Finance for Business Midterm Exam
Course Introduction
Finance for Business explores the fundamental principles of financial management within the context of modern organizations. The course covers essential topics such as financial analysis, planning and control, budgeting, capital investment decisions, risk assessment, and sources of funding. Emphasis is placed on understanding financial statements, interpreting key financial ratios, and applying financial tools to make informed business decisions. Through real-world case studies and practical exercises, students develop the skills needed to evaluate financial options, optimize resource allocation, and contribute to the financial health and strategic goals of a business.
Recommended Textbook Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) What is the most common type of firm in Canada and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
E) limited liability partnerships
Answer: A
Q2) Why is it possible for a corporation to enter into contracts,acquire assets,incur obligations,and enjoy protection against the seizure of its property?
A) The number of owners, and hence the spread of risk among these owners, is not limited.
B) Its owners are liable for any obligations it enters into.
C) The province in which the corporation is incorporated provides safeguards against any wrongdoing by the corporation.
D) It is a legally defined, artificial entity that is separate from its owners.
E) Corporations represent their owners, who have all of those rights.
Answer: D
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.What is the company's net working capital?
A) $7 million
B) $32 million
C) $33 million
D) $40 million
E) $20 million
Answer: D
Q2) Consider the above statement of cash flows.If all amounts shown above are in millions of dollars,what was AOS Industries' change in retained earnings for 2015?
A) $1.3 million
B) $1.7 million
C) $2.1 million
D) $5.4 million
E) $3.2 million
Answer: B
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) If the exchange rates,after fees,in Tokyo are ¥1000 = 6 = $9 and the exchange rates in Paris are 1 = $1.5 = ¥171,which of the following would you expect to occur?
A) a surge in conversion of dollars to yen in Tokyo
B) a surge in conversion of euros to yen in Tokyo
C) a surge in conversion of euros to dollars in Paris
D) a surge in conversion of euros to yen in Paris
E) a drop in conversion of euros to dollars in Tokyo
Answer: D
Q2) The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets,they will trade for the same price in each market.
A)True
B)False
Answer: True
Q3) How does arbitrage help the Law of One Price?
Answer: Any arbitrage opportunity will exploit any mispricing to restore the Law of One Price.
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Chapter 4: The Time Value of Money
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Q1) A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the present value (PV)of this perpetuity on the date that it is purchased,given that the interest rate is 4%?
A) $1410
B) $20,582
C) $20,548
D) $34,604
E) $25,000
Q2) Given that the interest rate is 10% per annum,what is the present value of an investment that has 5 equal payments of $50,000 each year for 5 years,starting today?
A) $250,000
B) $25,000
C) $208,493.27
D) $158,493.27
E) $ 178,493.27
Q3) What is the decision criteria for the Net Present Value rule?
Q4) In terms of present value (PV),how much will Joe receive for selling the family business?
Q5) Why must a growing perpetuity have a growth rate less than the discount rate?
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Chapter 5: Interest Rates
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Q1) If the current inflation rate is 4% and you have an investment opportunity that pays 10%,then the real rate of interest on your investment is closest to:
A) 10.0%
B) 14.0%
C) 6.0%
D) 5.8%
E) 4.0%
Q2) The effective annual rate (EAR)for a loan with a stated APR of 10% compounded quarterly is closest to:
A) 10.52%
B) 10.25%
C) 10.38%
D) 10.00%
E) 10.47%
Q3) The annual percentage rate indicates the amount of interest,including the effect of any compounding.
A)True
B)False
Q4) How are interest and return of principal handled in an amortizing loan payment?
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Chapter 6: Bonds
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Q1) What is the coupon rate of a 10-year $10,000 bond with semi-annual payments of $300?
A) 1%
B) 10%
C) 1.5%
D) 3%
E) 6%
Q2) A risk-free,zero-coupon bond with a face value of $1,000 has 15 years to maturity.If the YTM is 5.8%,which of the following would be closest to the price this bond will trade at?
A) $721
B) $686
C) $525
D) $429
E) $397
Q3) Bond traders generally quote bond yields rather than bond prices,since yield to maturity depends on the face value of the bond.
