Principles of Finance
Test Preparation
Course Introduction
Principles of Finance is an introductory course designed to familiarize students with the foundational concepts and tools used in financial decision-making. The course covers essential topics such as time value of money, risk and return, asset valuation, capital budgeting, financial markets, and the role of financial institutions. Students also learn about the financial management of firms, including capital structure, dividend policy, and working capital management. Emphasis is placed on understanding how individuals, businesses, and organizations allocate resources under conditions of uncertainty to achieve financial goals. This course lays the groundwork for advanced study in finance and provides valuable skills applicable in various careers in business and economics.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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17 Chapters
1391 Verified Questions
1391 Flashcards
Source URL: https://quizplus.com/study-set/446
Page 2
Chapter 1: An overview of financial management and the financial environment
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46 Verified Questions
46 Flashcards
Source URL: https://quizplus.com/quiz/7913
Sample Questions
Q1) If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.
A)True
B)False
Answer: True
Q2) Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?
A) Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers' shareholders (the ex-partners)will now be exposed to less liability.
D) Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.
Answer: C
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Chapter 2: Financial statements, cash flow, and taxes
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) The current cash flow from existing assets is highly relevant to the investor.However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Answer: False
Q2) Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?
A) The company purchases a new piece of equipment.
B) The company repurchases common stock.
C) The company pays a dividend.
D) The company issues new common stock.
E) The company gives customers more time to pay their bills.
Answer: D
Q3) Total net operating capital is equal to net fixed assets.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Analysis of financial statements
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) Refer to Exhibit 3.1.What is the firm's TIE?
A) 1.94
B) 2.15
C) 2.39
D) 2.66
E) 2.93
Answer: D
Q2) Refer to Exhibit 3.1.What is the firm's ROA?
A) 2.70%
B) 2.97%
C) 3.26%
D) 3.59%
E) 3.95%
Answer: A
Q3) Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.
A)True
B)False Answer: True
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Chapter 4: Time value of money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) You want to purchase a motorcycle 4 years from now, and you plan to save $3, 500 per year, beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions, how much will you have 4 years from today?
A) $16, 112
B) $16, 918
C) $17, 763
D) $18, 652
E) $19, 584
Q2) What is the PV of an ordinary annuity with 10 payments of $2, 700 if the appropriate interest rate is 5.5%?
A) $16, 576
B) $17, 449
C) $18, 367
D) $19, 334
E) $20, 352
Q3) Starting to invest early for retirement reduces the benefits of compound interest.
A)True
B)False
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Chapter 5: Bonds, bond valuation, and interest rates
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.
A)True
B)False
Q2) Assume that the current corporate bond yield curve is upward sloping.Under this condition, then we could be sure that
A) The economy is not in a recession.
B) Long-term bonds are a better buy than short-term bonds.
C) Maturity risk premiums could help to explain the yield curve's upward slope.
D) Long-term interest rates are more volatile than short-term rates.
E) Inflation is expected to decline in the future.
Q3) Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
A)True
B)False
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Chapter 6: Risk and return
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146 Verified Questions
146 Flashcards
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Sample Questions
Q1) Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.
A)True
B)False
Q2) For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then
A) the past realized return must be equal to the expected return during the same period.
B) the required return must equal the realized return in all periods.
C) the expected return must be equal to both the required future return and the past realized return.
D) the expected future returns must be equal to the required return.
E) the expected future return must be less than the most recent past realized return.
Q3) A stock with a beta equal to -1.0 has zero systematic (or market)risk.
A)True
B)False
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Page 8
Chapter 7: Valuation of stocks and corporations
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D??
A) $2.20
B) $2.44
C) $2.69
D) $2.96
E) $3.25
Q2) A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
A) $16.28
B) $16.70
C) $17.13
D) $17.57
E) $18.01
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Chapter 8: Financial options and applications in corporate finance
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28 Verified Questions
28 Flashcards
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Sample Questions
Q1) BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options, other things held constant?
