Introduction to Finance
Textbook Exam Questions
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and concepts that govern financial decision-making in businesses and personal settings. The course covers key topics such as time value of money, risk and return, financial statement analysis, budgeting, investment strategies, and the functioning of financial markets. Students will also explore the roles of financial institutions and the impact of economic factors on financial planning. Through practical examples and problem-solving exercises, this course equips students with essential tools to analyze and interpret basic financial information, enabling them to make informed financial choices.
Recommended Textbook
Financial Management Concepts and Applications 1st Edition by Stephen Foerster
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Chapter 1: Overview of Financial Management
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Q1) The ability to understand the short-term and long-term impact of investment decisions is a fundamental concept that a nonfinancial manager should understand in order to:
A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)None of the above.
Answer: A
Q2) A corporate financial manager who is trying to create value for its shareholders:
A)is not concerned with ethics but rather with writing iron-clad contracts.
B)can safely ignore ethics as long as no laws are broken.
C)must behave ethically to stay out of jail.
D)is concerned with ethics because unethical behavior destroys trust,and businesses cannot function without a certain degree of trust.
Answer: D
Q3) Limited partners may actively manage the business.
A)True
B)False
Answer: False
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Chapter 2: Sizing up a Business: a Non-Financial Perspective
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Q1) Which one of the following statements is true?
A)Plant or facilities management involves ensuring sufficient capacity or maximum output is available.
B)People or labor management involves hiring and maintenance of a sufficiently skilled work force.
C)Parts or inventory management involves tradeoffs between maintaining huge amounts of inventory to ensure any demand for the product can be readily met and the costs associated with maintaining huge amounts of inventory.
D)All of the above.
Answer: D
Q2) Managers must manage the supply network for efficient,responsive procurement and distribution to meet their customers' needs.
A)True
B)False Answer: True
Q3) Consumer spending is the main driver of economic activity in the United States.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Understanding Financial Statements
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Sample Questions
Q1) Explain how depreciation generates actual cash flows for the firm.
Answer: Because depreciation is a non cash expense,it generates cash flows for the firm by reducing the amount of taxable income without actually incurring a cash expense.
Q2) On an accrual basis income statement,revenues and expenses always match the firm's cash flow.
A)True
B)False Answer: False
Q3) Which of the following is best represents the income stream that is available to common stockholders?
A)Earnings before interest and taxes
B)Gross profit
C)Operating profit
D)Net profit after tax and after preferred dividend payments
Answer: D
Q4) Reducing a firm's debt will increase its cash flow.
A)True
B)False Answer: False
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Chapter 4: Measuring Financial Performance
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Sample Questions
Q1) Some analysts claim that the true value of ratio analysis is not that ratios answer our questions,but rather that they help us ask better questions.
A)True
B)False
Q2) Which of the following statement i s NOT accurate? Financial statements serve a number of purposes:
A)from a lender's perspective they often form the basis for covenant restrictions.
B)financial ratios are useful for planning and budgeting purposes
C)financial ratios are only useful when using book values because market values change almost continuously and distort manager's intentions.
D)the ROE measure helps us to understand how well we are rewarding our investors.
Q3) Use the information to determine the 2013 long term debt to equity ratio for Bacon Signs.
A)$5,500/$5,420 = 1.01
B)$5,500/$9,620 = 0.57
C)$6,678/ $5,420 = 1.23
D)$6,678/$9,620 = 0.69
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Chapter 5: Managing Day-To-Day Cash Flow
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Q1) Which of the following is NOT a potential source of cash for a firm?
A)A decrease in Accounts receivable
B)A decrease in inventory
C)An increase in retained earnings
D)A decrease in equity
Q2) An interesting fact about commerce in America is that we tend to see very few differences in the age of accounts receivable across industries.
A)True
B)False
Q3) Other things equal,it is more desirable to have a larger working capital gap.
A)True
B)False
Q4) Commercial paper would be considered appropriate for funding which types of corporate needs?
A)the purchase of capital equipment with lives of 5 years or longer
B)seasonal needs for a retail firm
C)financing long-term property purchases
D)all of the above
Q5) What is LIBOR,how are LIBOR interest rates determined,and for what are they used?
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Chapter 6: Projecting Financial Requirements and Managing Growth
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Q1) A firm that is growing more slowly than its sustainable growth rate may face which of the following scenarios if it generates excess cash rather than make greater investments in its own business?
A)Use the excess cash to acquire other businesses.
B)Use the excess cash to increase dividends.
C)Do nothing and become "cash rich."
D)All of the above are realistic scenarios.
Q2) A firm's ending equity equals the firms beginning equity plus any change in retained earnings.
A)True
B)False
Q3) Which of the following choices will lead to a DECREASE in loan requirements?
A)an increased age of accounts receivable
B)an increased age of accounts payable
C)a shortened age of inventory
D)Each of the above will lead to a decrease in loan requirements.
Q4) Pro forma estimates of cash flows are rarely if ever correct.
A)True
B)False
8
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Chapter 7: Time Value of Money Basics and Applications
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Q1) What is the present value of a series of $5,000 end-of-the-year cash flows to be received forever if the required rate of return is 6.00% per year and the first cash flow is one year from today?
A)$8,333.33
B)$83,333.33
C)$300.00
D)This question cannot be answered because there is no time period provided.
Q2) If a bond sells for less than its par value then the yield to maturity is greater than the coupon rate.
A)True B)False
Q3) Eastinghome Inc.just paid $8,000 to a landowner to explore for but not extract valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually for 7 years what is the investment worth at the end of that time period?
