Principles of Finance
Exam Materials
Course Introduction
Principles of Finance is an introductory course that provides students with a comprehensive understanding of the fundamental concepts and tools used in financial decision-making. The course covers topics such as the time value of money, risk and return, financial statement analysis, valuation of stocks and bonds, capital budgeting, and the functioning of financial markets and institutions. Students will learn how individuals and organizations manage financial resources, allocate capital, and assess investment opportunities to achieve financial goals. Through case studies and problem-solving exercises, the course emphasizes critical thinking and practical application of financial principles in both personal and corporate contexts.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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21 Chapters
2273 Verified Questions
2273 Flashcards
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Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.
A)True
B)False
Answer: True
Q2) Maximizing the earnings of the firm is the goal of financial management.
A)True
B)False
Answer: False
Q3) The most common partnership arrangement carries limited liability to the partners.
A)True
B)False
Answer: False
Q4) Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Review of Accounting
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130 Flashcards
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Sample Questions
Q1) A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within the firm's fiscal year.
A)True
B)False
Answer: True
Q2) An item which may be converted to cash within one year or one operating cycle of the firm is classified as a A) current liability.
B) long-term asset.
C) current asset.
D) long-term liability.
Answer: C
Q3) Net working capital is the difference between current assets and current liabilities. A)True
B)False
Answer: True
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Refer to the figure above. Times interest earned for Tew Company is
A) 6.8x
B) 10.5x
C) 25x
D) 11.5x
Answer: D
Q2) Asset utilization ratios relate balance sheet assets to income statement sales.
A)True
B)False
Answer: True
Q3) Total asset turnover indicates the firm's A) liquidity.
B) debt position.
C) ability to use its assets to generate sales.
D) profitability.
Answer: C
Q4) The stock market tends to move up when inflation goes up.
A)True
B)False
Answer: False
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) A pro forma balance sheet needs data from the prior balance sheet and the cash budget.
A)True
B)False
Q2) A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that
A) all sales were from current production.
B) all sales were from beginning inventory.
C) sales were from beginning inventory until it was depleted, and then use sales from current production.
D) all sales were for cash.
Q3) Net cash flow is equal to:
A) income after taxes minus depreciation.
B) income after taxes minus dividends.
C) cash receipts minus cash payments.
D) cash receipts minus cash payments minus depreciation.
Q4) When sales volume varies from month to month it is not advisable to use level production.
A)True B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) Stable industry
B) Cyclical demand for the firm's products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets
Q2) Degree of combined leverage considers the impact of a change in volume on the change in operating income.
A)True
B)False
Q3) Heavy use of long-term debt may be beneficial in an inflationary economy because
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.
Q4) Sales commissions and raw material are variable costs.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Heavy risk exposure due to short-term borrowing can be compensated for by carrying illiquid assets.
A)True
B)False
Q2) Financial managers can accurately predict future interest rates by
A) calculating the anticipated inflation rate
B) the Fed's decision regarding the target federal funds rate
C) measuring investor sentiment and consumer confidence indices
D) none of these
Q3) The concept of a self-liquidating asset implies that
A) the working capital associated with a product will be liquidated within a one year period.
B) all the product will be sold, receivables collected and bills paid over the time period specified.
C) assets associated with the production of a product will be liquidated over the depreciable life of the assets.
D) self-liquidating assets be financed by long-term sources of capital.
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Chapter 7: Current Asset Management
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Sample Questions
Q1) A lock-box is used by the selling corporation to speed up the check collection and check-clearing process.
A)True
B)False
Q2) A lock-box system is a method of extending disbursements.
A)True
B)False
Q3) How would electronic funds transfer affect the use of "float"?
A) Increase its use somewhat
B) Decrease its use somewhat
C) Virtually eliminate its use
D) Have no effect on its use
Q4) SWIFT's implementation of the "smart card" is expected to
A) decrease the likelihood of electronic fraud.
B) remove the need for secret information to be sent through mail.
C) guarantee the identity of the sender.
D) all of these.
Q5) Seasonal production allows for maximum efficiency in machinery and manpower use.