A)True
B)False
Q4) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Valuing Stocks
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Q1) The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA).What is Logitech International SA (USA)'s ticker symbol?
A) LIS
B) LOGITECH
C) LOG
D) LOGI
E) NASDAQ
Q2) Canberra Corp expects to have earnings per share of $8.40 in the coming year.Canberra has a return on new investment of 14%.If the firm's dividend payout rate is 75%,and its equity cost of capital is 9%,what is the value of Canberra's stock?
A) $114.55
B) $152.72
C) $70.00
D) $93.33
E) $129.23
Q3) What are the implications of the efficient markets hypothesis for corporate managers regarding accounting earnings?
Q4) What are the major limitations of valuation using multiples?
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Chapter 8: Investment Decision Rules
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Q1) A delivery service is buying 600 tires for its fleet of vehicles.One supplier offers to supply the tires for $85 per tire,payable in one year.Another supplier will supply the tires for $20,000 down today,then $50 per tire,payable in one year.What is the difference in PV between the first and the second offer,assuming interest rates are 8.5%?
A) $1000
B) $276
C) $645
D) -$1000
E) -$645
Q2) The profitability index for project B is closest to:
A) 23.34
B) 12.64
C) 0.17
D) 0.12
E) 1.14
Q3) Internal rate of return (IRR)can reliably be used to choose between mutually exclusive projects.
A)True
B)False
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.By how much could the discount rate rise before the net present value (NPV)of this project is zero,given that it is currently 10%?
A) by 17%
B) by 22%
C) by 25%
D) by 27%
E) by 30%
Q2) Which of the following will cause the EBIT break-even for sales to increase?
A) a decrease in the sales price
B) a decrease in the capital cost allowance
C) a decrease in selling, general, and administrative expenses
D) a decrease in the number of units sold
E) a decrease in the cost per unit
Q3) What is the major difference between scenario analysis and sensitivity analysis?
Q4) If a business owner is using the extra space at home for his business,does it imply a zero opportunity cost for the space?
Q5) What are the most difficult parts of capital budgeting?
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Chapter 10: Risk and Return in Capital Markets
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Q1) IGM Realty had a price of $30,$30,$35,$33,and $25 at the end of the last five quarters.If IGM pays a dividend of $2 at the end of each quarter,what is the annual realized return on IGM?
A) 8.61%
B) 7.6%
C) 7.10%
D) 8.09%
E) 8.24%
Q2) Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your dividend yield for this period is closest to:
A) -8.15%
B) -8.80%
C) 0.70%
D) 0.75%
E) 1.25%
Q3) What is the difference between systematic and unsystematic risk?
Q4) When looking at investment portfolios historically,was there a pattern between returns and volatility?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) Correlation is the degree to which the returns of two stocks share common risks.
A)True
B)False
Q2) The Capital Asset Pricing Model (CAPM)says that the excess return on a stock is equal to its beta times the market risk premium.
A)True
B)False
Q3) Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The return on your portfolio over the year is:
A) 0%
B) 7.5%
C) 3.5%
D) 5.0%
E) 2.5%
Q4) If you build a large enough portfolio,you can diversify away all the risks of a portfolio.
A)True
B)False
Q5) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 12: Determining the Cost of Capital
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Q1) Your estimate of the market risk premium is 7%.The risk-free rate of return is 4% and General Motors has a beta of 1.5.What is General Motors' cost of equity capital?
A) 13.5%
B) 14.5%
C) 13.9%
D) 14.8%
E) 15.1%
Q2) Preferred stock of Ford Motors pays a dividend of $4 each year and trades at a price of $30.What is the cost of preferred stock capital for Ford?
A) 13.3%
B) 14.5%
C) 15.5%
D) 16.2%
E) 16.5%
Q3) The costs of external financing must be deducted from the net present value (NPV)of a project to evaluate if it is worth undertaking.
A)True
B)False
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Chapter 13: Risk and the Pricing of Options
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Q1) The Black-Scholes formula gives the price of an American call option.
A)True
B)False
Q2) In practice,option prices are not very sensitive to changes in the risk-free rate.
