Principles of Finance
Exam Materials
Course Introduction
Principles of Finance introduces students to the fundamental concepts and techniques used in financial management and decision-making. The course covers key topics such as the time value of money, risk and return, asset valuation, capital budgeting, and the functioning of financial markets. Students will learn how financial information guides investment and financing decisions within firms, understand the role of financial institutions, and explore various financial instruments. Emphasis is placed on developing analytical skills for assessing financial statements, managing corporate finances, and evaluating both short-term and long-term financial strategies.
Recommended Textbook Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees,despite the large cost.They argue that this will not only increase the number of employees who stay with the firm,and thus reduce some costs involved in employee turnover,but also increase the employees' diligence and industry.What general principle is being argued by the board of directors?
A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders.
B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall.
C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders.
D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.
E) Decisions involving employees must take fairness into account.
Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Which type of transactions must be disclosed in the management discussion and analysis?
A) transactions that significantly affect the firm's leverage
B) off balance sheet transactions
C) off income statement transactions
D) very large transactions
E) transactions that reduce the firm's net income
Answer: B
Q2) If the above statement of financial position is for a retail company,what indications about this company would best be drawn from the changes in the statement of financial position between 2014 and 2015?
A) The company is having difficulties selling its product.
B) The company has reduced its debt.
C) The company has added a major new asset in terms of plant and equipment.
D) The company has experienced a significant rise in its market value.
E) The company has reduced its net working capital.
Answer: A
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Sample Questions
Q1) Assuming you currently have 10,000 Bbls of WTI crude,the added benefit (cost)to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
A) ($1400)
B) $1400
C) ($3908)
D) $3908
E) $2508
Answer: D
Q2) Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
E) $775,000
Answer: B
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) Since your first birthday,your grandparents have been depositing $1000 into a savings account on every one of your birthdays.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:
A) $25,645
B) $36,465
C) $12,659
D) $18,000
E) $50,645
Q2) An annuity will pay you $5,000 per year for 25 years.What is the FV of this annuity at the end of 25 years,if your interest rate is 8%?
A) $126,207
B) $365,530
C) $125,000
D) $135,000
E) $53,374
Q3) What is the difference between a perpetuity and an annuity?
Q4) Why must a growing perpetuity have a growth rate less than the discount rate?
Q5) Can we apply the growth perpetuity equation for negative growth as well?
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Chapter 5: Interest Rates
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Sample Questions
Q1) You decide to take out a car loan for $20,000 at 7% APR for 60 months.How much are your monthly payments?
A) $396.02
B) $333.33
C) $406.48
D) $400.00
E) $367.54
Q2) The present value (PV)of the lease payments for the delivery truck is closest to:
A) $206,900
B) $207,050
C) $207,680
D) $198,420
E) $205,475
Q3) Your bank account pays daily interest with an APR of 4.5%.What is the EAR?
A) 4.0%
B) 4.8%
C) 4.5%
D) 4.6%
E) 4.4%
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Page 7
Chapter 6: Bonds
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Q1) What must be the price of a $10,000 bond with a 6.5% coupon rate,semi-annual coupons,and two years to maturity if it has a yield to maturity of 8% APR?
A) $9727.76
B) $9819.74
C) $10,619.63
D) $10,754.44
E) $8816.59
Q2) If the yield to maturity of all of the following bonds is 6%,which trades at the greatest discount per $100 face value?
A) a bond with a $10,000 face value, four years to maturity and 6.2% semi-annual coupon payments
B) a bond with a $500 face value, ten years to maturity and 5.2% annual coupon payments
C) a bond with a $5000 face value, seven years to maturity and 5.5% annual coupon payments
D) a bond with a $1000 face value, five years to maturity and 6.3% annual coupon payments
E) a bond with a $100 face value, 3 years to maturity and 6.0% annual coupon payments
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Page 8
Chapter 7: Valuing Stocks
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Sample Questions
Q1) Rylan Industries is expected to pay a dividend of $5.20 per year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?
