Business Finance
Textbook Exam Questions
Course Introduction
Business Finance is a foundational course that explores the principles and practices of managing financial resources within a business context. Students learn about key concepts such as financial analysis, planning, and control, as well as the fundamentals of raising and allocating capital. Topics include time value of money, risk and return, financial statement analysis, working capital management, and investment decisions. The course also examines sources of financing, cost of capital, and budgeting processes, equipping students with the analytical tools necessary to make informed financial decisions that support organizational goals.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) Profit maximization does not adequately describe the goal of the firm because
A)profit maximization does not require the consideration of risk.
B)profit maximization ignores the timing of a project's return.
C)maximization of dividend payout ratio is a better description of the goal of the firm.
D)A and B.
Answer: D
Q2) Which of the following is a characteristic of an efficient market?
A)Small number of individuals
B)Opportunities exist for investors to profit from publicly available information.
C)Security prices reflect fair value of the firm.
D)Immediate response occurs for new public information.
Answer: C
Q3) Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship.
A)True
B)False
Answer: False
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Individuals are often savers because they wish to save for things such as a down payment on a home or graduate school.
A)True
B)False
Answer: True
Q2) All of the following are classified as non-bank financial intermediaries except A)stock brokerages.
B)investment banks.
C)insurance companies.
D)hedge funds.
Answer: A
Q3) The principal savers in the financial markets are A)businesses.
B)banks.
C)individuals.
D)governments.
Answer: C
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) Your firm has the following income statement items: sales of $52,000,000;income tax of $1,880,000;operating expenses of $9,000,000;cost of goods sold of $36,000,000;and interest expense of $800,000.Compute the firm's gross profit margin.
A)13.5%
B)8.3%
C)30.8%
D)69.2%
Answer: C
Q2) Which of the following best represents operating income?
A)Income after financing activities
B)Earnings before interest and taxes
C)Income from capital gains
D)Income from discontinued operations
Answer: B
Q3) Gross plant and equipment minus accumulated depreciation represents the fair market value of a company's fixed assets.
A)True
B)False
Answer: False
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) A firm's average collection period has decreased significantly from the previous year.Which of the following could possibly explain the results?
A)Customers are paying off their accounts quicker.
B)Customers are taking longer to pay for purchases.
C)The firm has a stricter collection policy.
D)Both A and C.
Q2) Colton Corp.has current assets of $4.5 million.The current ratio is 1.25 and the quick ratio is 0.75.What is the amount of Colton's current liabilities (in millions)?
A)$4.5
B)$1.8
C)$2.4
D)$2.9
E)$3.6
Q3) When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry,it is called trend analysis.
A)True
B)False
Q4) Discuss the limitations of ratio analysis.
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?
A)$100,000 now
B)$10,000 at the end of each of the next 12 years
C)The answer depends on the time value of money.
D)Either alternative is equally valuable.
Q2) Which of the following is the formula for present value?
A)FV<sub>n</sub> = P(1 + i)<sup>n</sup>
B)FV<sub>n</sub> = (1 + i)/P
C)FV<sub>n</sub> = P/(1 + i)<sup>n</sup>
D)FV<sub>n</sub> = P(1 + i)<sup>-n</sup>
Q3) The present value of a single future sum
A)increases as the number of discount periods increases.
B)is generally larger than the future sum.
C)depends upon the number of discount periods.
D)increases as the discount rate increases.
Q4) When calculating either discount rates or the number of periods using a financial calculator,the PV and FV must have opposite signs.
A)True
B)False
Page 7
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) The formula for calculating the present value of a growing perpetuity is PV = Payment <sub>period 1</sub>/(i-g)
A)True
B)False
Q2) Holding all other variables constant,payment per period for an annuity due will be higher than an ordinary annuity.
A)True
B)False
Q3) You believe WSU stock will pay dividends of $1.00,$1.25,and $1.50 at the end of each of the next 3 years.Immediately after receiving the third dividend,you will sell the stock for $28.50.If the appropriate discount rate is 12%,you should be willing to pay $20.75 for this stock.
A)True
B)False
Q4) The present value of a $100 perpetuity discounted at 5% is $1200.
A)True
B)False
Q5) If you have an opportunity cost of 10%,how much must you invest each year to have $4,000 accumulated in 10 years?
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Why do the arithmetic average return and the geometric return differ?
Q2) Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?
A)$51.00
B)$1.00
C)$2.00
D)$3.00
Q3) Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.
A)True
B)False
Q4) The cash return on an investment is calculated as purchase price-selling price. A)True
B)False
Q5) The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.