A) The exercise price of the option is increased.
B) The life of the option is increased, i.e., the time until it expires is lengthened.
C) The Federal Reserve takes actions that increase the risk-free rate.
D) BLW's stock price becomes more risky (higher variance).
E) BLW's stock price suddenly increases.
Q2) The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.
A)True
B)False
Q3) Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.
A)True
B)False
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Page 10
Chapter 9: The cost of capital
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Sample Questions
Q1) Granby Foods' (GF)balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%.The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million.The company has 10 million shares of stock, and the stock has a book value per share of $5.00.The current stock price is $20.00 per share, and stockholders' required rate of return, rs, is 12.25%.The company recently decided that its target capital structure should have 35% debt, with the balance being common equity.The tax rate is 40%.Calculate WACCs based on book, market, and target capital structures.What is the sum of these three WACCs?
A) 28.36%
B) 29.54%
C) 30.77%
D) 32.00%
E) 33.28%
Q2) The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
A)True B)False
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Page 11
Chapter 10: The basics of capital budgeting: evaluating cash flows
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
B) One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
C) One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future.
D) One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
E) One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.
Q2) The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.
A)True
B)False
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Page 12
Chapter 11: Cash flow estimation and risk analysis
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
A)True
B)False
Q2) We can identify the cash costs and cash inflows to a company that will result from a project.These could be called "direct inflows and outflows, " and the net difference is the direct net cash flow.If there are other costs and benefits that do not flow from or to the firm, but to other parties, these are called externalities, and they need not be considered as a part of the capital budgeting analysis.
A)True
B)False
Q3) Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.
A)True
B)False
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Chapter 12: Corporate valuation and financial planning
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41 Flashcards
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Sample Questions
Q1) Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%.However, its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions)would it have generated?
A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16
Q2) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q3) A firm's AFN must come from external sources.Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
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Chapter 13: Agency conflicts and corporate governance
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6 Flashcards
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q3) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q4) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
A) the dividend payout ratio is increasing.
B) no dividends were paid during the year.
C) the dividend payout ratio is decreasing.
D) the dollar amount of investments has decreased.
E) the dividend payout ratio has remained constant.
Q2) Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant, what is the best estimate of the stock's post-split price?
A) $50.00
B) $52.50
C) $55.13
D) $57.88
E) $60.78
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
Page 16
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Chapter 15: Capital structure decisions
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Sample Questions
Q1) Two operationally similar companies, HD and LD, have the same total assets, operating income (EBIT), tax rate, and business risk.Company HD, however, has a much higher debt ratio than LD.Also HD's basic earning power (BEP)exceeds its cost of debt (rd).Which of the following statements is CORRECT?
A) HD should have a higher times interest earned (TIE)ratio than LD.
B) HD should have a higher return on equity (ROE)than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
C) Given that BEP > rd, HD's stock price must exceed that of LD.
D) Given that BEP > rd, LD's stock price must exceed that of HD.
E) HD should have a higher return on assets (ROA)than LD.
Q2) Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage only affects EBIT.
A)True
B)False
Q3) As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components.
A)True
B)False
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Chapter 16: Supply chains and working capital management
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138 Verified Questions
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Sample Questions
Q1) Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.
A)True
B)False
Q2) Hinkle Corporation buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $550, 000 per year.On average, what is the dollar amount of total trade credit (costly + free)the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
A) $90, 411
B) $94, 932
C) $99, 678
D) $104, 662
E) $109, 895
Q3) A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.
A)True
B)False
Page 18
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Chapter 17: Multinational financial management
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Sample Questions
Q1) Multinational financial management requires that financial analysts consider the effects of changing currency values.
A)True
B)False
Q2) Suppose Yates Inc., a U.S.exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar.In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction.The terms were net 6 months.If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates actually receive after it exchanged yen for U.S.dollars?
A) $1, 075, 958
B) $1, 025, 000
C) $1, 000, 000
D) $975, 610
E) $929, 404
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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Page 19