Principles of Finance
Exam Questions
Course Introduction
Principles of Finance introduces students to the fundamental concepts and tools used in the financial management of businesses and personal assets. The course covers topics such as the time value of money, risk and return, valuation of stocks and bonds, capital budgeting, and financial statement analysis. Students learn how financial markets operate and are introduced to key principles underlying investment and financing decisions. This foundation prepares students to understand how organizations maximize value, allocate resources efficiently, and analyze the broader economic environment in which financial decisions are made.
Recommended Textbook
CFIN 3 3rd Edition by Scott Besley
Available Study Resources on Quizplus
18 Chapters
1302 Verified Questions
1302 Flashcards
Source URL: https://quizplus.com/study-set/3256
Page 2
Chapter 1: An Overview of Managerial Finance
Available Study Resources on Quizplus for this Chatper
51 Verified Questions
51 Flashcards
Source URL: https://quizplus.com/quiz/64652
Sample Questions
Q1) In a competitive marketplace,if managers deviate too far from making decisions that are consistent with stockholder wealth maximization,they risk being disciplined by the market.Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests.
A)True
B)False
Answer: True
Q2) Which of the following should be the primary goal pursued by the financial manager of a firm?
A) Maximize net income (profits).
B) Maximize the firm's net worth, or book value.
C) Maximize dividends paid to common stockholders.
D) Minimize variable operating expenses.
E) Maximize the market value of the firm's stock.
Answer: E
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: Analysis of Financial Statements
Available Study Resources on Quizplus for this Chatper
86 Verified Questions
86 Flashcards
Source URL: https://quizplus.com/quiz/64653
Sample Questions
Q1) You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA)is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36.What is the return on equity (ROE)?
A) 14.0%
B) 12.5%
C) 15.0%
D) 2.5%
E) 13.5%
Answer: B
Q2) The annual report contains all of the following financial statements except A) income statement.
B) statement of changes in long-term financing.
C) statement of cash flows.
D) balance sheet.
E) statement of retained earnings.
Answer: B
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: The Financial Environment: Markets, institutions, and Investment Banking
Available Study Resources on Quizplus for this Chatper
40 Verified Questions
40 Flashcards
Source URL: https://quizplus.com/quiz/64654
Sample Questions
Q1) The OTC market is a physical exchange,much like the New York Stock Exchange,where securities dealers provide trading in unlisted securities.
A)True
B)False
Answer: False
Q2) The facilities needed to conduct over-the-counter market transactions include all of the following except:
A) physical stock exchange to sell and buy stocks
B) securities dealers who make the market
C) brokers acting as agent to bring investors and dealers together
D) electronic networks that provide communication links between brokers and dealers.
E) all of the above are needed for over-the-counter market transactions.
Answer: B
Q3) The securities exchange commission is the U.S.government agency that regulates the issuance and trading of stocks and bonds.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: The Time Value of Money
Available Study Resources on Quizplus for this Chatper
95 Verified Questions
95 Flashcards
Source URL: https://quizplus.com/quiz/64655
Sample Questions
Q1) Your lease calls for payments of $500 at the end of each month for the next 12 months.Now your landlord offers you a new 1-year lease which calls for zero rent for 3 months,then rental payments of $700 at the end of each month for the next 9 months.You keep your money in a bank time deposit that pays a simple annual rate of 5 percent.By what amount would your net worth change if you accept the new lease? (Hint: Your return per month is 5%/12 = 0.4166667%.)
A) -$509.81
B) -$253.62
C) +$125.30
D) +$253.62
E) +$509.81
Q2) Solving for the interest rate associated with a stream of uneven cash flows,without the use of a calculator,usually involves a trial and error process.
A)True
B)False
Q3) The effective annual rate is less than the simple rate when we have monthly compounding.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 6
Chapter 5: The Cost of Money
Available Study Resources on Quizplus for this Chatper
45 Verified Questions
45 Flashcards
Source URL: https://quizplus.com/quiz/64656
Sample Questions
Q1) The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate.
A)True
B)False
Q2) Which of the following is not one of the four fundamental factors that affect the cost of money?
A) production opportunities
B) time preferences for consumption
C) risk
D) liquidity
E) inflation
Q3) The existence of an upward sloping yield curve proves that the liquidity preference theory is correct,because an upward sloping curve necessarily implies that firms must offer a maturity risk premium in order to induce investors to lend for longer periods.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Bonds Debt-Characteristics and Valuation
Available Study Resources on Quizplus for this Chatper
104 Verified Questions
104 Flashcards
Source URL: https://quizplus.com/quiz/64657
Sample Questions
Q1) You are offered a $1,000 par value bond which has a stepped-up coupon interest rate.The annual coupon rate is 10 percent coupon,payable semiannually ($50 each 6 months)for the first 15 years,and then the annual coupon increases to 13 percent,also payable semiannually,for the next 15 years.The first interest payment will be made 6 months from today,and the $1,000 principal amount will be returned at the end of Year 30.You currently have savings in an account which is earning a 9 percent simple rate,but with quarterly compounding; this is your opportunity cost for purposes of analyzing the bond.What is the value of the bond to you today?
