Principles of Finance Test
Bank
Course Introduction
Principles of Finance introduces students to the foundational concepts and tools essential for understanding financial management and decision-making within organizations. The course covers topics such as the time value of money, risk and return, valuation of stocks and bonds, capital budgeting, financial analysis, and the functioning of financial markets. Students will learn how to apply theoretical principles to real-world financial problems, develop critical thinking skills related to investment decisions, and gain insights into the ethical considerations inherent in financial practices. This course is designed as a basis for more advanced studies in finance and prepares students for professional roles in business and finance sectors.
Recommended Textbook
Foundations of Financial Management 15th Edition by Stanley B. Block
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2215 Verified Questions
2215 Flashcards
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Chapter 1: The Goals and Activities of Financial Management
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) When a corporation uses the financial markets to raise new funds, the sale of securities is made in the
A)primary market.
B)secondary market.
C)online market.
D)third market.
Answer: A
Q2) The Sarbanes-Oxley Act set up the Public Company Accounting Oversight Board with the responsibility for all of the following except
A)auditing standards within companies.
B)controlling the quality of audits.
C)certifying the competence of financial executives.
D)setting rules and standards for the independence of auditors.
Answer: C
Q3) Social responsibility and profit maximization are synonymous.
A)True
B)False
Answer: False
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Chapter 2: Review of Accounting
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Sample Questions
Q1) How many of the following items are found on the balance sheet, rather than the income statement?
Accounts receivable
Retained earnings
Income tax expense
Accrued expenses
Cash
Selling and administrative expenses
Plant and equipment
Operating expense
Marketable securities
Interest expense
A)Three of these items are found on the balance sheet.
B)Four of these items are found on the balance sheet.
C)Five of these items are found on the balance sheet.
D)Six of these items are found on the balance sheet.
Answer: D
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) A firm has a debt-to-equity ratio of 40%, a debt of $250,000, and a net income of $100,000. The return on equity is
A)60%.
B)16%.
C)30%.
D)There's not enough information to determine the return on equity.
Answer: B
Q2) Disinflation may cause
A)an increase in the value of gold, silver, and gems.
B)a reduced required return demanded by investors on financial assets.
C)additional profits through falling inventory costs.
D)None of the options
Answer: B
Q3) Which of the following is not an asset utilization ratio?
A)Inventory turnover
B)Return on assets
C)Fixed asset turnover
D)Average collection period
Answer: B
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) The finance department should work independently without input from other departments because there may be significant biases when creating pro formas.
A)True
B)False
Q2) A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
A)$7,500
B)$8,000
C)$7,900
D)$8,100
Q3) Wiggles Right forecasted sales of $5,000 in October, $4,000 in November, and $4,000 in December. All sales are on credit. 40% is collected in the month of the sale, and the remainder in the following month. How much is collected from accounts receivable in November?
A)$5,400
B)$4,800
C)$6,000
D)$4,600
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Page 6
Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Linear break-even analysis assumes that costs are linear functions of volume.
A)True
B)False
Q2) From Finance in Action - Global, we can correctly assume that
A)Japanese firms routinely employ high financial leverage.
B)Japanese firms prefer a position of low operating leverage.
C)Japanese firms tend to react aggressively to volume changes.
D)Japanese firms routinely employ high financial leverage and tend to react aggressively to volume changes.
Q3) A lower price for the firm's product will reduce the firm's break-even point.
A)True
B)False
Q4) A factory that relies on highly technical machinery may choose to reduce its overall leverage position by
A)selling its machinery.
B)increasing its accounts receivable.
C)utilizing a higher level of equity.
D)decreasing their variable costs per unit.
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7
Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) An aggressive working capital policy would have which of the following characteristics?
A)A high ratio of long-term debt to fixed assets
B)A low ratio of short-term debt to fixed assets
C)A high ratio of short-term debt to long-term sources of funds
D)A short average collection period
Q2) As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity.
A)True
B)False
Q3) Short-term interest rates are more dependent upon inflation than on current demand for money.
A)True
B)False
Q4) Permanent current assets are not similar to fixed assets because they are fully liquidated within the year.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) The cash-generating process for a firm is continuous, even though cash flow can be sporadic.
A)True
B)False
Q2) Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.
A)True
B)False
Q3) Use of the economic order quantity
A)determines the reorder point.
B)provides the lowest overall inventory costs.
C)determines the safety stock.
D)All of the options
Q4) The three primary policy variables to consider when extending credit include all of the following except
A)credit standards.
B)the level of inflation.
C)the terms of trade.
D)collection policy.