A)True
B)False
Q3) A European option on a stock is more valuable than an otherwise similar American option on the same stock.
A)True
B)False
Q4) Options are also called derivative assets because they derive their value solely from the price of another asset.
A)True
B)False
Q5) What is the long position of an options contract?
Q6) What is a call option?
Q7) What are American options?
Q8) When is an option out-the-money?
Q9) When is an option in-the-money?
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Chapter 14: Raising Equity Capital
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Q1) What is the post-money valuation for the series D funding round?
A) $1.89 million
B) $1.96 million
C) $2.14 million
D) $2.24 million
E) $2.43 million
Q2) What will the offer price of these shares be if Luther is selling 1 million shares?
A) $17.00
B) $17.50
C) $17.25
D) $16.75
E) $18.00
Q3) Equity investors in a private company usually plan to realize a return on their investment by selling their stock when that company is acquired by another firm or sold to the public in a public offering.
A)True
B)False
Q4) What is the general long-run performance of an IPO?
Q5) What are some of the disadvantages of going public?
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Chapter 15: Debt Financing
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Q1) A company issues a callable (at par)ten-year coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $107 per $100 of face value,and has a yield to call of 3.5%.What is the bond's coupon rate?
A) 4.34%
B) 3.5%
C) 7.00%
D) 10.75%
E) 3.27%
Q2) What kind of unsecured corporate debt has a maturity of greater than ten years?
A) mortgage bonds
B) asset-back bonds
C) term loans
D) notes
E) debentures
Q3) Why do corporations choose to have a Canada call provision rather than leaving the bonds as non-callable?
Q4) What is a sinking fund?
Q5) When would a firm choose to call a callable bond?
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Chapter 16: Capital Structure
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Q1) With perfect capital markets,because different choices of capital structure offer a benefit to investors,they affect the value of the firm.
A)True
B)False
Q2) With perfect capital markets,what is the market value of Luther's equity after the share repurchase?
A) $15 billion
B) $10 billion
C) $25 billion
D) $20 billion
E) $5 billion
Q3) A firm requires an investment of $100,000,financed with $60,000 of equity and the remainder with debt.If the return on equity is 12%,the cost of debt is 4% and the tax rate is 35%,what is the firm's WACC?
A) 6.64%
B) 7.20%
C) 7.96%
D) 8.24%
E) 8.80%
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Chapter 17: Payout Policy
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Q1) The date two business days prior to the date on which all shareholders of record receive a payment is called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
E) payable
Q2) Palo Alto Enterprises has $200,000 in cash.They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year.Alternately they can pay a dividend and allow shareholders to make the investment.In perfect capital markets,which option will shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options
E) most paid now, the balance paid in one year
Q3) What are the different ways a firm can repurchase shares?
Q4) What is the sequence of the four important dates for a dividend payment,from initial authorization to final payment?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) The market size for Loppins is 80 million units.If SPI Inc.has a market share of 30% and the average sales price is $2 per Loppin,what is the dollar amount of sales of SPI?
A) $40 million
B) $42 million
C) $45 million
D) $48 million
E) $50 million
Q2) Internal growth rate indicates whether a planned investment will increase or decrease firm value.
A)True
B)False
Q3) Based upon the average price-earnings ratio of the comparable firms,Ideko's target market value of equity is closest to:
A) $157 million
B) $155 million
C) $193 million
D) $165 million
E) $191 million
Q4) What are a firm's options when it generates more cash than planned?
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Chapter 19: Working Capital Management
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Q1) What is the effective annual cost of credit terms of 1/10 net 30,if the firm stretches the accounts payable to 45 days?
A) 8.49 %
B) 10.91%
C) 11.05%
D) 18.03%
E) 9.64%
Q2) If a firm decreases the level of inventory it carries,the order costs will ________ and the carrying costs will ________.
A) decrease, decrease B) increase, increase C) decrease, increase D) increase, decrease E) remain unchanged, decrease
Q3) What are the three reasons why a firm holds cash?
Q4) What are the five Cs of Credit?
Q5) What is a firm's operating cycle?
