Principles of Finance
Mock Exam
Course Introduction
Principles of Finance provides students with a foundational understanding of the financial systems, markets, and instruments that underpin modern economies. The course explores essential concepts such as time value of money, risk and return, valuation of stocks and bonds, financial statement analysis, and the role of financial institutions. Students also examine the decision-making processes relevant to personal and corporate finance, including capital budgeting, capital structure, and working capital management. Through case studies and practical examples, learners develop analytical skills necessary to interpret financial information and make informed financial decisions.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) A sole proprietorship is the most desirable business form in all circumstances.
A)True
B)False
Answer: False
Q2) The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return.
A)True
B)False
Answer: False
Q3) Assume that you are starting a business.Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon.What type of business organization would you choose?
A)Corporation
B)General Partnership
C)Sole proprietorship
D)Limited partnership
Answer: A
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Chapter 2: Firms and the Financial Market
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Q1) Each of the following is true of Mutual Funds EXCEPT
A)Funds can be classified as load or no-load funds.
B)Mutual Fund shares must be bought from or sold to the Fund by investors.
C)An index fund is the fund with the highest expenses payable by investors.
D)The NAV is the total value of stock held by the fund divided by the number of outstanding shares in the mutual fund.
Answer: C
Q2) Mutual Funds and ETFs provide the investor a chance to diversify without having to buy shares in numerous corporations.
A)True
B)False
Answer: True
Q3) Preferred stock prices are solely dependent on investors' expectations of future cash flows to the corporation.
A)True
B)False
Answer: False
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) Patriot Corporation purchased manufacturing equipment with an expected useful life of five years.The purchase of the machinery would be shown as
A)an expense on the balance sheet.
B)an expense on the income statement.
C)an asset on the balance sheet.
D)both an expense and an asset.
Answer: C
Q2) Which of the following best describes a balance sheet?
A)Reports cash receipts and cash disbursements for a specific accounting period
B)Reports investment activities for a specified accounting period
C)Reports revenues and expenses for a specific accounting period
D)Reports the amount and composition of assets and liabilities at a specified point in time
Answer: D
Q3) The highest marginal corporate tax rate is 35%.
A)True
B)False
Answer: False
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) The DuPont method decomposes return on equity into
A)return on assets and the debt ratio.
B)return on assets and the equity multiplier.
C)operating income and inventory turnover.
D)net profit margin and fixed asset turnover.
Q2) Which of the following is included in the denominator of the times-interest-earned ratio?
A)Lease payments
B)Principal payments
C)Interest expense
D)Gross profit
Q3) Since 2013,ABC's efficiency at using its assets has A)improved.
B)deteriorated.
C)remained the same.
D)been variable across components of the efficiency measures.
Q4) Companies chosen for benchmmarks should be of similar size and in the same or a similar industry.
A)True
B)False
Page 6
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?
A)51.7%
B)6.7%
C)10.9%
D)6.1%
Q2) The present value of a single sum
A)increases as the discount rate decreases.
B)decreases as the discount rate decreases.
C)increases as the number of discount periods increases.
D)increases as the discount rate increases.
E)none of the above.
Q3) A monthly credit card interest rate of 1.5% is equal to and effective annual rate of 19.56%
A)True
B)False
Q4) Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years.What annual rate of interest will you be paying?
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) As time increases for an amortized loan,the ________ decreases.
A)interest paid per payment
B)principal paid per payment
C)the outstanding loan balance
D)both A and C
Q2) What is the present value of the following perpetuities?
a.$600 discounted at 7%
b.$450 discounted at 12%
c.$1,000 discounted at 6%
d.$880 discounted at 9%
Q3) Holding all other variables constant,payment per period for an annuity due will be higher than an ordinary annuity.
A)True
B)False
Q4) You have just purchased a car from Friendly Sam.The selling price of the car is $6,500.If you pay $500 down,then your monthly payments are $317.22.The annual interest rate is 24%.How many payments must you make?
Q5) If your opportunity cost is 12%,how much will you pay for a bond that pays $100 per year forever?
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Which of the following best measures an asset's risk?
A)Expected return
B)The standard deviation
C)The probability distribution
D)The cash return
Q2) Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.
A)True
B)False
Q3) Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?
A)2.98%
B)3.73%
C)3.95%
D)There is insufficient information to derive an answer.
Q4) If a market is weak form efficient,an investor can make higher than expected profits by studying the past price patterns of a stock.
A)True
B)False
9
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) You are considering investing in Ford Motor Company.Which of the following is an example of diversifiable risk?
A)Risk resulting from the possibility of a stock market crash
B)Risk resulting from uncertainty regarding a possible strike against Ford
C)Risk resulting from an expected recession
D)Risk resulting from interest rates decreasing
Q2) You are considering a portfolio consisting of equal investments in the stocks Northbank Inc.and Tropical Escapes Inc.Returns on the 2 stocks under various conditions are shown below.
