Business Finance
Review Questions
Course Introduction
Business Finance provides students with a thorough understanding of the fundamental principles and practices underpinning financial decision-making in businesses. The course covers key topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Through case studies, real-world examples, and financial modeling, students learn to analyze financial health, assess investment opportunities, and make informed financial decisions to support organizational growth. This course equips students with essential tools and frameworks for managing corporate finances effectively in dynamic business environments.
Recommended Textbook
M Finance 3rd Edition by Marcia
Millon Cornett
14 Chapters
Verified Questions 1604 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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66 Verified Questions
66 Flashcards
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Sample Questions
Q1) From the perspective of access to capital, the best form of business organization is the:
A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.
Answer: B
Q2) Which statement is incorrect regarding hybrid organizations?
A)They offer single taxation.
B)They offer limited risk to the owners.
C)They offer the same type of control as a sole proprietorship.
D)All of these answers are correct statements.
Answer: C
Q3) Corporate stakeholders include all of the following EXCEPT: A)employees.
B)shareholders.
C)suppliers.
D)auditors.
Answer: D
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Page 3
Chapter 2: Reviewing Financial Statements
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Glo's Glasses balance sheet lists net fixed assets as $20 million. The fixed assets could currently be sold for $25 million. Glo's current balance sheet shows current liabilities of $7 million and net working capital of $3 million. If all the current accounts were liquidated today, the company would receive $9 million cash after paying $7 million in liabilities. What is the book value of Glo's assets today? What is the market value of these assets?
A)$10 million, $16 million
B)$10 million, $35 million
C)$30 million, $35 million
D)$30 million, $41 million
Answer: D
Q2) All of the following are cash flows from operations EXCEPT:
A)increases or decreases in cash.
B)net income.
C)depreciation.
D)increases or decreases in accounts payable.
Answer: A
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4
Chapter 3: Analyzing Financial Statements
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124 Verified Questions
124 Flashcards
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Sample Questions
Q1) Fancy Paws' year-end price on its common stock is $20. The firm has a profit margin of 12 percent, total assets of $20 million, a total asset turnover ratio of 0.5, no preferred stock, and there are 2 million shares of common stock outstanding. What is the PE ratio for Fancy Paws?
A)3.33
B)8.33
C)10.00
D)33.33
Answer: D
Q2) Tops N Bottoms Corp. reported sales for 2013 of $50 million. Tops N Bottoms listed $4 million of inventory on its balance sheet. Using a 365-day year, how many days did Tops N Bottoms' inventory stay on the premises? How many times per year did Tops N Bottoms' inventory turn over?
A)29.2 days, 12.5 times, respectively
B)12.5 days, 29.2 times, respectively
C)0.08 days, 12.5 times, respectively
D)29.2 days, 0.0345 times, respectively
Answer: A
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Page 5
Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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144 Flashcards
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Sample Questions
Q1) How much would be in your savings account in 12 years if you deposited $1,500 today? Assume the bank pays 5 percent per year.
A)$2,387.12
B)$2,491.03
C)$2,693.78
D)$2,771.09
Q2) Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?
A)12.00 percent
B)25.00 percent
C)49.33 percent
D)86.99 percent
Q3) Determine the interest rate earned on an $800 deposit when $808 is paid back in one year.
A)100 percent
B)10 percent
C)1 percent
D)15 percent
6
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) Compute the present value of a $2,500 deposit in year 4 and another $10,000 deposit at the end of year 8 if interest rates are 15 percent.
A)$4,211.26
B)$4,572.19
C)$4,698.40
D)$4,901.57
Q2) 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
Q3) What is the present value of a $775 annuity payment over six years if interest rates are 11 percent?
A)$3,017.84
B)$3,119.67
C)$3,2002.92
D)$3,278.67
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Chapter 6: Understanding Financial Markets and Institutions
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104 Flashcards
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Sample Questions
Q1) Which of the following statements is correct?
A)According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate.
B)The rate on a 10-year Corporate can never be less than the rate on a 10-year Treasury.
C)We usually observe the inverted yield curve.
D)The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury.
Q2) Which of the following statements is correct?
A)If the unbiased expectations theory is correct, we could see an inverted yield curve.
B)If a yield curve is inverted, long-term bonds have higher yields than short-term bonds.
C)If the maturity risk premium is zero, the yield curve would be flat.
D)If the unbiased expectations theory is correct, the maturity risk premium is zero.
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Chapter 7: Valuing Bonds
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122 Flashcards
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Sample Questions
Q1) An 8 percent coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in six years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.
A)4.68 percent; yes, the bond will be called
B)9.36 percent; yes, the bond will be called
C)9.36 percent; no, the bond will not be called
D)10.71 percent; no, the bond will not be called
Q2) A bond with 14 years to maturity is selling for $1,070 and has a yield to maturity of 10.06 percent. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?