A) $29.52
B) $55.11
C) $25.58
D) $80.70
E) $11.83
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) $40.22
C) $41.45
D) $42.40
E) $43.50
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Page 9
Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A company has identified the following investments as looking promising.Each requires an initial investment of $1.2 million.Which is the best investment?
A) a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 10%
B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 12%
C) an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6%
D) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6%
E) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 2%
Q2) You can evaluate alternative projects with different lives by calculating and comparing their equivalent annual annuity.
A)True
B)False
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) Which of the following costs would you consider when making a capital budgeting decision?
A) sunk cost
B) opportunity cost
C) interest expense
D) fixed overhead cost
E) past research and development expenditures
Q2) Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?
A) 7 years
B) 2 years
C) 4 years
D) 5 years
E) 6 years
Q3) The capital cost allowance (CCA)is only used for financial reporting purposes,and usually not for tax purposes.
A)True
B)False
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Page 11
Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) The risk premium of a security is determined by its ________ risk and does not depend on its ________ risk.
A) systematic, undiversifiable
B) systematic, unsystematic
C) diversifiable, diversifiable
D) diversifiable, unsystematic
E) unsystematic, diversifiable
Q2) Suppose you invested $150 in Tesla Motors one month ago.It paid a dividend of $1.55,and you sold it right after the dividend was paid for $162.What was your realized return from holding the stock?
A) 6%
B) 1%
C) 9%
D) 8%
E) 7%
Q3) Why must riskier investments offer higher expected returns?
Q4) How does diversification affect systematic and unsystematic risk?
Q5) Is volatility a reasonable measure of risk when evaluating large portfolios?
Q6) Which type of investment has historically had the highest volatility?
Q7) Which type of investment has historically had the lowest volatility?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) The volatility on Home Depot's returns is closest to:
A) 35%
B) 31%
C) 42%
D) 18%
E) 22%
Q2) The weight of Lowes in your portfolio is:
A) 40%
B) 20%
C) 50%
D) 30%
E) 10%
Q3) If you build a large enough portfolio,you can diversify away all ________ risk,but you will be left with ________ risk.
A) diversifiable, unsystematic
B) unsystematic, systematic
C) systematic, undiversifiable
D) diversifiable, diversifiable
E) common, unsystematic
Q4) Is it possible for a stock to have high total risk but low systematic risk?
Page 13
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Chapter 12: Determining the Cost of Capital
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Sample Questions
Q1) WestJet Airlines is considering purchasing 20 new planes that will save the company $25 million per year in fuel and maintenance costs for the next 10 years.If the cost of the new planes is $200 million dollars and WestJet's WACC is 8.5%,what is the NPV of the project?
A) -$200,000
B) $50 million
C) $30.4 million
D) $0
E) $4.4 million
Q2) Xcom Industries will pay a dividend of $0.44 next year,and expects its dividends to grow at 8% per year.The current price of Xom stock is $6.45 per share.What is Xom's cost of equity?
A) 17%
B) 14.8%
C) 6.8%
D) 7.4%
E) 15.4%
Q3) Why do we use leverage if it increases the risk of a firm?
Q4) Is it incorrect to use the coupon rate of debt toward cost of debt?
Q5) What is the assumption about leverage when using WACC to evaluate a project?
Page 14
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Chapter 13: Risk and the Pricing of Options
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Sample Questions
Q1) Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.
A) decrease, debt holders
B) decrease, suppliers
C) increase, directors
D) increase, debt holders
E) increase, suppliers
Q2) A put option on a stock has an exercise price of $74.If the stock price at expiration is $79,what is the option payoff for a long put position?
A) $0
B) $5
C) -$5
D) $79
E) -$79
Q3) How does option pricing theory help explain why equity holders have an incentive to take on negative-NPV,high-volatility investments?
Q4) What are American options?
Q5) What are European options?
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) An IPO is offered at $9.50 per share for 7 million shares.The IPO underwriters had a spread of 7.25%.What price did the underwriters pay per share of the IPO firm?
