Introduction to Finance Test Preparation
Course Introduction
Introduction to Finance offers a foundational overview of financial principles and practices essential for managing personal and business finances. The course covers core topics such as the time value of money, risk and return, financial markets and instruments, capital budgeting, and basic financial statements. Emphasizing both theory and practical application, students gain insights into how individuals and organizations make investment, financing, and dividend decisions. Through real-world examples and problem-solving exercises, the course equips learners with the analytical tools necessary to understand the financial environment and make informed financial decisions.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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21 Chapters
1604 Verified Questions
1604 Flashcards
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Chapter 1: Introduction to Corporate Finance
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56 Verified Questions
56 Flashcards
Source URL: https://quizplus.com/quiz/74202
Sample Questions
Q1) Insider trading is:
A)illegal.
B)impossible to have in our efficient market.
C)legal.
D)discouraged,but legal.
E)defined as the trading of stock by a corporate director based on publicly-available information.
Answer: A
Q2) The treasurer and the controller of a corporation generally report to the:
A)president.
B)board of directors.
C)chief executive officer.
D)chief financial officer.
E)chairman of the board.
Answer: D
Q3) What should be the primary goal of a financial manager of a corporation? Why?
Answer: The primary goal of financial management is to maximize the current market value of the outstanding stock.This goal focuses on enhancing the returns to current stockholders who are the owners of the firm.
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Page 3
Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) Why is depreciation added as a part of the capital spending formula?
Answer: The purpose of the capital spending formula is to determine the net fixed asset purchases,or purchases minus dispositions,for the period.Since depreciation expense lowers the ending net fixed asset balance,depreciation must be added back to offset that decrease.Once the depreciation expense has been offset,then the net fixed asset purchases is just the difference between the ending and beginning account values.
Q2) Teddy's Pillows had beginning net fixed assets of $600 and ending net fixed assets of $730.Assets valued at $400 were sold during the year.Depreciation was $50.What is the amount of net capital spending?
A)$130
B)$80
C)$450
D)$180
E)$350
Answer: D
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Chapter 3: Financial Statements Analysis and Financial Models
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77 Flashcards
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Sample Questions
Q1) Suppose a firm calculates its external funding need and finds that it is negative.What are the firm's options in this case?
Answer: With a negative external financing need,the firm has a surplus of funds that it can use to reduce current liabilities,reduce long-term debt,buy back stock,or increase dividends.If positive net present value opportunities exist,the firm could also invest the excess funds.
Q2) Ratio analysis works best when evaluating the financial statements of two firms:
A)in the same industry but located in different countries.
B)of differing sizes in the same industry.
C)with one being in a single-line of business while the other is a conglomerate.
D)of the same size in differing industries.
E)when both are conglomerates with varying lines of business.
Answer: B
Q3) Which is a more meaningful measure of profitability for a firm,return on assets or return on equity? Why?
Answer: Most would argue the return on equity is more meaningful since it measures returns relative to the amount of money shareholders have invested in the firm.In addition,since shareholder wealth maximization is a firm's primary goal,it makes more sense to look at this measure.
Page 5
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Chapter 4: Discounted Cash Flow Valuation
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100 Flashcards
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Sample Questions
Q1) Wilt's Mart is expected to produce a cash flow of $38,900 at the end of next year with increases of 1.5 percent annually for a total of 25 years.What is the present value of this business at a discount rate of 14.5 percent,compounded annually?
A)$370,141.41
B)$344,247.79
C)$825,868.09
D)$911,216.57
E)$284,523.90
Q2) Maxwell Foods established a trust fund that will provide $225,000 in scholarships each year forever.The trust fund earns a 4.63 percent rate of return.How much money did the firm contribute to the fund 20 years ago,assuming that only the interest income is distributed?
A)$5,291,613.13
B)$4,859,611.23
C)$556,297.39
D)$532,897.04
E)$9,100,348.24
Q3) What circumstances are required for an APR to equal an EAR?
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Chapter 5: Interest Rates and Bond Valuation
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85 Flashcards
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Sample Questions
Q1) The term structure of interest rates reflects the:
A)pure time value of money for various lengths of time.
B)actual risk premium being paid for corporate bonds of varying maturities.
C)pure inflation adjustment applied to bonds of various maturities.
D)interest rate risk premium applicable to bonds of varying maturities.
E)nominal interest rates applicable to coupon bonds of varying maturities.
