True
B)False
Q3) Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
A)True
B)False
Q4) A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Sample Questions
Q1) LIBOR is an acronym for London Interbank Offer Rate,which is an average of interest rates offered by London banks to smaller U.S.corporations.
A)True
B)False
Q2) In 1985,a given Japanese imported automobile sold for 1,476,000 yen,or $8,200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar,what would the car be selling for today in U.S.dollars?
A) $5.964
B) $8,200
C) $10,250
D) $12,628
E) $13,525
Q3) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
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19
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Sample Questions
Q1) Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
A) A provision in the bond indenture lowers the call price on specific dates,and yesterday was one of those dates.
B) The flotation costs associated with issuing new bonds rise.
C) The firm's CFO believes that interest rates are likely to decline in the future.
D) The firm's CFO believes that corporate tax rates are likely to be increased in the future.
E) The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation.
Q2) Refer to the data for NorthWest Water (NWW).What is the NPV if NWW refunds its bonds today?
A) $1,746,987
B) $1,838,933
C) $1,935,719
D) $2,037,599
E) $2,241,359
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20
Chapter 19: Lease Financing
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Q1) To finance some manufacturing tools it needs for the next 3 years,Waldrop Corporation is considering a leasing arrangement.The tools will be obsolete and worthless after 3 years.The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life.It can borrow $4,800,000,the purchase price,at 10% and buy the tools,or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them.The loan obtained from the bank is a 3-year simple interest loan,with interest paid at the end of the year.The firm's tax rate is 40%.Annual maintenance costs associated with ownership are estimated at $240,000,but this cost would be borne by the lessor if it leases.What is the net advantage to leasing (NAL),in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands. )
A) $96
B) $106
C) $112
D) $117
E) $123
Q2) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles
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Sample Questions
Q1) Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00,and has an expected constant growth rate of 5.00%.The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have an 8.00% annual coupon,and each bond could be converted into 20 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.00%.What is the estimated floor price of the convertible at the end of Year 3?
A) $794.01
B) $835.81
C) $879.80
D) $926.10
E) $972.41
Q2) Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.
A)True
B)False
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Page 22
Chapter 21: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is Kitto's value of equity?
A) $1,492,000
B) $1,529,300
C) $1,567,533
D) $1,606,721
E) $1,646,889
Q2) MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.
A)True
B)False
Q3) According to MM,in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
A)True
B)False
Q4) In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the unlevered cost of equity.
A)True
B)False
23
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Chapter 22: Mergers and Corporate Control
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Q1) The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.
A)True
B)False
Q2) A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.
A)True
B)False
Q3) Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.
A)True
B)False
Q4) Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) Which of the following statements is most CORRECT?
A) Futures contracts generally trade on an organized exchange and are marked to market daily.
B) Goods are never delivered under forward contracts,but are almost always delivered under futures contracts.
C) There are futures contracts for currencies but no forward contracts for currencies.
D) Futures contracts don't have any margin requirements but forward contracts do.
E) One advantage of forward contracts is that they are default free.
Q2) Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.
A)True
B)False
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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25
Chapter
12
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Sample Questions
Q1) Bankruptcy plays no role in settling labor disputes and product liability suits.Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
Q2) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
Q3) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q4) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
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26
Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Which of the following is NOT a potential problem with beta and its estimation?
A) Sometimes,during a period when the company is undergoing a change such as toward more leverage or riskier assets,the calculated beta will be drastically different than the "true" or "expected future" beta.
B) The beta of "the market," can change over time,sometimes drastically.
C) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
D) There is a wide confidence interval around a typical stock's estimated beta.
E) Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
Q2) It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.
A)True
B)False
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
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Chapter 26: Real Options
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Q1) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
Q2) Which of the following is most CORRECT?
A) Real options change the risk,but not the size,of projects' expected cash flows.
B) Real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows.
C) Very few projects actually have real options.
D) Real options are less valuable when there is a lot of uncertainty about the true values future sales and costs.
E) Real options change the size,but not the risk,of projects' expected cash flows.
Q3) Real options are most valuable when the underlying source of risk is very low. A)True B)False
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Chapter 27: Providing and Obtaining Credit
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Sample Questions
Q1) The collection process,although sometimes difficult,is a fairly inexpensive component of doing business.
A)True
B)False
Q2) A firm's credit policy consists of which of the following items?
A) Credit period,cash discounts,credit standards,collection policy.
B) Credit period,cash discounts,receivables monitoring,collection policy.
C) Cash discounts,credit standards,receivables monitoring,collection policy.
D) Credit period,receivables monitoring,credit standards,collection policy.
E) Credit period,cash discounts,credit standards,receivables monitoring.
Q3) Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,with interest prepaid (a discounted loan).Also,assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value.What effective annual interest rate are you being charged?
A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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29 Verified Questions
29 Flashcards
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Sample Questions
Q1) Refer to Exhibit 28.3.What is the firm's EOQ?
A) 26,833
B) 30,040
C) 43,987
D) 13,563
E) 21,456
Q2) Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180.In addition,the total estimated cash costs (transfers and carrying cost)for the firm,based on 16 transactions per year,are $5,760.On what opportunity cost of holding cash was this analysis based?
A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%
Q3) A just-in-time system is designed to stretch accounts payable as long as possible.
A)True B)False
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Chapter 29: Pension Plan Management
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10 Verified Questions
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Sample Questions
Q1) If employees have a right to receive pension benefits even if they leave the company prior to retirement,their pension rights are said to be vested.
A)True
B)False
Q2) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows. )
A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491
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Source URL: https://quizplus.com/quiz/65480
Sample Questions
Q1) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A) Fund capital is obtained by retaining earnings if all earnings are paid out as dividends,no fund capital is created.
B) Preferred stock is never used by not-for-profit firms.
C) Not-for-profit firms are not allowed to raise capital by borrowing.
D) Not-for-profit firms usually have high dividend payouts.
E) Since not-for-profit firms are tax exempt,there is no tax advantage to debt capital.
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q3) Not-for-profit firms have fund capital in place of equity capital.Since fund capital does not have to provide a return to stockholders,the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
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