A) $9.17
B) $8.86
C) $10.19
D) $9.50
E) $8.81
Q2) Big Box retailing has a market capitalization of $500 million and 20 million shares outstanding.In order to finance its growth,the management of Big Box plans to raise further capital through a rights issue.All shareholders will be issued ten rights to purchase a new share at a price of $1.50.What will the price of a share be after the SEO,if all shareholders exercise their rights?
A) $1.50
B) $2.32
C) $2.41
D) $2.50
E) $3.64
Q3) Who benefits from IPO underpricing?
Q4) What are the four IPO puzzles?
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Chapter 15: Debt Financing
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Sample Questions
Q1) What are callable bonds?
Q2) A covenant that restricts a company from making loans or otherwise providing credit is best viewed as a restriction on which of the following?
A) issuing new debt
B) dividends and share repurchases
C) mergers and acquisitions
D) asset disposition
E) investment opportunities
Q3) What is a sinking fund?
Q4) A bond issue that does not trade on the public market but instead is sold to a small group of investors is called a(n)
A) private placement.
B) syndicated bond.
C) revolving line of credit.
D) syndicated bank loan.
E) Eurobond.
Q5) Why do corporations choose to have a Canada call provision rather than leaving the bonds as non-callable?
Q6) Explain the difference between notes and debentures.
Page 17
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Chapter 16: Capital Structure
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Sample Questions
Q1) Financial managers prefer to choose the same debt level no matter which industry they operate in.
A)True
B)False
Q2) Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.If the company uses no leverage,what is expected return to equity holders?
A) 8.0%
B) 11.6%
C) 9.33% D) 30.0% E) 33.3%
Q3) In general,issuing equity may not dilute the ownership of existing shareholders if A) the value of new shares is equal to the value of debt.
B) the new shares are sold at a fair price.
C) the firm has no debt financing.
D) the firm uses debt conservatively.
E) the original owners do not sell their shares.
Q4) What are the issues in determining the present value (PV)of financial distress?
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Chapter 17: Payout Policy
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Sample Questions
Q1) A firm issues a 75% stock dividend.This transaction is equivalent to a:
A) 3:2 stock split.
B) 4:3 stock split
C) 7:4 stock split
D) 3:4 stock split
E) 1:1 stock split
Q2) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Q3) Dividend payments that are the result of liquidation of assets are known as ________ and are taxed as capital gains.
A) return of capital
B) rolling dividends
C) alternate payments
D) private earnings
E) special dividends
Q4) With perfect capital markets,investors prefer share repurchases to receiving dividends.
A)True
B)False
Q5) What is the difference between a regular dividend and a liquidating dividend?
Page 19
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Sample Questions
Q1) What is minimum required cash?
Q2) A firm has $20 million in equity and $20 million of debt,it pays dividends of 20% of net income,and has a net income of $5 million.What is the firm's sustainable growth rate?
A) 18%
B) 19%
C) 20%
D) 21%
E) 22%
Q3) Compute the value of a firm with free cash flows of $4000,$4500,and $5000 over the next three years,a terminal firm value of $60,000 after three years,and the unlevered cost of capital is 10%.Assume that the interest rate tax shield is zero.
A) $56,191
B) $57,234
C) $58,098
D) $59,123
E) $61,431
Q4) Is total net working capital or incremental net working capital more relevant for calculation of free cash flow?
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Chapter 19: Working Capital Management
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Q1) The three steps in establishing a credit policy are establishing credit standards,establishing credit terms,and establishing a collection policy.
A)True
B)False
Q2) What is the effective annual cost of credit terms of 3/15 net 30,if the firm stretches the accounts payable to 60 days?
A) 1.7%
B) 3.35%
C) 12.65%
D) 28.03%
E) 17.42%
Q3) Your firm purchases goods from its supplier with a discount of 1%,and a credit period of 20 days.If the effective annual cost of forgoing the discount is 27.71%,what is the length of the discount period?
A) 25 days
B) 20 days
C) 15 days
D) 10 days
E) 5 days
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Page 21
Chapter 20: Short Term Financial Planning
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Q1) Occasionally,a company will encounter circumstances in which cash flows are temporarily negative for an unexpected reason.We refer to such a situation as
A) a liquidity shock.