Q2) Municipal bonds:
A)primarily appeal to high tax-bracket investors.
B)generally pay a higher pretax rate of return than corporate bonds.
C)are issued only by local municipalities,such as a city or a borough.
D)are rarely callable.
E)pay interest that is exempt from all income tax.
Q3) Assume a bond yields a real rate of return of 3.6 percent during a time when inflation is 1.87 percent.What would the actual nominal rate of return be?
A)5.61%
B)5.46%
C)5.49%
D)5.54%
E)5.57%
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Page 7
Chapter 6: Stock Valuation
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90 Flashcards
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Sample Questions
Q1) Nu-Tek,Inc.is expecting a period of intense growth,so it has decided to retain more of its earnings to help finance that growth.As a result,it is going to reduce its annual dividend by 20 percent a year for the next three years.After that it will maintain a constant dividend of $1.60 a share.Last year,the annual dividend was $2.60 a share.What is the market value of this stock if the required rate of return is 13 percent?
A)$9.86
B)$12.60
C)$16.08
D)$14.23
E)$11.15
Q2) What is the primary role of a designated market maker (DMM)?
A)Providing a two-sided market
B)Acting as a floor broker
C)Functioning as a supplementary liquidity provider
D)Acting as a one-sided trader
E)Handling only electronic trades
Q3) Contrast some of the features of preferred stock versus common stock.
Q4) Provide an example that illustrates the key difference between a cumulative and a non-cumulative preferred stock.
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Chapter 7: Net Present Value and Other Investment Rules
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83 Flashcards
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Sample Questions
Q1) Assume a project has normal cash flows.According to the accept/reject rules,the project should be accepted if the:
A)PI is less than 1.
B)AAR is less than the required AAR.
C)IRR exceeds the required return.
D)payback period is less than the life of the project.
E)discounted payback period is less than the life of the project.
Q2) An investment is acceptable if the profitability index (PI)of the investment is:
A)greater than one.
B)less than one.
C)greater than the internal rate of return (IRR).
D)less than the net present value (NPV).
E)greater than a pre-specified rate of return.
Q3) The discount rate that makes the net present value of an investment exactly equal to zero is called the:
A)profitable rate of return.
B)internal rate of return.
C)average accounting return.
D)profitability index.
E)risk-free rate.
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Uptown Motors is analyzing a project with sales of $420,000,depreciation of $30,000,and a net working capital requirement of $56,000.The firm has a tax rate of 35 percent and a profit margin of 5 percent.The firm has no interest expense.What is the amount of the operating cash flow?
A)$49,384
B)$50,616
C)$51,000
D)$58,340
E)$107,000
Q2) Project analysis is focused on _____ costs.
A)total
B)sunk
C)variable
D)incremental
E)fixed
Q3) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
Q4) Should financing costs be included as an incremental cash flow in capital budgeting analysis?
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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85 Verified Questions
85 Flashcards
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Sample Questions
Q1) If a project breaks even on an accounting profit basis,then:
A)the project's net present value will be zero.
B)its sales quantity will be higher than if the project were to break even on a financial basis.
C)the project's net present value will be negative.
D)it will also break even on a financial basis.
E)its contribution margin must be zero.
Q2) Last month you introduced a new product to the market.Consumer demand has been overwhelming and it appears that strong demand will exist over the long-term.Given this situation,management should consider the option to:
A)suspend.
B)contract.
C)withdraw.
D)abandon.
E)expand.
Q3) Should managers perform Monte Carlo simulation on all projects before accepting them? If so,why? If not,then when should Monte Carlo simulation be applied?
Q4) Explain the significance of the financial break-even point.
Page 11
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Chapter 10: Risk and Return Lessons From Market History
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84 Verified Questions
84 Flashcards
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Sample Questions
Q1) Which one of these statements correctly reflects historical history from 1926 through 2012?
A)Large-company stocks had the widest distribution of returns for the period.
B)The rate of return in any given year is a good estimate of the rate of return for the following year.
C)For small-company stocks,both the worst annual rate of return and the best annual rate of return occurred during the period 1929-1939.
D)The annual rate of return on U.S.Treasury bills has never exceeded 8 percent.
E)The standard deviation of returns for U.S.Treasury bills was zero percent for the period.
Q2) Assume inflation averaged 3.2 percent during a period in which U.S.Treasury bills earned 4.3 percent.What was the average real rate of return on large-company stocks if the risk premium on those stocks was 7.4 percent for the period?