A)True
B)False
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%.The coefficient of correlation between the stocks is .75.The standard deviation of any portfolio combining the two stocks will be less than 20%.
A)True
B)False
Q2) Security A has an expected rate of return of 22% and a beta of 2.5.Security B has a beta of 1.20.If the Treasury bill rate is 2.0%,what is the expected rate of return for security B?
Q3) The beta of ABC Co.stock is the slope of
A)the security market line.
B)the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C)the arbitrage pricing line.
D)the line of best fit for a plot of ABC Co.returns against the returns of the market portfolio for the same period.
Q4) U.S.Treasury bills can be used to approximate the risk-free rate.
A)True
B)False
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Page 10
Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Junk bonds
A)pay little or no interest.
B)are commonly used to finance municipal waste disposal facilities.
C)are issued by the U.S.Treasury Department.
D)have yields that are considerably higher than those of the highest rated bonds.
Q2) A(n)________ is used to outline the issuing company's contractual obligations to bondholders.
A)mortgage
B)debenture
C)bond rating
D)indenture
Q3) Colby & Company bonds pay semiannual interest of $50.They mature in 15 years and have a par value of $1,000.The market rate of interest is 8%.The market value of Colby bonds is (round to the nearest dollar)
A)$1,173.
B)$743.
C)$1,000.
D)$827.
Q4) What elements determine what the yield to maturity will be for a bond?
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Chapter 10: Stock Valuation
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Sample Questions
Q1) The stockholder's expected rate of return consists of a dividend yield and interest.
A)True
B)False
Q2) A decrease in the ________ will cause an increase in common stock value.
A)growth rate
B)required rate of return
C)last paid dividend
D)both B and C
Q3) Zorba's is a small chain of restaurants whose stock is not publicly traded.The average P/E ratio for similar restaurant chains is 16.5;the P/E ratio for the S&P 500 Index is 15.2.This year's earnings were $1.21 per share and next year's earnings are forecasted at $1.46 per share.A reasonable price for a share of Zorba's stock is
A)$24.09.
B)$19.96.
C)$20.23.
D)$16.50.
Q4) Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.
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Page 12
Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Discounted payback periods for projects Y and Z are
A)1.64 and 1.71 years.
B)3.14 years and never.
C)2 years and 2 years.
D)5 years and never.
Q2) Most firms use the payback period as a secondary capital-budgeting technique,which in a sense allows them to control for risk.
A)True
B)False
Q3) Dieyard Battery Recyclers is considering a project with the following cash flows:
Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%,compute the NPV of this project.
Q4) What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a 10% discount rate.Would you accept the project?
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Page 13
Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Anderson-EOG Inc.is evaluating the construction of a gas pipeline to bring natural gas from Western New York state to New York City.The controller argues that every project of the company has to absorb a portion of administrative overhead including corporate headquarters and executive salaries.The Treasurer argues that these costs are irrelevant because they are merely being shifted from part of the company to another.Who is correct?
Q2) Bull Gator Industries is considering a new assembly line costing $6,000,000.The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life.Operating costs of the new machine are expected to be $1,100,000 per year.The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000.If sold today the company would receive $2,400,000 for the existing machine.Annual operating costs on the existing machine are $2,100,000 per year.Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent.
a.Calculate the net present value of replacing the existing machine.
b.Explain the impact on NPV of the following:
i.Required rate of return increases
ii.Operating costs of new machine are increased
iii.Existing machine sold for less
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Page 14
Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) Most of the variables used in forecasting cash flows are known with certainty.
A)True
B)False
Q2) Which of the following abilities are crucial for risk analysis?
A)A knowledge of marketing
B)A knowledge of cost accounting
C)A knowledge of economics
D)All of the above
Q3) Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.Depreciation expense of $2,500,000 are included in fixed costs.The worst case forecast calls for sales of 240,000 valves,the best case for $290,400.Will MM reach cash break-even in the worst case scenario?
A)Sales will fall short of cash break even by $8,666,667.
B)The product will exactly break even.
C)Sales will fall short of cash break even by $2,000,025.
D)Sales will exceed cash break even by $2,166,667.
Q4) Why is it important to perform risk analysis before accepting or rejecting major projects?
Page 15
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Because issuing common equity entails less risk to the firm,it is always less expensive than borrowing.
A)True
B)False
Q2) Discuss the primary advantages of the CAPM approach in determining the cost of common equity.
Q3) The total capital that should be used in computing the weights for Spencer's WACC is
A)$1,275.
B)$2,400.
C)$2,250.
D)$1,575.
