Principles of Finance
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Course Introduction
Principles of Finance introduces students to the fundamental concepts and tools used in financial decision-making. The course covers the role of financial markets and institutions, the time value of money, risk and return analysis, valuation of assets such as stocks and bonds, capital budgeting, and the basics of financial statement analysis. By exploring these core topics, students develop an understanding of how individuals and organizations manage financial resources to achieve their objectives, laying a solid foundation for more advanced studies in finance and related business fields.
Recommended Textbook
M Finance 4th Edition by Marcia Cornett
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14 Chapters
1727 Verified Questions
1727 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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71 Flashcards
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Sample Questions
Q1) This group is elected by stockholders to oversee management in a corporation.
A) chief counselors
B) chief executives
C) board of directors
D) auditors
Answer: C
Q2) Agency problems exist in which forms of business ownership?
A) sole proprietorship
B) S corporation
C) partnership
D) corporation
Answer: D
Q3) A potential future negative impact to value and/or cash flows is often discussed in terms of probability of loss and the expected magnitude of the loss.This is called A) options.
B) standard deviation.
C) coefficient of variation.
D) risk.
Answer: D
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Zoe's Dog Biscuits,Inc.has net cash flows from operating activities for the last year of $226 million.The income statement shows that net income is $150 million and depreciation expense is $85 million.During the year,the change in inventory on the balance sheet was an increase of $14 million,change in accrued wages and taxes was an increase of $15 million and change in accounts payable was an increase of $10 million.At the beginning of the year the balance of accounts receivable was $45 million.What was the end of year balance for accounts receivable?
A) $20 million
B) $25 million
C) $45 million
D) $65 million
Answer: D
Q2) Net operating profit after taxes (NOPAT)is defined as which of the following?
A) net profit a firm earns before taxes, but after any financing costs
B) net profit a firm earns after taxes, and after any financing cost
C) net profit a firm earns after taxes, but before any financing costs
D) net profit a firm earns before taxes, and before any financing cost
Answer: C
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Page 4
Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Burt's TVs has current liabilities of $25 million.Cash makes up 40 percent of the current assets and accounts receivable makes up another 20 percent of current assets.Burt's current ratio = 0.85 times.What is the value of inventory listed on the firm's balance sheet?
A) $4.25m.
B) $8.5m.
C) $10m.
D) $40m.
Answer: B
Q2) Which of the following will increase a firm's quick ratio assuming no other accounts change?
A) a reduction in accounts payable
B) an increase in accounts receivable
C) an increase in marketable securities
D) all of these choices are correct.
Answer: D
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) How many years (and months)will it take $4 million to grow to $7 million with an annual interest rate of 12 percent?
A) 4 years and 1.92 months
B) 4 years and 11.28 months
C) 5 years and 6.54 months
D) 5 years and 10.86 months
Q2) Determine the interest rate earned on a $500 deposit when $650 is paid back in one year.
A) 0.77 percent
B) 1.30 percent
C) 30.0 percent
D) 77.0 percent
Q3) Which is more valuable,receiving $1,000 today or receiving $1,200 in 3 years if interest rates are 7 percent?
A) receiving $1,000 today
B) receiving $1,200 in 3 years
C) They are worth the same amount.
D) need more information to make a determination
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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Sample Questions
Q1) A perpetuity pays $250 per year and interest rates are 5.5 percent.How much would its value change if interest increased to 8.5 percent? Did the value increase or decrease?
A) $1,604.27; increase
B) $1,604.27; decrease
C) $1,508.29; increase
D) $1,508.29; decrease
Q2) You wish to buy a $15,000 car.The dealer offers you a 4-year loan with a 9 percent APR.What are the monthly payments?
A) $260.78
B) $312.50
C) $373.28
D) $3,820.56
Q3) If the present value of an ordinary,4-year annuity is $1,000 and interest rates are 6 percent,what is the present value of the same annuity due?
A) $943.40
B) $1,000.00
C) $1,040.00
D) $1,060.00
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) All of the following special provisions benefit security holders EXCEPT A) tax-free status.
B) convertibility.
C) callability.
D) All of these choices are correct.
Q2) All of the following are factors that influence interest rates for individual securities EXCEPT
A) the security's term to maturity.
B) inflation.
C) special provisions regarding the use of funds raised by a particular security issuer.
D) the home mortgage rate.
Q3) The real interest rate is
A) the rate charged to the corporations with the best credit rating or least amount of default risk.
B) the rate that a security would pay if no inflation were expected over its holding period.
C) the rate that a security would pay if the security had no maturity risk.
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) A 5 percent coupon bond has 10 years to maturity and could be called in two years.If the bond is called,investors will earn 6.2 percent.The call premium is one year of coupon payments.If coupon payments are made semi-annually and par value is $1,000,what is the bond's yield to maturity?