Q6) What is the credit period?
Q7) What are the advantages of holding inventory?
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Chapter 20: Short Term Financial Planning
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Q1) ABX Corp.is offered a $1.4 million line of credit for nine months at an APR of 7.5%.This loan has a loan origination fee of 1%.What is the actual nine-month interest rate paid,expressed as an EAR?
A) 7.50%
B) 7.57%
C) 6.69%
D) 8.92%
E) 9.02%
Q2) Bhupinder's Bakery has a one-year $300,000 line of credit at an interest rate of 6% (EAR).The loan has a loan origination fee of 1%.What is the actual interest rate paid?
A) 7%
B) 6.7%
C) 7.07%
D) 7.14%
E) 6%
Q3) What are compensating balance and what effect does it have on the loan?
Q4) Why should permanent working capital be financed with long-term sources of funds?
Q5) How can positive cash flow shocks affect short-term financing needs?
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Chapter 21: Risk Management
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Q1) Which of the following best describes how moral hazard affects the price of insurance?
A) Since insurers can acquire complete information regarding the riskiness of borrowers, they can charge actuarially fair premiums.
B) Since firms may have private information about how risky they are, insurers must raise premiums to compensate for the existence of this uncertainty.
C) Since purchasing insurance reduces the firm's incentive to avoid risk, insurers must raise premiums to compensate for the increase in risk.
D) Since purchasing insurance reduces the firm's risk, insurers can lower premiums to compensate for the reduction in risk.
E) Since high premiums will drive away the low-risk firms, insurers must lower premiums in order to attract low-risk borrowers.
Q2) Because insurance pays off in bad times,it is generally a negative-beta asset. A)True B)False
Q3) What is moral hazard?
Q4) What is business interruption insurance?
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Chapter 22: International Corporate Finance
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Q1) When would a firm be affected by exchange rate risk?
Q2) What is the best explanation for the existence of currency swaps,and how do they mitigate exchange rate risk?
Q3) Why might firms prefer hedging with options rather than forward contracts?
Q4) The spot exchange rate for the British pound is 0.5 GBP/CAD.The one-year interest rate in Canada is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.606
B) 0.612
C) 0.617
D) 0.505
E) 0.631
Q5) What are the three factors that drive the supply and demand for each currency?
Q6) What is the amount of Canadian taxes paid,in dollars,on KT's Irish operations?
A) $0
B) $14.2
C) $9.14 million
D) $5.08 million
E) $9.8 million
Page 24
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Chapter 23: Leasing
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Q1) For a lease to be attractive to both the lessee and the lessor,the gains must come from some underlying economic benefits that the leasing arrangement provides.
A)True
B)False
Q2) For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?
Q3) Because finance leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet.
A)True
B)False
Q4) To evaluate a lease correctly,the appropriate comparison is not lease versus buy,but rather,lease versus borrow.
A)True B)False
Q5) Why are loan payments typically higher than lease payments when the lease has a positive residual value?
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Chapter 24: Mergers and Acquisitions
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Q1) What is the difference between economies of scale and economies of scope?
Q2) Explain the difference between a horizontal merger and a vertical merger.
Q3) Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 40% and no tax loss carryback or carryforward?
A) $0
B) $2 million
C) $3 million
D) $5 million
E) $4 million
Q4) Once a tender offer is announced,the target's share price immediately rises by the amount of the acquisition premium.
A)True
B)False
Q5) What are synergies?
Page 26
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Chapter 25: Corporate Governance
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Q1) How does a pyramid structure work?
Q2) Corporate governance is the system of controls designed to minimize conflicts between bondholders and shareholders.
A)True
B)False
Q3) Which of the following countries has employees appoint some board members?
A) Canada
B) the United States
C) Turkey
D) Germany
E) Australia
Q4) Billy,the CEO of Movin On Up Company,was granted stock options with an exercise price of $62.04 per share.Refer to the week-ending stock prices that occured during the quarter.What is the most likely date on which the stock options were awarded?
A) 13-Sep-15
B) 11-Oct-15
C) 13-Dec-15
D) 25-Oct-15
E) 7-Sep-15
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