Q4) The weighted average cost of capital is computed using before-tax costs of each of the sources of financing that a firm uses to finance a project.
A)True
B)False
Q5) Why are market values preferred to book (balance sheet)values when computing a firm's weighted average cost of capital.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The Modigliani and Miller Capital Structure Theorem suggests that the cost of equity decreases as financial leverage increases.
A)True
B)False
Q2) A company that earns a rate of return on its investments lower than the interest rate on its debt is said to have
A)unfavorable financial leverage.
B)a sub-optimal capital structure.
C)favorable financial leverage.
D)negative financial leverage.
Q3) Which two ratios would be most helpful in managing a firm's capital structure?
A)Book Debt to Equity,Current Ratio
B)Debt to Value Ratio and Times Interest Earned
C)Debt to Assets,Profit Margin
D)Payables Turnover,Return on Assets
Q4) U.S.companies differ very little in their capital structures.
A)True
B)False
Q5) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Dividend payout ratios are generally much lower for small or newly established firms than for large,publicly owned firms.
A)True
B)False
Q2) M.Camus bought 1000 shares of Oran Co.at $60 per share and 100 shares of Gitane Co.at $40 per share.Both stocks are now worth $50 per share.Both companies have offered to repurchase their shares.If M.Camus would like to have about $5,000 in cash,should he sell the Oran or Gitane?
A)Oran,because a tax deduction on the loss will leave him with more than $5,000 and taxes on the capital gain from Gitane would leave him with less than $5,000.
B)Gitane because the price is rising.
C)He should sell equal amounts of each so that his gains cancel out his losses.
D)there is no difference,he makes $5,000 either way.
Q3) A stock split will cause changes in the dollar value of which of the following?
A)The par value of the stock
B)The book value of common equity
C)The market value of common equity
D)The per share price of the stock
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) A discretionary form of financing would be
A)notes payable.
B)accounts payable.
C)accrued expenses.
D)none of the above.
Q2) Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Hercules is expected to generate sales of $31 million next year,what will the firm's investment in current assets be?
A)$8.3 million
B)$4.0 million
C)$6.2 million
D)$5.0 million
Q3) Which of the following is a spontaneous source of financing?
A)Accrued expenses
B)Notes payable
C)Common stock
D)Paid-in capital
Q4) What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?
19
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Chapter 18: Working Capital Management
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Sample Questions
Q1) What factors should we consider when selecting a source of short-term credit?
A)Effective cost and availability
B)Liquidity and profitability
C)Historical trend analysis and liquidity
D)None of the above
Q2) A& B Global's annual credit sales are $18 million;the accounts receivable balance is $1.5 million;the cost of goods sold is $12.6 million;the inventory balance is $350,000,and the balance in accounts payable is $700,000.
a.Compute A&B's operating cycle.
b.Compute A&B's cash conversion cycle.
Q3) Which item would constitute poor collateral for an inventory loan?
A)Lumber
B)Vegetables
C)Copper
D)Chemicals
Q4) Management of a firm's liquidity involves management of the firm's investment in current assets.
A)True
B)False
Q5) Describe the differences between secured and unsecured short-term credit.
Page 20
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Chapter 19: International Business Finance
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Sample Questions
Q1) An investor purchased 1,000,000 Canadian dollars at an exchange rate of 1.0309 Canadian dollars to the U.S.dollar.The Canadian dollars cost her
A)$103,090.
B)$970,026.
C)$1,030,927.
D)$97,000.
Q2) What are some of the potential risks,other than exchange rate risk,that need to be considered in foreign direct investment decisions.
Q3) What is the difference between forward rates and spot rates? What is the purpose of forward contracts?
Q4) Millheim Electronics is an American firm operating in India,whose government refuses to allow Millheim to send its earnings out of the country.This is an example of repatriation of profits.
A)True
B)False
Q5) As December 26,2012,the spot rate for Swiss francs was 1.0917.The 3 month forward rate was 1.0939.
Compute the annualized percentage rate premium or discount for Swiss francs.
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) The decision to purchase insurance is justified if the cost of the contract is less than the expected loss.
A)True
B)False
Q2) Which of the following types of risk cannot typically be transferred to an insurance company?
A)Losses due to property damage from storms
B)Losses due to on-the job injuries suffered by employees
C)Losses due to rising raw materials costs that cannot be passed on to customers
D)Losses due to the untimely death of an employee in a key position
Q3) The seller of an option keeps the option premium regardless of whether or not the option is ever exercised.
A)True
B)False
Q4) If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.
A)True
B)False
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