Principles of Finance
Pre-Test Questions
Course Introduction
Principles of Finance provides an introduction to the fundamental concepts and tools used in the field of finance. The course covers topics such as time value of money, risk and return, valuation of stocks and bonds, capital budgeting, financial statement analysis, and the role of financial markets and institutions. Students learn how financial decisions are made within firms and the impact of these decisions on corporate value. Through case studies and practical exercises, the course equips students with essential skills for analyzing financial information and making informed financial decisions both in personal finance and within organizations.
Recommended Textbook Analysis for Financial Management 10th Edition by Robert C. Higgins
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9 Chapters
220 Verified Questions
220 Flashcards
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Page 2
Chapter 1: Interpreting Financial Statements
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24 Verified Questions
24 Flashcards
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Sample Questions
Q1) Playdough Products earned net income of $400,000 in 2011.The firm increased its accounts receivable during the year by $250,000.The book value of its assets declined by the year's depreciation charge,which was $180,000,and the market value of its assets increased by $20,000.Based only on this information,how much cash did Playdough Products generate during the year?
Please ignore taxes for this problem.
Answer: Playdough Products generated $330,000 of cash during the year.The $400,000 net income ignores the fact that accounts receivable rose $250,000,a use of cash.It also treats $180,000 depreciation as an expense,whereas it is a noncash charge.The $20,000 increase in market value of assets adds to the value of the business,but is not a cash flow.Summary: 11ea6dd0_94f0_41ec_9009_03070a067a24_TB2315_00
Q2) Which one of the following is a use of cash?
A) increase in notes payable
B) increase in inventory
C) increase in long-term debt
D) decrease in accounts receivable
E) increase in common stock
Answer: B
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Page 3
Chapter 2: Evaluating Financial Performance
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23 Flashcards
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Sample Questions
Q1) Use Limited Brands,Inc.'s financial statements,above,to answer the following question.Use the company's operating profit as an approximation of its EBIT,and assume a 40% tax rate for your calculations.What percentage decline in earnings before interest and taxes could Limited Brands have sustained in fiscal years 2006 and 2007 before failing to cover:
a)Interest and principal repayment requirements; b)Interest,principal and common dividend payments?
Answer: 11ea6dd0_94ef_5789_9009_491ff1f52c96_TB2315_00 (Note that principal payment in year t equals current portion of long-term debt in year t-1.)
Q2) Assume a 365-day year for your calculations.The inventory turnover,based on cost of goods sold,at the end of 2012 is:
A) 5.2
B) 24.3
C) 28.8
D) 35.7
E) None of the above. Answer: A
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Page 4
Chapter 3: Financial Forecasting
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Sample Questions
Q1) Edna's Laundry Services just completed pro forma statements using the percentage of sales approach.The pro forma shows a projected external financing need of -$5,500.Interpret this figure.What are the firm's options in this case?
Answer: A negative value implies that the company has excess cash above its desired minimum.With a negative external financing need,the firm has a surplus of funds that it can use to reduce current liabilities,reduce long-term debt,buy back common stock,or increase dividends.If acceptable opportunities exist,the firm might also use the extra funds to purchase fixed assets,thereby increasing its potential growth,should that action be warranted.
Q2) Financial planning:
A) focuses solely on the short-term outlook for a firm.
B) is a process that firms employ only when major changes to a firm's operations are anticipated.
C) is a process that firms undergo once every five years.
D) considers multiple options and scenarios for the next two to five years.
E) provides minimal benefits for firms that are highly responsive to economic changes. Answer: D
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Page 5
Chapter 4: Managing Growth
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Sample Questions
Q1) The sustainable growth rate of a firm is best described as the:
A) minimum growth rate achievable assuming a 100 percent retention ratio.
B) minimum growth rate achievable if the firm maintains a constant equity multiplier.
C) maximum growth rate achievable excluding external financing of any kind.
D) maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
E) maximum growth rate achievable with unlimited debt financing.
F) None of the above.
Q2) Use the information from Boss's annual financial statements.What is the difference between the sustainable growth and actual growth rates for 2011?
