Principles of Finance Test
Questions
Course Introduction
Principles of Finance introduces students to the foundational concepts and practices that guide financial decision-making in both personal and business contexts. The course covers essential topics such as the time value of money, risk and return, financial statement analysis, capital budgeting, interest rates, and the functioning of financial markets. Students will learn how to evaluate investment opportunities, understand the role of financial institutions, and apply financial strategies to achieve short-term and long-term goals. Through lectures, case studies, and practical exercises, learners gain the analytical skills necessary to make informed financial decisions and understand the dynamic landscape of modern finance.
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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Chapter 1: Interpreting Financial Statements
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24 Verified Questions
24 Flashcards
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Sample Questions
Q1) Which one of the following is the financial statement that shows a financial snapshot,taken at a point in time,of all the assets the company owns and all the claims against those assets?
A) income statement
B) creditor's statement
C) balance sheet
D) cash flow statement
E) sources and uses statement
Answer: C
Q2) Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?
A) income statement
B) balance sheet
C) cash flow statement
D) shareholders' equity statement
E) market value statement
Answer: C
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Chapter 2: Evaluating Financial Performance
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23 Verified Questions
23 Flashcards
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Sample Questions
Q1) Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?
A) current ratio
B) debt-to-equity
C) retention
D) asset turnover
E) return on assets
Answer: D
Q2) The gross margin for 2012 is:
A) -94%
B) 13%
C) 26%
D) 31%
E) None of the above.
Answer: E
Q3) Use Limited Brands,Inc.'s financial statements,above,to prepare common-size financial statements for Limited Brands,Inc.for 2006 - 2007.
Answer: 11ea6dd0_94ef_578a_9009_f1aa9d08a97e_TB2315_00
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Chapter 3: Financial Forecasting
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21 Verified Questions
21 Flashcards
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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) Which one of the following statements is correct concerning the cash balance of a firm?
A) Most firms attempt to maintain a zero cash balance at all times.
B) The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.
C) Most firms attempt to maximize the cash balance at all times.
D) A cumulative cash deficit indicates a borrowing need.
E) The ending cash balance must equal the minimum desired cash balance.
Answer: D
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Chapter 4: Managing Growth
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Sample Questions
Q1) A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent.The asset turnover ratio is 0.85 and the assets-to-equity ratio (using beginning-of-period equity)is 1.80.What is the profit margin?
A) 3.79 percent
B) 5.69 percent
C) 6.75 percent
D) 10.13 percent
E) 18.24 percent 0.062 = PRAT = profit margin x .40 x 0.85 x 1.80 Profit margin = 0.062/(.40 x 0.85 x 1.80); profit margin = 10.13 percent
Q2) Use the information from Boss's annual financial statements.What is the retention ratio for 2009?
A) 0.32
B) 0.68
C) 0.97
D) 1.00
E) None of the above.
Q3) Law Dog paid its first dividends in 2004.As an analyst,assess the company's decision to pay dividends.
Q4) Calculate the actual and sustainable growth rate for each year.
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Chapter 5: Financial Instruments and Markets
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22 Verified Questions
22 Flashcards
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Sample Questions
Q1) 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?
Q2) You believe interest rates will soon fall.
a.Would you rather own a three-year,6 percent coupon,fixed-rate bond or an equivalent-risk,three-year,floating-rate bond currently paying 6 percent interest?
b.Would your answer to (a)change if you were contemplating issuing a bond rather than owning one?
If so,how?
c.Would your answer to (a)change if,as an investor,you believed interest rates would soon rise?
If so,why?
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Chapter 6: The Financing Decision
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Sample Questions
Q1) The best financing choice is the one that:
A) sets the debt-to-assets ratio equal to 1.
B) trades off the tax disadvantage of debt against the signaling effects of equity.
C) maximizes expected cash flows.
D) ignores the false comfort of financial flexibility.
E) results in the lowest possible financial distress costs.
Q2) The interest tax shield has no value when a firm has:
I.no taxable income.
II.debt-equity ratio of 1.
III.zero debt.
IV.no leverage.
A) I and III only
B) II and IV only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, and IV only
F) None of the above.
Q3) Calculate next year's earnings per share assuming Nile raises the $100 million of new debt.
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Page 8
Chapter 7: Discounted Cash Flow Techniques
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25 Verified Questions
25 Flashcards
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Sample Questions
Q1) Ian is going to receive $20,000 six years from now.Sunny is going to receive $20,000 nine years from now.Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?
A) The present values of Ian and Sunny's monies are equal.
B) In future dollars, Sunny's money is worth more than Ian's money.
C) In today's dollars, Ian's money is worth more than Sunny's.
D) Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money.
E) Sunny's money is worth more than Ian's money given the 7 percent discount rate.
F) None of the above.
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) The standard deviation of returns on Wildcat Oil Drilling is very high.Does this necessarily imply that Wildcat Oil Drilling is a high-risk investment when investors hold diversified portfolios?
Explain why or why not.
Q2) Estimate FM's weighted-average cost of capital.
A) 6.46%
B) 6.58%
C) 11.27%
D) 11.32%
E) 11.52%
F) None of the above.
Q3) Unsystematic risk:
A) can be effectively eliminated by portfolio diversification.
B) is compensated for by the risk premium.
C) is measured by beta.
D) is measured by standard deviation.
E) is related to the overall economy.
F) None of the above.
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Chapter 9: Business Valuation and Corporate Restructuring
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27 Verified Questions
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Sample Questions
Q1) Estimate the present value of BSL's free cash flow (in $ millions)for the years 20112015.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.
A) - $1.29
B) $628.24
C) $720.58
D) $726.68
E) $743.94
F) None of the above.
Q2) Rainy City Coffee's (RCC)free cash flow next year will be $100 million and it is expected to grow at a 4 percent annual rate indefinitely.The company's weighted average cost of capital is 10 percent,the market value of its liabilities is $1 billion,and it has 20 million shares outstanding.
a.Estimate the price per share of RCC's common stock.
b.A hedge fund believes that by selling the company's private jet and instituting other cost savings,it can increase RCC's free cash flow next year to $110 million and can add a full percentage point to RCC's growth rate without affecting its cost of capital.What is the maximum price per share the hedge fund can justify bidding for control of RCC?
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