A) $1,614.53
B) $1,419.18
C) $1,306.21
D) $1,250.25
E) $1,155.98
Q2) Eurobonds are typically issued as registered bonds rather than bearer bonds. A)True
B)False
Q3) A bond's value will increase as interest rates rise over time. A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 8
Chapter 7: Stocks Equity-Characteristics and Valuation
Available Study Resources on Quizplus for this Chatper
68 Verified Questions
68 Flashcards
Source URL: https://quizplus.com/quiz/64658
Sample Questions
Q1) A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return,what should be the price of this preferred stock?
A) $57.25
B) $50.00
C) $62.38
D) $46.75
E) $41.64
Q2) Suppose you are willing to pay $30 today for a share of stock which you expect to sell at the end of one year for $32.If you require an annual rate of return of 12 percent,what must be the amount of the annual dividend which you expect to receive at the end of Year 1?
A) $2.25
B) $1.00
C) $1.60
D) $3.00
E) $1.95
To view all questions and flashcards with answers, click on the resource link above. Page 9
Chapter 8: Risk and Rates of Return
Available Study Resources on Quizplus for this Chatper
68 Verified Questions
68 Flashcards
Source URL: https://quizplus.com/quiz/64659
Sample Questions
Q1) Which of the following statements is most correct?
A) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio
B) If you formed a portfolio which included a large number of low beta stocks (stocks with betas less than 1.0 but greater than -1.0), the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, so the portfolio would have a relatively low degree of risk.
C) If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measure by its beta, then, according to the CAPM theory, you should invest some of your money in each stock in the market, i.e., if there were 10,000 traded stocks in the world, the least risky portfolio would include some shares in each of them.
D) Company specific (or unsystematic) risk can be eliminated by forming a large portfolio, but normally even highly diversified portfolios are subject to market (or systematic) risk.
E) Statements b and d are both correct.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Capital Budgeting Techniques
Available Study Resources on Quizplus for this Chatper
94 Verified Questions
94 Flashcards
Source URL: https://quizplus.com/quiz/64660
Sample Questions
Q1) The post-audit two main purposes are to improve forecasts and to improve operations.
A)True
B)False
Q2) Beyond some point,a further increase in the size of the firm's total capital budget may lead to a decrease in the NPVs of all the investments being considered.
A)True
B)False
Q3) The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.
A)True
B)False
Q4) A major disadvantage of the payback period method is it
A) Is useless as a risk indicator.
B) Ignores cash flows beyond the payback period.
C) Does not directly account for the time value of money.
D) All of the above are correct.
E) Only answers b and c are correct.
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Project Cash Flows and Risk
Available Study Resources on Quizplus for this Chatper
103 Verified Questions
103 Flashcards
Source URL: https://quizplus.com/quiz/64661
Sample Questions
Q1) Which of the following statements concerning cash flow evaluation in capital budgeting is incorrect?
A) When determining a project's terminal cash flows, it is generally assumed that the firm's operations return to the same level as they were before the project was purchased.
B) If a depreciable asset is sold at a price different than its book value, taxes will affect the net cash received from the disposal of the asset at the end of its life.
C) The relevant marginal cash flows associated with a project should always include depreciation, because depreciation is an annual operating expense that requires a cash payment.
D) If an asset is depreciated using the Modified Accelerated Cost Recovery System (MACRS), its depreciable basis is the amount that can be depreciated over the asset's useful life, which generally includes the purchase price plus any shipping and installation charges or other costs that are incurred in order to prepare the asset for use.
E) The sunk costs associated with an investment proposal are not relevant cash flows for capital budgeting analysis, so they should not be included in the computation of the marginal cash flows.
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: The Cost of Capital
Available Study Resources on Quizplus for this Chatper
86 Verified Questions
86 Flashcards
Source URL: https://quizplus.com/quiz/64663
Sample Questions
Q1) The marginal cost of capital __________ as more capital is raised during a given period.
A) does not change B) decreases C) increases D) changes in an unpredictable way E) approaches zero
Q2) Since 70 percent of preferred dividends received by a corporation is excluded from taxable income,the component cost of equity for a company which pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be
Cost of equity = r<sub>s</sub>(0.30)(0.50)+ r<sub>s</sub>(1 - T)(0.70)(0.50).
A)True
B)False
Q3) Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them,but capital raised by selling new stock or bonds does have a cost.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 13
Chapter 12: Capital Structure
Available Study Resources on Quizplus for this Chatper
86 Verified Questions
86 Flashcards
Source URL: https://quizplus.com/quiz/64664
Sample Questions
Q1) Two firms,although they operate in different industries,have the same expected earnings per share and the same standard deviation of expected EPS.Thus,the two firms must have the same business risk.