A)True B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) The Magic Pumpkin Limousine Company wants to purchase a car entertainment system for one of its automobiles. The entertainment system vendor has offered to finance the $2,000 purchase over one year in 12 installments, with a total of $200 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finance the purchase with an installment loan, where $155 in interest will be repaid and payments on the loan must be made quarterly. What are the effective interest rates on these loans? Which loan should they select?
Q2) The commercial paper market is available to all New York Stock Exchange companies.
A)True
B)False
Q3) It is difficult to acquire a loan in US dollars outside the United States.
A)True
B)False
Q4) One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.
A)True
B)False
Q5) Annual payment.
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Chapter 9: The Time Value of Money
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Sample
Questions
Q1) Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement in 40 years. How much will she have available for retirement if she can make 8% on her investment?
A) $596,250
B) $2,953,000
C) $1,345,100
D) $469,020
Q2) Jeff believes he will need $60,000 annual income during retirement. If he can achieve a 6% return during retirement and believes he will live 20 years after retirement, how much does he need to save by the time he retires?
A) $724,055
B) $1,600,000
C) $688,200
D) $209,320
Q3) Using semi-annual compounding rather than annual compounding will increase the future value of an annuity.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Which of the following regarding preferred stock is true?
A) If the price decreases, required rate of return has decreased
B) If the required rate of return increases, the price decreases
C) If the required rate of return increases, the price increases
D) The price in the market remains at par
Q2) In a general sense, the value of any asset is the
A) value of the dividends received from the asset.
B) present value of the cash flows received from the asset.
C) value of past dividends and price increases for the asset.
D) future value of the expected earnings discounted by the asset's cost of capital.
Q3) The preferred stock of Lewis-Schultz Enterprises pays an annual dividend of $1.32. What is the required return if the market value of the preferred stock:
a) $40
b) $30
c) $20
Q4) As time to maturity increases, bond price sensitivity decreases.
A)True
B)False
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Page 12
Chapter 11: Cost of Capital
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Sample Questions
Q1) The cost of new common stock is greater than the cost of outstanding common stock.
A)True
B)False
Q2) Taking on additional debt will reduce the cost of equity.
A)True
B)False
Q3) The use of the optimum capital structure minimizes the cost of capital.
A)True
B)False
Q4) If the flotation cost goes up, the cost of retained earnings will A) go up.
B) go down.
C) stay the same.
D) slowly increase.
Q5) A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (K<sub>p</sub>= D/P<sub>o</sub>+ g).
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following 2 projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 12% cost of capital, which decision should the financial manager make?
A) Select project A
B) Select project B
C) Do not select either project
D) Select both projects
Q2) A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow:
Q3) Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project?
A) $18,000
B) $19,000
C) A loss of $21,000
D) None of these
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we
A) need to consider the impact of a given project on the overall risk of the firm.
B) recognize that a risky investment may create a portfolio with less risk.
C) need to consider how the returns of the projects in the portfolio are correlated.
D) all of these are true.
Q2) Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with:
A) normal risk.
B) high risk.
C) no risk.
D) low risk.
Q3) In order to reduce risk in a firm, the firm would seek to enter a business that
A) has high positive correlation with its present business.
B) has zero correlation with its present business.
C) has high negative correlation with its present business.
D) has high negative variation with its present business.
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Page 15
Chapter 14: Capital Markets
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Sample Questions
Q1) Commission rates for stock transactions are fixed as a result of the Securities Act Amendments of 1975.
A)True
B)False
Q2) The efficient market hypothesis deals primarily with
A) random speculation in securities.
B) the degree to which prices adjust to new information.
C) degrees to which price movements are the result of past trends.
D) how an investor can significantly outperform the market in general.
Q3) Foreign investors have preferred to invest in the United States due to all but one of the following reasons:
A) less stringent regulation of securities markets.
B) political stability of the U.S. government.
C) the U.S. dollar is the world's international currency.
D) all of these are reasons that foreign investors prefer to invest in the United States.
Q4) Financial intermediaries channel funds into the capital markets from the household sector.
A)True B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Large well-established investment bankers often distribute new issues on a best-efforts basis.