Scenario Return (%)Return % Return %
Probability Northbank Tropical Portfolio
0.20 4% 16%
0.50 10% 10%
0.30 20% -10%
Calculate the expected rate of and the standard deviation return of the portfolio.
Q3) A stock with a beta of 1.0 would on average earn the risk-free rate.
A)True
B)False
Q4) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) As the time to maturity increases,the maturity premium increases.
A)True
B)False
Q2) Pursuant to the Fisher Effect,the real interest rate is exactly equal to the nominal interest rate less the rate of inflation.
A)True
B)False
Q3) If provided the nominal rate of interest (r)of 14.2% and the anticipated rate of inflation (i)of 5.5%,what is the real rate of interest (R)?
Q4) Compare and contrast current yield and yield to maturity.
Q5) The Fisher effect can be expressed mathematically as
A)( nominal rate)= (the real rate of interest)( the inflation rate).
B)(1+ the nominal rate)= (1+the real rate of interest)(1 + the inflation rate).
C)the nominal rate)= the real rate of interest + the inflation rate).
D)the real rate of interest= the nominal rate - the inflation rate).
Q6) DAH,Inc.has issued a 12% bond that is to mature in nine years.The bond had a $1,000 par value,and interest is due to be paid semiannually.If your required rate of return is 10%,what price would you be willing to pay for the bond?
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Marble Corporation's ROE is 17%.Their dividend payout ratio is 20%.The last dividend,just paid,was $2.58.If dividends are expected to grow by the company's sustainable growth rate indefinitely,what is the current value of Marble common stock if its required return is 18%?
A)$14.33
B)$18.27
C)$47.67
D)$66.61
Q2) Is the following common stock priced correctly? If no,what is the correct price?
Price = $26.25
Required rate of return = 13%
Dividend year 0 = $2.00
Dividend year 1 = $2.10
Q3) CEOs naming friends to the board of directors and paying them more than the norm is an example of the A)agency problem.
B)preemptive right.
C)majority voting feature.
D)proxy fights.
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Page 12
Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Which of the following would be considered a capital budgeting decision?
A)Walmart purchases inventory for resale to customers.
B)Apple sells bonds and uses the proceeds to repurchase stock.
C)Goldman Sachs obtains short-term loans to finance day to day operations.
D)Pfizer develops a new therapy and brings it to market.
Q2) What is payback for Project Z?
A)Two years
B)One year
C)Zero years
D)Project Z does not payback the original investment.
Q3) The higher the discount rate,the greater the importance of the early cash flows.
A)True
B)False
Q4) With respect to the capital budgeting practices of large U.S.corporations
A)the profitability index has been gaining in popularity.
B)IRR and NPV have been gaining in popularity.
C)payback and discounted payback have been gaining in popularity.
D)IRR and NPV have declined in popularity.
Q5) Briefly describe the actual capital budgeting methods of large U.S.corporations.
Page 13
Q6) Why is it so difficult for firms to find good investment ideas?
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) The machine's IRR is
A)less than 0.
B)greater than 12 percent.
C)less than 12 percent.
D)equal to 12 percent.
Q2) Jefferson Corporation is considering an expansion project.The necessary equipment could be purchased for $15 million and shipping and installation costs are another $500,000.The project will also require an initial $2 million investment in net working capital.The company's tax rate is 40%.What is the project's initial investment outlay (in millions)?
A)$15.0
B)$15.5
C)$17.0
D)$17.5
Q3) Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.
A)True
B)False
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14
Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) Accounting break-even analysis solves for the level of sales that will result in
A)IRR = Cost of Capital.
B)net income = $0.00.
C)Free cash flow = $0.00.
D)NPV = $0.00.
Q2) In reality,anticipated cash flows are only estimates and are thus uncertain.
A)True
B)False
Q3) Real options are derivative securities that derive their value from the value of the underlying projects.
A)True
B)False
Q4) Briefly distinguish between sensitivity analysis,scenario analysis,and simulation.
Q5) In capital-budgeting decisions,simulation analysis gives a probability distribution only for cash flows.
A)True
B)False
Q6) Why is it important to consider real options in the capital budgeting process? Give two specific examples.
Page 15
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.Compute Jen and Barry's weighted average flotation cost.
A)6.6%
B)6.0%
C)9.5%
D)16.1%
Q2) Why are market values preferred to book (balance sheet)values when computing a firm's weighted average cost of capital.
Q3) The after-tax cost of debt is
A)6.20%.
B)5.40%.
C)4.60%.
D)3.80%.
Q4) The amount of debt in the firm's capital structure should include all interest-bearing debt,both long-term and short-term.
