Financial Analysis and Planning
Exam Solutions
Course Introduction
This course provides students with a comprehensive understanding of the processes and tools used in financial analysis and planning within organizations. Topics include the interpretation of financial statements, ratio analysis, budgeting, forecasting, working capital management, and the assessment of financial performance. Students will learn to apply analytical techniques to evaluate financial data, identify trends, and make informed decisions to support strategic planning and resource allocation. Through case studies and practical exercises, the course equips students with the skills essential for effective financial management and long-term business success.
Recommended Textbook
Fundamentals of Corporate Finance 3rd Australian Edition by Berk DeMarzo
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23 Chapters
2076 Verified Questions
2076 Flashcards
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) In a limited partnership, limited partners may
A)make managerial decisions for the firm.
B)have private property seized to pay off the firm's outstanding debts.
C)trigger a dissolution of the firm if they withdraw their participation.
D)none of the above
Answer: D
Q2) What is the most important duty of a financial manager?
A)To decide how to pay for investments
B)To manage working capital
C)To make investment decisions
D)To ensure that the firm has enough cash on hand to meet its commitments at any given time
Answer: C
Q3) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A)capital budgeting
B)making investment decisions
C)overseeing accounting and tax functions
D)managing credit
Answer: C
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) What is the need for the notes to the financial statements when the firm's operations are already documented in the financial statements?
Answer: Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off-balance sheet transactions, which have to be reported through notes to the financial statements.
Q2) Which of the following is likely to have contributed to the failure of HIH Insurance?
A)unsupervised delegated authority
B)rapid expansion
C)fraudulent reporting
D)All of the above contributed to the failure of HIH.
Answer: D
Q3) How does a firm select the dates for preparation of its income statement?
Answer: The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the fiscal year-end of 30 June. Typically, the income statement spans the flow between two adjacent balance sheets.
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Chapter 3: Time Value of Money: an Introduction
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Sample Questions
Q1) A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a kilo for 10 000 kilos, if it also buys 5 000 kilos of wheat at $16.00 per kilo. However, the manufacturer does not use any barley in its products, and currently needs 20 000 kilos of wheat. If the current market price of barley is $3.80 per kilo, and wheat is $15.80 per kilo, should this opportunity be taken, and why?
A)Because the value of the opportunity is negative, the opportunity should not be taken.
B)Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken.
C)Because the company has no need of barley, the opportunity should not be taken.
D)Because the value of the opportunity is positive, the opportunity should be taken.
Answer: D
Q2) What is one of the prerequisite conditions for the Valuation Principle to work?
Answer: The availability of competitive market prices is a prerequisite for the Valuation Principle to be effective and efficient.
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Sample Questions
Q1) Can we apply the growing perpetuity equation for negative growth as well?
Q2) Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's university education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2 000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, then the amount available for the daughter's university expenses on her 18th birthday is closest to:
A)$103 063
B)$42 825
C)$97 331
D)$67 998
Q3) The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.
A)True
B)False
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Chapter 5: Interest Rates
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Sample Questions
Q1) Assuming you do not pay the points and borrow from the mortgage lender at 6.25%, then your monthly mortgage payment (with payments made at the end of the month)will be closest to:
A)$1 540
B)$1 500
C)$1 570
D)$1 530
Q2) The net present value (NPV)of an investment that costs $2 700 and pays $1 000 at the end of one, three, and five years is closest to:
A)$1 665.62
B)-$100.26
C)$21.47
D)-$71.38
Q3) The monthly discount rate that you should use to evaluate the truck lease is closest to:
A)0.487%
B)0.4124%
C)0.4175%
D)0.4149%
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Chapter 6: Bond Valuation
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Sample Questions
Q1) A bond is currently trading below par. Which of the following must be true about that bond?
A)The bond's yield to maturity is less than its coupon rate.
B)The bond is a zero-coupon bond.
C)The bond's yield to maturity is greater than its coupon rate.
D)B and C above
Q2) Before it matures, the price of any bond is always less than its face value.
A)True
B)False
Q3) What is the 'dirty price' of a bond?
A)the bond's actual cash price
B)the bond's price based only on the bond's yield
C)the bond's price based only on coupon payments
D)the bond's price less an adjustment for changes in interest rates
Q4) Based upon the information given above, you can conclude
A)that the yield curve is downward sloping.
B)that the yield curve is upward sloping.
C)that the yield curve is flat.
D)nothing about the shape of the yield curve.
Q5) How are the cash flows of a coupon bond different from an amortising loan?
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Chapter 7: Share Valuation: the Dividend-Discount Model
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Sample Questions
Q1) A share is bought for $20.00 and sold for $24.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?