A)True
B)False
Q2) Only the strong investment bankers are in a position to benefit from the new shelf registration process.
A)True
B)False
Q3) The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.
A)True
B)False
Q4) When an investment banker acts as an "underwriter" he
A) gives a "firm commitment" to purchase the securities from the corporation at a set price.
B) The company suffers a decline in earnings after taxes.
C) may sell as many securities as possible and return the rest unsold.
D) may give advice to management.
Page 17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) An investor would consider investing in a zero coupon bond because
A) tax benefits of amortization
B) lower volatility
C) ability to lock in to multiplier of investment
D) none of these are reasons to invest in zero coupons
Q2) Which of the following bonds offers the most security to the bondholder?
A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bond
D) Income bond
Q3) Long-term bond prices are more volatile than short-term bond prices given an equal percentage change in the interest rate.
A)True
B)False
Q4) Over the decades, the times interest earned ratio of the Standard and Poor's' 500 corporations has held fairly steady.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Which of the following is the correct order of corporate issues based on risk and return? (most risk-return to least risk-return)
A) Common stock, subordinated debentures, secured debt, treasury bills.
B) Preferred stock, common stock, subordinated debentures, secured debt.
C) Common stock, long-term government bonds, secured debt, subordinated debt.
D) Common stock, secured debt, subordinated debentures, preferred stock.
Q2) Investors are usually in favor of poison pills because it prevents takeovers. A)True
B)False
Q3) Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of common stock. The cumulative preferred stock has a stated dividend of $1.75 per share. Under normal conditions, Kreisler pays out preferred dividends and 30% of remaining earnings to common stockholders, however, because of a severe recession, Fritz retained all earnings last year. This year, Fritz earned net income of $5 million.
Calculate the dividend per share to be received by the common stockholders this year.
Q4) The ex-rights date usually takes place after the end of the subscription period. A)True B)False
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Page 19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends.
A)True
B)False
Q2) Some researchers feel that stockholders prefer dividends to retained earnings because dividends have information content.
A)True
B)False
Q3) Which of the following does not affect a company's dividend policy?
A) Legal rules concerning capital impairment
B) The efficient market hypothesis
C) Access to capital markets
D) Tax position of shareholders
Q4) A stock dividend will
A) increase the value of a share of stock.
B) decrease the capital in excess of par account.
C) decrease the retained earnings account.
D) none of these.
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Page 20
Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Warrants are often attached to debt securities to increase the debt issue's attractiveness to investors.
A)True
B)False
Q2) The Burma Hat Company's warrant is trading for $10.20. The warrant carries the option to purchase two shares of common stock for $48. What is the speculative premium if the stock price is $51.30?
A) $3.30
B) $3.60
C) $6.60
D) None of these.
Q3) The intrinsic value of a warrant to buy 4 shares of Merton stock at $53 per share is $20. What is the current market price of Merton stock?
A) $55.00
B) $59.00
C) $58.00
D) None of these
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) A Tender Offer describes the attempted purchase of a firm with the consent of that firm's management.
A)True
B)False
Q2) The direct financial motives for merger activity include all of following EXCEPT
A) the portfolio effect.
B) improved financial posture and greater debt.
C) the utilization of tax loss carryforwards.
D) vertical integration.
Q3) The portfolio effect of a merger is greatest for the selling stockholders.
A)True
B)False
Q4) If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm, the surviving firm will automatically get an increase in E.P.S.
A)True
B)False
Q5) A cash purchase is similar to a capital budgeting decision.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) All of the following groups are subject to foreign exchange risk except:
A) Importers and exporters
B) Investors
C) MNCs
D) All of these are subject to foreign exchange risk
Q2) A forward exchange rate is used to help determine the value of a currency at a future point in time.
A)True
B)False
Q3) Eurobond issues are sold simultaneously in several national capital markets, but denominated in a currency different from that of the nation in which the bonds are issued.
A)True
B)False
Q4) A firm exposed to exchange rate risk can hedge its risk by A) using the forward exchange market.
B) borrowing in international money markets.
C) utilizing foreign currency futures markets.
D) all of these.
Q5) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
Page 23
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