B) a negative cash flow shock.
C) a negative liquidity shock.
D) a cash crunch.
E) a margin squeeze.
Q2) In which quarter(s)are Fancy's seasonal working capital needs the greatest?
A) 1
B) 2
C) 3
D) 4
E) 1 and 2
Q3) How can a conservative financing policy reduce firm value?
Q4) According to the matching principle,short-term needs for funds should be financed by short-term sources of funds; long-term need for funds should be financed by long-term sources of funds.
A)True
B)False
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Chapter 21: Risk Management
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Sample Questions
Q1) Firms can hedge risk by making real investments in assets with offsetting risk.
A)True
B)False
Q2) Which of the following best describes how moral hazard affects the price of insurance?
A) Since insurers can acquire complete information regarding the riskiness of borrowers, they can charge actuarially fair premiums.
B) Since firms may have private information about how risky they are, insurers must raise premiums to compensate for the existence of this uncertainty.
C) Since purchasing insurance reduces the firm's incentive to avoid risk, insurers must raise premiums to compensate for the increase in risk.
D) Since purchasing insurance reduces the firm's risk, insurers can lower premiums to compensate for the reduction in risk.
E) Since high premiums will drive away the low-risk firms, insurers must lower premiums in order to attract low-risk borrowers.
Q3) What is business interruption insurance?
Q4) What is a duration mismatch?
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Chapter 22: International Corporate Finance
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Q1) The spot exchange rate is the rate at which one currency can be converted into another today.
A)True
B)False
Q2) Which two currencies account for more than half of all the trading volume in the foreign exchange market?
A) Euro and Chinese yuan
B) U.S. dollar and the British pound
C) Euro and the British pound
D) U.S. dollar and the euro
E) U.S. dollar and the Canadian dollar
Q3) The spot exchange rate for the British pound is 0.5 GBP/CAD.The one-year interest rate in Canada is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.606
B) 0.612
C) 0.617
D) 0.505
E) 0.631
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Page 24
Chapter 23: Leasing
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Q1) A lease that is viewed as a rental for accounting purposes is called a(n)
A) operating lease.
B) finance lease.
C) true tax lease.
D) security interest.
E) direct lease.
Q2) What is the amount of the lease-equivalent loan for the CT scanner?
A) $74,890.28
B) $1,749,890
C) $3,487,027
D) $2,367,560
E) $1,604,027
Q3) In a perfect capital market,leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways.
A)True
B)False
Q4) Why are loan payments typically higher than lease payments when the lease has a positive residual value?
Q5) What is the difference between a true tax lease and a non-tax lease?
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Chapter 24: Mergers and Acquisitions
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Questions
Q1) General Mills,a producer of breakfast cereal,has proposed an acquisition of Kellogg,another cereal producer.The combined firm is expected to be able to negotiate a reduced cost for the grain used in its cereal.What type of synergies are the most likely reason behind this merger?
A) economies of scale
B) vertical integration
C) economies of scope
D) monopoly gains
E) efficiency gains
Q2) What are synergies?
Q3) Why does a recapitalization make a firm a less attractive target for a takeover?
Q4) The merger of two companies in the same industry that make products required at different stages of the production cycle is called
A) economies of scope.
B) vertical integration.
C) economies of scale.
D) horizontal integration.
E) efficiency gains.
Q5) What is a conglomerate merger?
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Chapter 25: Corporate Governance
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Q1) What is the role of takeovers in corporate governance?
Q2) Directors who are not as directly connected to the firm but who have existing or potential business relationships with the firm are called A) grey directors.
B) independent directors.
C) advising directors.
D) inside directors.
E) unelected directors.
Q3) The Smith family has a 45% stake in A company and A company has a 75% stake in B company.Finally,B company has a 35% stake in C company.What percentage ownership does the Smith family have in C company?
A) 21%
B) 12%
C) 34%
D) 26%
E) 16%
Q4) How does shareholder voice serve to discipline poorly performing managers?
Q5) What is tunnelling?
Q6) What is the cost of aligning managers' interests with those of shareholders?
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