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Chapter 8: Sources of Short-Term Financing
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122 Verified Questions
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Sample Questions
Q1) If you borrow $15,000 at $1,000 interest for one year, what is your effective interest cost for the following payment plans?
Semiannual payments.
Q2) On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.
A)True
B)False
Q3) Compensating balances are important for banks because their existence allows them to make loans at lower quoted rates.
A)True
B)False
Q4) LIBOR is
A)a resource used in production.
B)an interest rate paid on Eurodollar loans in the London market.
C)an interest rate paid by European firms when they borrow Eurodollar deposits from U.S.banks.
D)the interest rate paid by the British government on its long-term bonds.
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) As the discount rate becomes higher and higher, the present value of inflows approaches
A)0.
B)minus infinity.
C)plus infinity.
D)More information is needed.
Q2) You are to receive $12,000 at the end of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?
A)Present value of an annuity of $1
B)Future value of an annuity of $1
C)Present value of $1
D)Future value of $1
Q3) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?
A)$3,633
B)$9,250
C)$13,113
D)$15,445
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) High-risk corporate bonds are as risky as junk bonds.
A)True
B)False
Q2) Will an increase in inflation have a larger impact on the price of a bond or preferred stock?
A)The bond.
B)The preferred stock.
C)The impact will be the same.
D)There is not enough information to determine the relative impact.
Q3) Market Enterprises would like to issue bonds and needs to determine the approximate rate they would need to pay investors. A firm with similar risk recently issued bonds with the following current features: a 5% coupon rate, 10 years until maturity, and a current price of $1,150. At what rate would Market Enterprises expect to issue their bonds, assuming annual interest payments? (Solve this problem using either Excel's "Goal Seek" function or a financial calculator.)
A)3.2%
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Page 12
Chapter 11: Cost of Capital
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Sample Questions
Q1) Tobin's Barbeque has a bank loan at 8% interest and an after-tax cost of debt of 6%. What will the after-tax cost of debt be when the loan is due if a new loan is taken out yielding 11%.
A)7.52%
B)8.25%
C)13.33%
D)None of these options
Q2) All of the following are important considerations for minimizing the cost of capital except:
A)future inflation rates
B)industry debt ratios
C)future economic conditions
D)current coupon rates of outstanding debt
Q3) Retained earnings has a cost associated with it because A)new funds must be raised.
B)there is an opportunity cost associated with stockholder funds.
C)K<sub>e</sub> > g.
D)flotation costs increase the cost of funding.
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) Under MACRS depreciation, taxes paid in the first year of an asset's life are subtracted from the base used to calculate depreciation expense. It would be inaccurate and inappropriate to adjust for tax savings in calculating a depreciable base.
A)True
B)False
Q2) The modified internal rate of return method assumes that inflows are reinvested at 80% of the internal rate of return.
A)True
B)False
Q3) Which of the following is not a step in creating the net present value profile?
A)Determine the net present value at a zero discount rate.
B)Determine the net present value at a normal discount rate.
C)Determine the project's internal rate of return.
D)Determine the payback for the project.
Q4) Under MACRS depreciation, there are no tax credits for the purpose of calculating the base for depreciation expenses.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) In order to reduce risk in a firm, the firm would seek to enter a business that
A)has a high positive correlation with its present business.
B)has a zero correlation with its present business.
C)has a high negative correlation with its present business.
D)has a high negative variation with its present business.
Q2) Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's stock price.
A)True
B)False
Q3) Simulation models allow the planner to
A)reduce the standard deviations of projects.
B)test possible changes in each variable.
C)deal with the uncertainty in forecasting outcomes.
D)test possible changes in each variable and deal with the uncertainty in forecasting outcomes.
Q4) The standard deviation can be defined as
A) \(\sqrt { \Sigma ( D - \bar { D } ) ^ { 2 } P }\)
B) \(\sqrt { \Sigma ( D - \bar { D } ) P }\)
C) \(\sqrt { ( D - \bar { D } ) P }\)
D) \(\sqrt { ( \bar { D } - D ) P }\)
Page 15
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Chapter 14: Capital Markets
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Sample Questions
Q1) The European Central Bank that was created with the European Monetary Union has no control over monetary policy but is responsible for clearing transactions between the countries.
A)True
B)False
Q2) When an investor buys stock in the stock market, he is purchasing shares from a company.
Investors purchase shares from the company only in the initial offering.
A)True
B)False
Q3) Which of the following is false regarding decimalization?
A)Bid-ask spreads have decreased.
B)Decimalization makes trading easier for the common investor.