A)8.5%
B)3.2%
C).1%
D)7.5%
E)14.9%
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Page 12
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) A portfolio contains four assets.Asset 1 has a beta of .7 and represents 35 percent of the portfolio.Asset 2 has a beta of 1.3 and represents 20 percent of the portfolio.Asset 3 has a beta of 1.1 and is 25 percent of the portfolio.Asset 4 has a beta of 2.16.What is the portfolio beta?
A)1.212
Q2) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q3) Securities with zero or negative correlations are desired by many investors for their portfolio holdings.How might you go about identifying such securities?
Q4) According to the CAPM,the expected return on a risky asset depends on three components.Describe each component,and explain its role in determining expected return.
Q5) If an optimal portfolio of risky assets can be identified,why should investors mix that portfolio with risk-free securities?
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Chapter 12: Risk, Cost of Capital, and Valuation
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86 Flashcards
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Sample Questions
Q1) Which one of these statements related to beta is correct?
A)The beta of a risk-free security is set at 1.
B)The higher the beta the lower the risk of a security.
C)Beta measures the risk of a single security if held in a large,diversified portfolio.
D)Beta measures the total risk of a single security whether held independently or as part of a portfolio.
E)A stock with a high standard deviation will also have a high beta.
Q2) An all-equity firm has a beta of 1.36.What will be the equity beta if the firm adopts a debt-to-equity ratio of .3?
A)1.660
B)1.768
C)1.360
D)1.674
E)1.943
Q3) Explain how leverage affects the relationship between the asset beta and the equity beta.
Q4) Explain the logic that underpins the statement: "The discount rate of a project should be the expected return on a financial asset of comparable risk."
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Page 14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
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48 Flashcards
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Sample Questions
Q1) The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.
A)stable
B)weak
C)semistrong
D)strong
E)open
Q2) In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:
A)the decision between LIFO and FIFO for inventory accounting can significantly affect stock prices.
B)a firm can affect its stock price if it either withholds information or provides incorrect information.
C)accounting changes that increase accounting earnings also increase stock prices.
D)switching depreciation methods can significantly affect stock prices.
E)the choice between the percentage-of-completion or the completed-contract method for construction projects affect stock prices.
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Page 15
Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) Which of these will appear on a market value balance sheet?
I.Original cost of fixed assets less any depreciation to date
II.Issue value of bonds
III.Current sales value of a firm's plant and equipment
IV.Current market value of the outstanding shares of stock
A)I and II only
B)III and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV
Q2) Financial leverage impacts the performance of a firm by:
A)increasing the volatility of the firm's EBIT.
B)decreasing the volatility of the firm's EBIT.
C)decreasing the volatility of the firm's net income.
D)increasing the volatility of the firm's net income
E)lowering the firm's level of risk.
Q3) Draw a graph with EPS on the vertical axis and earnings before interest on the horizontal axis.Assume there are no taxes.Draw lines depicting a levered and an unlevered firm.Identify the point where the firm is indifferent to its capital structure and also the area that represents the advantage of debt.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Which one of these statements most applies to a firm that is suffering from financial distress?
A)Bondholders will desire high risk projects in order to protect their investment.
B)Stockholders will increase their investment in the firm to protect their current investment.
C)Stockholders will generally prefer low-risk over high-risk projects.
D)Managers will tend to lower dividends in an effort to protect shareholder value.
E)Stockholders will bear the cost of selfish investment strategies through higher interest payments.
Q2) The optimal capital structure has been achieved when the:
A)weight of equity is equal to the weight of debt.
B)debt-to-equity ratio selected results in the lowest possible weighted average cost of capital.
C)firm is totally financed with debt.
D)debt-to-equity ratio is such that the cost of debt exceeds the cost of equity.
E)cost of equity is maximized.
Q3) How might business risk affect the capital structure of a firm?
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Page 17
Chapter 16: Dividends and Other Payouts
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Sample Questions
Q1) Of the following factors,which one is considered to be the primary factor affecting a firm's dividend decision?
A)The personal taxes company stockholders incur on dividend distributions
B)Maintaining consistency with the historical dividend policy
C)Attracting retail investors
D)Attracting institutional investors
E)Sustainable changes in earnings
Q2) A common stock is selling for $63 a share.The par value per share is $1 and the total market value of the firm is $94,500.How many shares of stock will be outstanding if the firm does a 3-for-1 stock split?