A) - 11.40%
B) - 7.09%
C) -3.04%
D) 5.47%
E) 13.98%
F) 21.40%
Q3) Why do financial managers need to understand the implications of the sustainable rate of growth?
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6
Chapter 5: Financial Instruments and Markets
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22 Flashcards
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Sample Questions
Q1) Which of the following statements related to market efficiency tends to be supported by current evidence?
I.Markets tend to respond quickly to new information.
II.It is difficult for the typical investor to earn above-average returns without taking above-average risks.
III.Short-run prices are difficult to predict accurately based on public information.
IV.Markets are most likely weak form efficient.
A) I and III only
B) II and IV only
C) I and IV only
D) I, III, and IV only
E) I, II, and III only
F) None of the above.
Q2) If the stock market in the United States is efficient,how do you explain the fact that some people make very high returns?
Would it be more difficult to reconcile very high returns with efficient markets if the same people made extraordinary returns year after year?
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Chapter 6: The Financing Decision
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Sample Questions
Q1) Calculate next year's earnings per share assuming Nile raises the $100 million of new debt.
Q2) For next year,calculate Squamish's times burden covered ratio if Squamish sells 2 million new shares at $20 a share.
A) 1.03
B) 1.38 C) 1.60 D) 1.89 E) 2.10
F) None of the above.
Q3) Calculate next year's times burden covered ratio and earnings per share if Nile sells 2 million new shares at $50 a share instead of raising new debt.
Q4) Can a company incur costs of financial distress without ever going bankrupt? Explain.What is the nature of these costs?
Q5) Assume Nile raises $100 million of new debt at the end of 2011,at an interest rate of 7%.
a.Calculate the firm's pro forma 2012 times interest earned (TIE)ratio.
b.Calculate the percentage EBIT can fall (below expected EBIT)before interest coverage dips below 1.0.
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Chapter 7: Discounted Cash Flow Techniques
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Sample Questions
Q1) When making a capital budgeting decision,which of the following is/are NOT relevant?
I.The size of a cash flow.
II.The risk of a cash flow.
III.The accounting earnings from a cash flow.
IV.The timing of a cash flow.
A) I only
B) II only
C) III only
D) II and III only
E) III and IV only
F) They are all relevant
Q2) Ten years ago you invested $1,000 for 10 shares of Steeze,Inc.common stock.You sold the shares recently for $2,000.While you owned the stock it paid $10.08 per share in annual dividends.What was your rate of return on Steeze stock?
Q3) At $1,000 par value,10 percent coupon bond matures in 20 years.If the price of the bond is $1,196.80,what is the yield to maturity on the bond? Assume interest is paid annually.
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Chapter 8: Risk Analysis in Investment Decisions
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30 Verified Questions
30 Flashcards
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Sample Questions
Q1) What is the present value of a cash flow stream of $10,000 per year annually for 11 years that then grows at 2 percent per year forever? Assume the appropriate discount rate is 12 percent.
Q2) Suppose that your company's weighted-average cost of capital is 9 percent.Your company is planning to undertake a project with an internal rate of return of 12%,but you believe that this project is not a good investment for the firm.What logical arguments might you use to convince your boss to forego the project despite its high rate of return? Is it possible that making investments with expected returns higher than your company's cost of capital will destroy value? If so,how?
Q3) Estimate FM's after-tax cost of equity capital.
A) 4.50%
B) 6.92%
C) 7.93%
D) 12.20%
E) 17.48%
F) None of the above.
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Chapter 9: Business Valuation and Corporate Restructuring
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Sample Questions
Q1) Estimate the fair market value of Kenmore Air's equity per share at the end of 2012 under the following assumptions:
a.EBIT in year 2016 will be $200 million.
b.At year-end 2016,Kenmore Air has reached maturity,and analysts expect its equity will sell for 12 times year 2016 net income.
c.At year-end 2016,Kenmore Air has $250 million of interest-bearing liabilities outstanding at an average interest rate of 10 percent.
Q2) Assume that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.What is the maximum acquisition price (in $ millions)Macklemore should pay to acquire BSL's equity at the end of 2010?
A) $3,484.68
B) $4,723.26
C) $4,938.06
D) $5,554.68
E) $6,343.26
F) None of the above.
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