C)It's difficult for trading screens to adjust to decimals.
D)Professional traders complain that trading profits have declined.
Q4) Regional exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) Which of the following is an advantage to private bond placement over public offerings?
A)Higher interest costs
B)Greater flexibility in negotiating terms
C)Higher SEC registration fees
D)Lower interest costs
Q2) Which of the following is not an advantage of private placement?
A)No expensive registration process
B)Typically lower interest rates
C)More flexibility in negotiation
D)No extensive public relations requirements
Q3) In a public distribution, the dealer group will generally pay a A)higher price for the stock than the public.
B)lower price for the stock than the managing investment banker.
C)higher price for the stock than the managing investment banker.
D)lower price for the stock than members of the investment banking syndicate group.
Q4) The top 10 underwriters in the world are all large U.S. firms.
A)True
B)False
17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Because of the legal problems associated with specific asset claims in a secured bond offering, the trend is for companies to issue more debentures.
A)True
B)False
Q2) A capital (or "financing") lease usually calls for an annual expense deduction equal to the lease payment.
This is more indicative of an "operating" lease.
A)True
B)False
Q3) Investors consider which of the following to be the most important measure of bond returns?
A)The coupon rate
B)The yield to maturity
C)The current yield
D)None of these options
Q4) Par value and face value on a bond generally are the same.
A)True
B)False
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Page 18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Generally, the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors.
A)True
B)False
Q2) Which would NOT be considered an ADR stock in the U.S.?
A)Heineken
B)Nestle
C)Sony
D)Intel
Q3) The "convertible exchangeable" feature of preferred shares gives the holder the sole right to exchange their preferred stock for common stock.
A)True
B)False
Q4) American Depository Receipts
A)have annual reports and financial statements presented in English.
B)pay dividends in dollars.
C)are more liquid and less expensive to buy than foreign stock.
D)All of these are true.
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Stock dividends may be utilized to provide information to investors about growing companies.
A)True
B)False
Q2) When a firm that previously paid regular dividends ceases to do so, the stock is ex-dividend until the firm resumes regular dividend payments.
A)True
B)False
Q3) The primary purpose of a stock split is to
A)indicate the firm's desire to retain funds.
B)increase the investor's overall wealth.
C)reduce the threat of a takeover by creating more shares.
D)bring the stock price to a lower trading range.
Q4) A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into maturity.
A)True
B)False
Q5) The stockholders' equity portion of Brimstone Tire Company follows:
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Chapter 19: Convertibles, Warrants and Derivatives
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Sample Questions
Q1) The conversion price divided into the market value of a convertible bond provides the conversion ratio.
Face value is used, rather than market price.
A)True
B)False
Q2) One advantage to the corporation in selling a convertible bond is
A)the interest rate on a convertible is lower than a straight debt issue of equal risk.
B)the bond may never get converted into common stock and create dilution.
C)if interest rates fall, the bond is likely to be refunded.
D)All of these options
Q3) A call provision is a commonly used device by a corporation to force conversion into common stock.
A)True
B)False
Q4) When the market price of a common stock rises above the conversion price, the convertible should always be converted immediately before it drops.
A)True
B)False
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21
Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) A tax loss carryforward is a benefit to the acquired firm's shareholders.
A)True
B)False
Q2) Under a two-step buyout procedure
A)shareholders receive a higher total price than if a single offer is made.
B)the second offer is at a higher price per share.
C)shareholders are encouraged to react quickly to the offer.
D)Two of the options are correct.
Q3) Leveraged takeovers occur to firms that have an unusually large cash/total assets position.
A)True
B)False
Q4) The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.
A)True
B)False
Q5) Sandler Inc. plans to acquire Young Corp. Information on each for last year and today, the last day of that period, follows (all shares outstanding are common shares):
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Chapter 21: International Financial Management
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Sample Questions
Q1) Which of the following statements about foreign affiliates is (are) true?
A)In general, foreign affiliates are more profitable than domestic businesses.
B)Foreign affiliates usually lower the portfolio risk of the parent company.
C)Foreign affiliates may have a significant positive impact on the host company's economic growth, employment, trade, and balance of payments.
D)All of these options are true.
Q2) Legal, political, and economic factors are most conducive to which form of multinational corporation (MNC) organization?
A)Exporter/importer
B)Licensing agreements
C)Joint ventures
D)Fully owned foreign subsidiaries
Q3) Transaction exposure results in foreign exchange gains and losses.
A)True
B)False
Q4) A forward exchange rate can be used to help establish the value of a currency at a future point in time.
A)True
B)False
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