A)True
B)False
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Which of the following is part of a firm's financial structure but NOT a component of its capital structure?
A)Retained earnings
B)Mortgage bonds
C)Accounts payable
D)Both A and C
Q2) Tremont Inc.'s Total Assets =$25 million.The balance sheet shows Accounts payable and accruals totaling $7 million,common stock and retained earnings total $10 million.There is no preferred stock.What is the book value of interest bearing debt?
A)$15 million
B)$7 million
C)$18 million
D)$8 million
Q3) The enterprise value of the firm is defined as
A)(Market Value of Interest Bearing Debt-Excess Cash)+ Market Value of Equity
B)(Book Value of Interest Bearing Debt-Excess Cash)+ Market Value of Equity
C)(Book Value of Interest Bearing Debt-Excess Cash)+ Book Value of Equity
D)Market Value of Interest Bearing Debt + Market Value of Equity
Q4) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) According to the Modigliani & Miller dividend indifference theorem,if a company decreased its dividend per share,an investor would be forced to sell his common stock at a depressed price.
A)True
B)False
Q2) The stable dividend policy is the most common.
A)True
B)False
Q3) All of the following might influence a firm's dividend payment EXCEPT
A)investment opportunities.
B)investor transaction costs.
C)common stock par value.
D)flotation costs.
Q4) Which of the following would result from payment of the stock dividend?
A)Total equity would remain at $50,000,000.
B)Total equity would increase to $57,500,000.
C)Total equity would decrease to $43,478,261.
D)The effect on the equity account would depend on the market's reaction to the dividend.
Q5) Compare the Stable Dividend Payout to the Residual Dividend Policy.
Page 18
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Long-term financial plans typically encompass
A)6 to 12 months.
B)about 5 years.
C)5 to 10 years.
D)the entire lifecycle of the corporation.
Q2) Broad Cloth,Inc.'s average collection period is 15 days.The vice-president of marketing has projected credit sales of $2.million for October,$2.5 million for November and $3 million for December.Purchases equal 60% of sales and are made one month in advance of budgeted sales.Payments are made 1 month after the date of purchase.Compute payments for purchases for the months of November and December.
Q3) Based on the information in Table 2,how much short-term financing is needed by March 30,2014?
A)$110,000
B)$15,000
C)$70,000
D)$85,000
Q4) Pro forma financial statements are a required part of the firm's tax returns.
A)True
B)False
Page 19
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Chapter 18: Working Capital Management
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Sample Questions
Q1) An increase in ________ would increase a firm's current ratio and net working capital.
A)notes payable
B)inventories
C)cash
D)both B and C
Q2) Trade credit is an example of which of the following sources of financing?
A)Spontaneous
B)Temporary
C)Permanent
D)Both A and B
Q3) P.Noel's Inc.'s current ratio is 2.Current liabilities are $500,000.P.Noel's current assets equal ________ and net working capital is ________.
A)$500,000 and $1,000,000
B)$500,000 and $250,000
C)$1,000,000 and $500,000
D)$500,000 and $500,000
Q4) Cash Conversion Cycle = Operating Cycle - Accounts Payable Deferral Period. A)True
B)False
20
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Chapter 19: International Business Finance
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Sample Questions
Q1) The British pound to Swiss franc exchange rate is
A)1.4719 British pounds to the Swiss franc.
B)14.719 British pounds to the Swiss franc.
C).6794 British pounds to the Swiss franc.
D)1.0917 British pounds to the Swiss franc.
Q2) Expropriation of plant and equipment without compensation is an example of financial risk from direct foreign investments.
A)True
B)False
Q3) One U.S.dollar buys 12.9923 Mexican pesos and .7585 euros.What is the peso/euro exchange rate.
Q4) The following are the prices in the foreign exchange market between the U.S.dollar and a foreign currency (fc).Spot 0.6335US$/fc;three-month forward 0.6375US$/fc.What was the discount or premium on three-month forward for the foreign currency?
A)0.63% premium
B)0.40% premium
C)0.63% discount
D)0.40% discount
Q5) What is meant by interest rate parity?
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Assume that the current price of DEY stock is $27.50,that a 6 month call option on the stock has a strike or exercise price of $25.50,the risk free rate is 4%,and that you have calculated N(d<sub>1</sub>)as .5476 and N(d2)as .4432.Use the Black-Scholes model to calculate the price of the option.
A)$1.74
B)$4.20
C)$1.98
D)($2.50)
Q2) The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by
A)buying call options on a stock index.
B)buying put options on a stock index.
C)selling put options on a stock index.
D)buying both call and put options with the same expiration date.
Q3) If a call option's exercise price is above the stock price,then the option's intrinsic value is zero.
A)True
B)False
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