A)500 shares
B)1,000 shares
C)3,000 shares
D)3,500 shares
E)4,500 shares
Q3) Identify at least four pros of paying dividends.
Q4) Summarize at least four key points that are known about dividends and share repurchases.
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Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) Which variable within the Black-Scholes option pricing formula is the delta?
A)S
B)e<sup>-Rt</sup>
C)N(d<sub>2</sub>)
D)N(d<sub>1</sub>)
E)E
Q2) Rita owns 12 put option contracts on Farmington stock with an exercise price of $32.50.What is the total intrinsic value of these contracts if the stock is currently selling for $31.98 a share?
A)-$624
B)-$312
C)$0
D)$312
E)$624
Q3) Which one of these combinations is a protection put?
A)Writing identical puts and calls on the same asset
B)Buying a put and buying the underlying asset
C)Selling a call and buying the underlying asset
D)Buying a call and selling the underlying asset
E)Selling a put and buying the underlying asset
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Is it possible to have a negative cash cycle? If not,why not? If so,how can this occur?
Q2) A firm has an inventory turnover rate of 16,a receivables turnover rate of 21,and a payables turnover rate of 11.How long is the operating cycle?
A)37.00 days
B)40.19 days
C)42.87 days
D)63.08 days
E)73.37 days
Q3) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of financing are there that the firm could use as an alternative?
Q4) Countrywide Machine Parts is considering a proposal whereby customers who pay their bills on time will receive a 2 percent rebate on their purchases.Those who pay cash will receive a 5 percent rebate.All rebates will be applied to the next order placed by the customer.Explain the impact of this proposal on the firm.
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Page 20
Chapter 19: Raising Capital
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Sample Questions
Q1) Denver Mines is offering 45,000 shares of stock to the public in a general cash offer.The offer price is $48 a share and the underwriter's spread is 9.5 percent.The administrative costs are estimated at $360,000.How much will Denver Mines net from this stock offering assuming the issue is completely sold?
A)$1,629,000
B)$1,646,000
C)$1,594,800
D)$1,705,450
E)$1,988,950
Q2) Iver Mfg.wants to raise $14.7 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $320,000 for accounting,legal,and other costs.The underwriting spread is 8.5 percent and the issue price is $22 per share.How many shares of stock must be sold if the firm is to receive sufficient funds to purchase all its desired equipment?
A)744,799 shares
B)802,108 shares
C)746,150 shares
D)740,759 shares
E)833,333 shares
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Page 21
Chapter 20: International Corporate Finance
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Sample Questions
Q1) You want to invest in a riskless project in Sweden.The project has an initial cost of SKr380,000 and is expected to produce cash inflows of SKr210,000 a year for 2 years.The project will be worthless after two years.The expected inflation rate in Sweden is 2.6 percent while it is 2.1 percent in the U.S.A risk-free security is paying 3.8 percent in the U.S.The current spot rate is $1 = SKr6.56.What is the net present value of this project in U.S dollars using the foreign currency approach?
A)$1,811.70
B)$13,799.21
C)$2,192.65
D)$3,684.44
E)$14,383.78
Q2) An agreement made today that sets both the exchange rate and the quantity of currency that will be traded at some point in the future is called a ____ trade.
A)spot
B)floating
C)swap
D)triangle
E)forward
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Page 22
Chapter 21: Mergers and Acquisitions Web Only
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Sample Questions
Q1) On average,shareholders of the:
A)target firm benefit from mergers.
B)target firm benefit from cash mergers and incur losses in stock mergers.
C)acquiring firm benefit the most from a merger.
D)target firm suffer losses when a merger occurs.
E)both the acquiring and target firm incur losses when firms merge.
Q2) JLM has 6,000 shares of stock outstanding at a market price per share of $27.Hi-Tek has 30,000 shares outstanding that sell for $50 a share.By merging,$35,000 of synergy can be created.Hi-Tek is acquiring JLM for $200,000 worth of Hi-Tek stock.What is the post-merger value per share?
A)$50.00
B)$56.57
C)$49.91
D)$51.17
E)$48.83
Q3) Explain the pros and cons of a cash acquisition over a stock acquisition.
Q4) Explain a golden parachute and justify why a firm's shareholders may be willing to agree to such an arrangement.
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Page 23