A) 2.36 percent
B) 4.72 percent
C) 5.18 percent
D) 6.49 percent
Q2) Which of the following statements is correct?
A) There is an inverse relationship between bond prices and bond yields.
B) There is a positive relationship between bond prices and bond yields.
C) There is no relationship between bond prices and bond yields.
D) The relationship between bond prices and bond yields is dependent on the market interest rate.
Q3) Many bonds are not callable,but for those that are,which of following is a common feature?
A) Called any time after 2 years of issuance.
B) Called any time after 2 years from the time an investor buys the bond.
C) Called any time after 10 years of issuance.
D) Called any time after 10 years from the time an investor buys the bond.
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Chapter 8: Valuing Stocks
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Sample Questions
Q1) Suppose that a firm's recent earnings per share and dividends per share are $3.00 and $1.50,respectively.Both are expected to grow at 10 percent.However,the firm's current P/E ratio of 20 seems high for this growth rate.The P/E ratio is expected to fall to 16 within five years.Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years.Then discount these cash flows using a 14 percent required rate.
A) $31.68
B) $40.15
C) $46.89
D) $60.00
Q2) GEN has 10 million shares outstanding and a stock price of $89.25.What is GEN's market capitalization?
A) $89,250,000,000
B) $89,250,000
C) $892,500,000
D) $892,500
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) We commonly measure the risk-return relationship using which of the following?
A) Coefficient of variation
B) Correlation coefficient
C) Standard deviation
D) Expected returns
Q2) Which of the following statements is correct?
A) A dominant portfolio has the best risk-return relationship as compared to other portfolios.
B) It is not necessarily true that when an investment achieves a high return that it is risky.
C) A low standard deviation means that the investment is less likely to achieve high returns, which means that it is more risky.
D) None of the statements are correct.
Q3) Which of the following are investor diversification problems?
A) Many employees hold mostly their employer's stocks as investments.
B) Many households hold relatively few individual stocks-the median is three.
C) Investors seem to prefer local firms thereby limiting diversification opportunities.
D) All of the options are investor diversification problems.
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11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) Stock A has a required return of 12 percent.Stock B has a required return of 15 percent.Assume a risk-free rate of 4.75 percent.Which of the following is a correct statement about the two stocks?
A) Stock A is riskier.
B) Stock B is riskier.
C) The stocks have the same risk.
D) We would need to know if the markets are efficient to answer this question.
Q2) Which of the following is the asset pricing theory based on a beta,a measure of market risk?
A) behavioral asset pricing model
B) capital asset pricing model
C) efficient markets asset pricing model
D) efficient market hypothesis
Q3) A company has a beta of 4.5.If the market return is expected to be 14 percent and the risk-free rate is 7 percent,what is the company's risk premium?
A) 7.0 percent
B) 25.5 percent
C) 31.5 percent
D) 38.5 percent
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Page 12
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Paper Exchange has 80 million shares of common stock outstanding,60 million shares of preferred stock outstanding,and 50 thousand bonds.If the common shares are selling for $20 per share,the preferred shares are selling for $10 per share,and the bonds are selling for 105 percent of par,what would be the weight used for preferred stock in the computation of Paper's WACC?
A) 26.64 percent
B) 27.27 percent
C) 33.33 percent
D) 42.84 percent
Q2) Which of the following statements is true?
A) If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
B) If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.
C) If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.
D) The new project's risk is not a factor in determining its cost of capital.
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000.This is an example of a(n):
A) opportunity cost.
B) sunk cost.
C) incremental cash flow.
D) relevant cash flow.
Q2) The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as:
A) substitute and complement.
B) pro forma analysis.
C) incremental cash flows.
D) estimation and depreciation analysis.
Q3) Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as:
A) complementary effects.
B) substitutionary effects.
C) sunk effects.
D) marginal effects.
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) We accept projects with a positive NPV because it means that:
A) we have recovered all our costs.
B) we are creating wealth for shareholders.
C) the project's expected return exceeds the cost of capital.
D) all of the options.
Q2) Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?
A) Discounted payback
B) Net present value
C) Internal rate of return
D) Profitability index
Q3) A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:
A) IRR.
B) EAR.
C) NPV.
D) MIRR.
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) All of the following are the different types of float the firm may experience in its collections EXCEPT:
A) mail float.
B) availability float.
C) check kiting float.
D) processing float.
Q2) Rose N More Resources faces a smooth annual demand for cash of $50 million,incurs transaction costs of $350 every time they sell marketable securities,and can earn 5.2 percent on their marketable securities.What will be their optimal cash replenishment level?
A) $18,708.29
B) $187,082.87
C) $82,041.27
D) $820,412.65
Q3) If a firm has a cash cycle of 30 days and an operating cycle of 92 days,what is its average payment period?
A) 92 days
B) 58 days
C) 34 days
D) 30 days
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