A)$5,499.49
B)$11,637.43
C)$56,000.00
D)$66,135.15
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Chapter 8: Making Investment Decisions
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Q1) The capital budgeting techniques presented by the author in chapter 8 are quantitative assessment tools to determine whether a firm should proceed with an investment in a project
A)True
B)False
Q2) For projects with typical cash flows the IRR method agrees with the NPV accept/reject decision.
A)True
B)False
Q3) The appropriate hurdle rate for a particular project reflects the perceived riskiness of the project.
A)True
B)False
Q4) The single most important and desirable of aspect of the payback method is the fact that the maximum acceptable length of the payback period is arbitrary
A)True
B)False
Q5) Identify at least two major problems with the internal rate of return method of capital budgeting.
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Chapter 9: Overview of Capital Markets: Long-Term
Financing Instruments
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Q1) Empirical evidence supports the notion that U.S.financial markets are generally ________ form efficient.
A)weak
B)semi-strong
C)strong
D)none of the above
Q2) In what ways are preferred shares like debt and in what ways are they like common equity?
Q3) When a firm needs to raise money via a bond issue,one of the quickest ways is through a ________.This activity involves the purchase of a large block of securities by a large institutional investor such as a pension fund,an endowment fund,or an insurance company.
A)private placement.
B)public placement.
C)secondary offering.
D)none of the above.
Q4) If a financial market is semi-strong form efficient,then it must also be at least weak-form efficient.
A)True
B)False
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Chapter 10: Assessing the Cost of Capital: What Return
Investors Require
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Q1) Another name for market risk is:
A)systematic risk.
B)standard deviation.
C)unsystematic risk.
D)total risk.
Q2) For purposes of pricing,preferred shares are considered a form of perpetuity.
A)True
B)False
Q3) The market risk premium represents the expected difference between:
A)the return on AAA bonds and Treasury bonds.
B)the prime rate and the 3-month Treasury bill rate.
C)the return on the stock market and the return on preferred shares.
D)the return on the stock market investment and the risk-free return.
Q4) Which of the following is an accurate list of risky securities ranked from most risky to the least?
A)speculative stocks,blue-chip stocks,government bonds,corporate bonds
B)corporate bonds,speculative stocks,blue-chip stocks,government bonds
C)government bonds,corporate bonds,blue-chip stocks,speculative stocks
D)speculative stocks,blue-chip stocks,corporate bonds,government bonds
Q5) Identify methods that firms use to establish hurdle rates for capital projects.
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Chapter 11: Understanding Financing and Payout Decisions
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Q1) A publicly traded firm just announced that its issuing debt to finance a new project.Which of the following scenarios is most likely true in a market with asymmetric information?
A)The firm's future prospects look good and they are sending a costly signal that indicates they will be able to meet higher debt obligations.
B)The firm has a questionable project and are attempting to increase the attractiveness of the project by raising the WACC via an increase in the level of debt financing.
C)The firm has a poor project but they know debt financing provides an effective tax shield.
D)None of these signals are viable explanations.
Q2) The author cites a global study by Servaes and Tufano from 2006 which shows ________ as the dividend policy preferred by the vast majority (76%)of the firms surveyed.
A)a specific percentage amount
B)a specific target amount
C)a specific growth amount
D)no specific policy
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Chapter 12: Designing an Optimal Capital Structure
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Q1) Plastic Products Inc.has a levered beta of 1.30,a debt-equity ratio of 0.50,and a tax rate of 40%.What is the value of the firm's unlevered beta?
A)0.70
B)1.00
C)1.30
D)1.60
Q2) Which of the following statements is NOT true?
A)Valuing stock by using a P/E multiple at least attempts to reflect the anticipated growth in earnings.
B)Valuing stock by using a P/E multiple at least attempts to reflect the uncertainty associated with the earnings.
C)Valuing stock by using a P/E multiple is an easy and intuitive methodology for an initial valuation technique.
D)All of the above are true.
Q3) Why is the price/earnings ratio a common and popular technique for evaluating stocks? Why do fast growing firms have higher P/E ratios? What is a long-run average P/E ratio for larger publicly traded firms in the United States? What are some limitations to using this technique to evaluate stock prices?
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Chapter 13: Measuring and Creating Value
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Q1) EBITDA is an acronym for:
A)earnings before interest,taxes,depreciation,and annuitization.
B)earnings before interest,taxes,depreciation,and amortization.
C)earnings before income taxes,depreciation,and amortization.
D)earnings before income taxes,depreciation,and annuitization.
Q2) In order for a firm to realize positive EVA,the:
A)ROCE must be less than the cost of capital.
B)cost of capital must be greater than the ROCE.
C)ROCE must be greater than the cost of capital.
D)the ROCE and cost of capital must be equal.
Q3) If a viable firm is not growing but is expected to continue over time,then we would expect capital expenditures to be equal to:
A)sales.
B)depreciation.
C)EBIT.
D)taxes payable.
Q4) Complete by filling in each of the missing values (there are 18 total missing values).
Q5) Use the information from Figure 13-2 and complete the missing information.
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Chapter 14: Comprehensive Case Study: Wal-Mart
Stores,inc
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Q1) Which of the following is NOT a factor that would be analyzed by a firm as part of an external SWOT analysis?
A)Expected inflation
B)Expected growth of firm-wide sales
C)Expected changes in GDP
D)Political uncertainty
Q2) Following the recession of 2007 - 2009,yield curves for interest rates the United States were ________,and overall,rates were beneficial for ________.
A)sharply downward sloping; lenders
B)sharply downward sloping; borrowers
C)sharply upward sloping; lenders
D)sharply upward sloping; borrowers
Q3) AS of 2012,the Internet appears to be Walmart's greatest retail sale competitive advantage over it 's competitors.
A)True
B)False
Q4) Use the information provided to complete the pro forma 2013 income statement in table 14-1.
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