A)True
B)False
Q2) The probability of incurring bankruptcy increase as the firm increases as the debt/equity ratio decreases.
A)True
B)False
Q3) If the announcement of a stock sale does in fact trigger a decline in stock price,this reinforces the effects of flotation costs incurred with new equity issues.Further,this implies a larger break in the MCC schedule.
A)True
B)False
Q4) One of the implications of signaling theory for capital structure decisions is that firms should normally seek to maintain a reserve borrowing capacity.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
Available Study Resources on Quizplus for this Chatper
40 Verified Questions
40 Flashcards
Source URL: https://quizplus.com/quiz/64665
Sample Questions
Q1) The ex-dividend date is the date on which a firm actually mails dividend checks.
A)True
B)False
Q2) In the real world,we find that dividends
A) Usually exhibit greater stability than earnings.
B) Fluctuate more widely than earnings.
C) Tend to be a lower percentage of earnings for mature firms.
D) Are usually changed every year to reflect earnings changes.
E) Are usually set as a fixed percentage of earnings.
Q3) Which of the following influences dividend policy?
A) constraints on dividend payments such as debt contract restrictions
B) investment opportunities
C) alternative sources of capital
D) cash availability
E) all of these exert an influence on dividend policy.
Q4) The dividend payout ratio,on average,for companies in the United States is higher than for companies in Japan.
A)True
B)False
15
To view all questions and flashcards with answers, click on the resource link above.
Chapter 14: Working Capital Policy
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/64666
Sample Questions
Q1) The average length of time between the purchase of raw material and labor and the payment of cash for them is called the __________.
A) cash conversion cycle
B) inventory conversion period
C) receivables collection period
D) payables deferral period
E) days sales outstanding
Q2) A firm's goal should be to lengthen the cash conversion cycle since shorter cash conversion cycles leads firms to increase their dependence on costly external financing.
A)True
B)False
Q3) A high current ratio insures that a firm will have the cash required to meet its needs.
A)True B)False
Q4) The sale of inventory at cost for cash will increase the current assets for a firm. A)True B)False
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: Managing Short-Term Assets
Available Study Resources on Quizplus for this Chatper
108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/64667
Sample Questions
Q1) If the unit sales of a firm double,the optimal order quantity as determined by the EOQ model will also double.
A)True
B)False
Q2) Ace Hardware's EOQ is 100 widgets,and it maintains a 50 unit safety stock.Which of the following is Ace's average inventory?
A) 100 units
B) 60 units
C) 57.07 units
D) 12.25 units
E) 75 units
Q3) Offering trade credit discounts is costly to a firm and as a result,firms that offer trade discounts are usually those that are performing poorly and need cash quickly.
A)True
B)False
Q4) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Managing Short-Term Liabilities Financing
Available Study Resources on Quizplus for this Chatper
101 Verified Questions
101 Flashcards
Source URL: https://quizplus.com/quiz/64668
Sample Questions
Q1) A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed,would want to separate the construction loan from other current liabilities associated with working capital management.
A)True
B)False
Q2) Which of the following statements concerning commercial paper is false?
A) Commercial paper generally is written for terms less than 270 days.
B) Commercial paper generally carries an interest rate below the prime rate.
C) Commercial paper is sold to money market mutual funds, as well as to other financial institutions and nonfinancial corporations.
D) Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
Q3) A bank with fluctuating deposit liabilities in a static community will tend to follow creative banking practices when approving loans.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
18
Chapter 17: Financial Planning and Control
Available Study Resources on Quizplus for this Chatper
91 Verified Questions
91 Flashcards
Source URL: https://quizplus.com/quiz/64669
Sample Questions
Q1) All else equal,which of the following activities should increase the financial risk of a firm?
A) decrease common stock dividends
B) issue new bonds
C) issue new common stock
D) repurchase (pay off) outstanding debt
E) an increase in the fixed operating costs
Q2) Which of the following is a key determinant of financial leverage?
A) Level of debt.
B) Technology.
C) Labor costs.
D) Amount of fixed assets used by the firm.
E) Variable cost of goods sold.
Q3) Breakeven analysis can involve determining the magnitude of the firm's profit or losses at output levels on and around the point where revenues equal costs.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: project Cash Flows and Risk
Available Study Resources on Quizplus for this Chatper
5 Verified Questions
5 Flashcards
Source URL: https://quizplus.com/quiz/64662
Sample Questions
Q1) A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses MACRS accelerated depreciation than if it uses the optional straight-line alternative,other things being equal.
A)True
B)False
Q2) Other things held constant,which of the following would increase the NPV of a project being considered?
A) A shift from MACRS to straight-line depreciation.
B) Making the initial investment in the first year rather than spreading it over the first 3 years.
C) A decrease in the discount rate associated with the project.
D) The sale of the old machine, in a replacement decision, at a capital loss rather than at book value.
E) An increase in required working capital.
To view all questions and flashcards with answers, click on the resource link above. Page 20