A)5.50 percent
B)8.19 percent
C)9.57 percent
D)11.00 percent
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Chapter 8: Valuing Stocks
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) A stock is expected to pay a $5.00 dividend per share. The growth rate is expected to be -2 percent. If investors demand 8 percent on this stock, what is the expected price of the stock five years from now?
A)$54.68
B)$45.20
C)$41.06
D)$53.12
Q2) A stock recently paid a dividend of $3 per share. Its growth rate is expected to be 8 percent. Investors require a 10 percent return. The stock is selling in the market for $140.
What is this stock worth and is the stock undervalued or overvalued?
A)$162; undervalued
B)$162; overvalued
C)$150; undervalued
D)$150; overvalued
Q3) Value stocks usually have:
A)low P/E ratios and high growth rates.
B)high P/E ratios and low growth rates.
C)low P/E ratios and low growth rates.
D)high P/E ratios and high growth rates.
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Page 10
Chapter 9: Characterizing Risk and Return
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) If you own 400 shares of Xerox at $15.00, 500 shares of Qwest at $10.00, and 350 shares of Liz Claiborne at $45.00, what are the portfolio weights of each stock?
A)Weight of Xerox: 22.43 percent; Weight of Qwest: 11.09 percent; Weight of Liz Claiborne: 58.88 percent
B)Weight of Xerox: 34.67 percent; Weight of Qwest: 16.69 percent; Weight of Liz Claiborne: 48.64 percent
C)Weight of Xerox: 22.43 percent; Weight of Qwest: 18.69 percent; Weight of Liz Claiborne: 58.88 percent
D)Weight of Xerox: 36.98 percent; Weight of Qwest: 61.07 percent; Weight of Liz Claiborne: 1.95 percent
Q2) An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?
A)Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
B)Adobe System = 0.1667, Dow Chemical = 0.3333, Office Depot = 0.5
C)Adobe System = 0.3333, Dow Chemical = 0.1667, Office Depot = 0.5
D)Adobe System = 0.2, Dow Chemical = 0.4, Office Depot = 0.6
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Chapter 10: Estimating Risk and Return
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101 Flashcards
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Sample Questions
Q1) The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?
A)6.2 percent
B)11.9 percent
C)18.1 percent
D)24.3 percent
Q2) Which of the following is incorrect?
A)Most firms would want to sell additional shares of common stock if they feel their stock is undervalued.
B)Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued.
C)It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements.
D)None of these statements are incorrect.
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12
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Pumpkin Pie Industries has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $50 per share, the preferred shares are selling for $31 per share, and the bonds are selling for 98 percent of par ($1,000), what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock, preferred stock, and bonds, respectively?
A)33.33 percent, 33.33 percent, 33.33 percent
B)83.19 percent, 16.64 percent, 0.17 percent
C)85.97 percent, 10.67 percent, 3.38 percent
D)27.93 percent, 17.32 percent, 54.75 percent
Q2) What is the theoretical minimum for the weighted average cost of capital?
A)The after-tax cost of debt
B)The cost of preferred stock
C)CAPM
D)The cost of equity
Q3) Which of the following will directly impact the cost of debt?
A)Capital structure
B)Debt ratio
C)Coupon rate
D)Competition within the industry
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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110 Flashcards
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Sample Questions
Q1) Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?
A)$6,499.35
B)$6,344.95
C)$5,999.45
D)$6,554.95
Q2) When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?
A)EBIT - Interest - Taxes + Depreciation
B)EBIT - Taxes
C)EBIT + Depreciation
D)EBIT - Taxes + Depreciation
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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112 Flashcards
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Sample Questions
Q1) All of the following are strengths of NPV EXCEPT:
A)it works equally well for independent and mutually exclusive projects.
B)managers have a preference for using a statistic that is in percent instead of dollars. C)it uses a conservative reinvestment rate assumption. D)these are all strengths of the NPV statistic.
Q2) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. \[\begin{array} { l l l l l }
\text { Time } & 0 & 1 & 2 & 3 \\
\text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \\
\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000
\end{array}\] Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?
A)Accept both A and B
B)Accept neither A nor B
C)Accept A, reject B
D)Reject A, accept B
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Chapter 14: Working Capital Management and Policies
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127 Flashcards
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Sample Questions
Q1) Suppose that Jamie's Jams has annual sales of $900,000; cost of goods sold of $600,000; average inventories of $11,000; average accounts receivable of $50,000; and an average accounts payable balance of $30,000. Assuming that all of Jamie's sales are on credit, what will be the firm's cash cycle?
A)45.22
B)8.72
C)18.25
D)26.97
Q2) Which of the following current asset financing policies reflects the decision to finance the peaks of current assets with long-term debt and equity that provides the firm with a surplus of cash and marketable securities most of the time, except during peak asset demand?
A)Flexible financing policy
B)Restrictive financing policy
C)Compromise financing policy
D)Alternative financing policy
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