A)1.27%
B)14.00%
C)20.00%
D)25.00%
Q2) Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.50 in the coming year. It decides to retain 20% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 12%, what is the expected share price of Jumbo Transport?
A)$28.57
B)$19.23
C)$16.67
D)$24.75
Q3) A firm must pay its earnings out to its investors.
A)True
B)False
Q4) Can the dividend-discount model handle negative growth rates?
Q5) How can the dividend-discount model handle changing growth rates?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) If the appropriate discount rate for this project is 14%, then the net present value (NPV)is closest to:
A)$867
B)-$867
C)$600
D)$612
Q2) The owners of a chain of fast-food restaurants spend $28 million installing doughnut makers in all their restaurants. This is expected to increase cash flows by $10 million per year for the next five years. If the discount rate is 6.5%, were the owners correct in making the decision to install doughnut makers?
A)Yes, as it has a net present value (NPV)of $8.74 million.
B)No, as it has a net present value (NPV)of -1.68 million.
C)Yes, as it has a net present value (NPV)of $13.56 million.
D)No, as it has a net present value (NPV)of -$2.25 million.
Q3) Preference for cash today versus cash in the future in part determines net present value (NPV).
A)True
B)False
Q4) What is the decision criteria using internal rate of return (IRR)rule?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices. It decides to start with a gaming version of its standard keyboard, increasing the number of macro keys, adding a small LCD screen to display game data, and giving the user the ability to backlight keys in different colours. If this device is a success, the manufacturer plans to release gaming versions of its trackballs and other peripherals. What option is the manufacturer gaining by the release of the new keyboard?
A)option to delay
B)option to expand
C)option to abandon
D)option to switch
Q2) The free cash flow for the first year of Epiphany's project is closest to:
A)$47 750
B)$47 000
C)$39 000
D)$45 000
Q3) What is 'break-even analysis'?
Q4) What are 'sunk costs'?
Q5) Why does the option to abandon a project have value?
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Chapter 10: Share Valuation: a Second Look
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Sample Questions
Q1) Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as
A)the 'excessive trading costs hypothesis'.
B)the 'disposition effect'.
C)the investor 'attention hypothesis'.
D)the investor 'overconfidence hypothesis'.
Q2) Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firm's future cash flows
II. the firm's cost of capital
III. the firm's stock price
A)I only
B)II only
C)III only
D)I and II
Q3) Which is the best valuation technique when using comparables?
Q4) What additional adjustments are required to find the share price, in case we are using the discounted cash flow model?
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Chapter 11: Risk and Return in Capital Markets
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Sample Questions
Q1) You own shares in Darling that were purchased at a price of $21 per share. Gorilla has offered to purchase Darling and buy your shares at a price of $31 per share. What will be your return if you tender your shares to Gorilla and the deal is completed?
A)43.34%
B)33.45%
C)49.65%
D)47.62%
Q2) The average annual return on the All Ords from 2007 to 2016 is closest to:
A)4.00%
B)9.75%
C)7.10%
D)8.75%
Q3) The risk premium of a share is not affected by its A)unsystematic risk.
B)undiversifiable risk.
C)typical risk.
D)systematic risk.
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) For each 1% change in the market portfolio's excess return, the investment's excess return is expected to change by ________ percent due to risks that it has in common with the market.
A)alpha
B)beta
C)zero
D)Cannot say for sure.
Q2) The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money.
A)lower than B)similar to C)higher than D)none of the above
Q3) The amount of a share's risk that is diversified away:
A)depends on market risk premium.
B)depends on risk-free rate of interest.
C)is independent of the portfolio that you add it to.
D)depends on the portfolio that you add it to.
Q4) Is it possible for a share to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Sample Questions
Q1) The current yield of a firm's debt can be used as the firm's current cost of debt.
A)True
B)False
Q2) Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are different.
A)True
B)False
Q3) Your estimate of the market risk premium is 8%. The risk-free rate of return is 2.5% and Virgin Australia has a beta of 1.5. What is Virgin's cost of equity capital?
A)14.5%
B)13.9%
C)13.5%
D)14.8%
Q4) To attract capital from outside investors, a firm must offer potential investors an expected return that is commensurate with the level of risk that they can bear.
A)True
B)False
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15
Chapter 14: Raising Capital
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Sample Questions
Q1) Suppose you sold the 1.25 million shares to the angel investor for $500 000. What was the post-money valuation of your shares immediately following the angel investor's investment?
A)$2.0 million
B)$500 000
C)$1.0 million
D)$2.5 million
Q2) Which of the following statements regarding firm commitment IPOs is FALSE?
A)It is the most common underwriting arrangement.
B)The underwriter purchases the entire issue (at the offer price)and then resells it at a slightly higher price to interested investors.
C)If the entire issue does not sell out, the remaining shares must be sold at a lower price and the underwriter must take the loss.
D)The underwriter guarantees that it will sell all of the issue at the offer price.
Q3) As with IPOs, evidence suggests that companies overperform following a seasoned offering.
A)True
B)False
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Page 16
Chapter 15: Debt Financing
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Sample Questions
Q1) Private debt can be in the form of bonds.
A)True
B)False
Q2) A company issues a callable (at par)10-year, 6% 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 $104 per $100 of face value.
What is the yield to call of this bond when it is released?
A)5.47%
B)1.92%
C)1.50%
D)0.60%
Q3) If a bond covenant is not met, then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.
A)True
B)False
Q4) Bond covenants tend to increase a bond issuer's borrowing costs.
A)True
B)False
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Chapter 16: Capital Structure
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Sample Questions
Q1) Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company uses no leverage, what is the expected return to equity holders?
A)9.33%
B)8.0%
C)11.6%
D)30.0%
Q2) What are the issues in determining the present value (PV)of financial distress?
Q3) The market value of Luther's non-cash assets is closest to:
A)$25 billion
B)$20 billion
C)$24 billion
D)$19 billion
Q4) Equity in a firm with debt is called 'risky equity'.
A)True
B)False
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Chapter 17: Payout Policy
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Sample Questions
Q1) For valuation purposes, the calculation of the equity cost of capital under an imputation system should be reduced by a factor representing, in broad terms
A)the proportion of taxes collected from the firm that will be included in the taxable income in the hands of the shareholders.
B)the proportion of taxes collected from the firm that will be rebated against the personal tax in the hands of shareholders.
C)the franking credits available to shareholders of the firm, weighted against the likelihood that the firm will pay a franked dividend to shareholders.
D)the proportion of taxes paid by individual shareholders that the firm will compensate through the payment of franking credits.
Q2) The financial manager should try to maximise size of the dividends paid to shareholders.
A)True
B)False
Q3) The 'distribution date' is the date on which a firm pays out dividends.
A)True
B)False
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Chapter 18: Financial Modelling and Pro-Forma Analysis
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Sample Questions
Q1) Total working capital, rather than changes in working capital, has implications for cash flows.
A)True
B)False
Q2) Based upon the average EV/Sales ratio of the comparable firms, if Loop holds $6.5 million of cash in excess of its working capital needs, then Loop's target market value of equity is closest to:
A)$155 million
B)$193 million
C)$157 million
D)$165 million
E)$191 million
Q3) The 'per cent of sales method' relies on the idea that capacity increases are ________, even though in practice such increases are ________.
A)incremental, incremental
B)lumpy, lumpy
C)lumpy, incremental
D)incremental, lumpy
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Chapter 19: Working Capital Management
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Sample Questions
Q1) The 'credit period' is the number of days the buyer gets to take advantage of the cash discount.
A)True
B)False
Q2) Which of the following statements is FALSE?
A)It is the firm's financial manager who must arrange for the financing necessary to support the firm's inventory policy and who is responsible for ensuring the firm's overall profitability.
B)Inventory management receives extensive coverage in courses on operations management.
C)Unlike trade credit, inventory represents one of the required factors of production.
D)Under the Modigliani-Miller assumptions of perfect capital markets, the amount of inventory is irrelevant.
Q3) 'Working capital management' involves the management of short-term asset accounts such as cash, inventory and accounts receivable, as well as short-term liability accounts such as accounts payable.
A)True
B)False
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Chapter 20: Option Applications and Corporate Finance
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Sample Questions
Q1) Which of the following statements is FALSE?
A)When the exercise price of an option is equal to the current share price, the option is said to be 'at-the-money'.
B)Because the 'long side' has the option to exercise, the 'short side' has an obligation to fulfil the contract.
C)A holder would not exercise an 'in-the-money' option.
D)The 'option seller', also called the 'option writer', sells (or writes)the option and has a short position in the contract.
Q2) An investor purchases a call option and its underlying share on the same day. If the share appreciates by 25%, the call option will appreciate by A)less than 25%.
B)exactly 25%.
C)more than 25%.
D)None of the above.
Q3) The Black-Scholes formula gives the price of an American call option.
A)True
B)False
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22
Chapter 21: Mergers and Acquisitions
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Sample Questions
Q1) Which of the following statements regarding 'poison pills' is FALSE?
A)Poison pills also increase the bargaining power of the target firm when negotiating with the acquirer because poison pills make it difficult to complete the takeover without the cooperation of the target board.
B)Companies with poison pills are harder to take over, and when they are taken over, the premium that existing shareholders receive for their shares is higher.
C)Because a poison pill increases the cost of a takeover, all else equal, a target company must be in better shape to justify the expense of waging a takeover battle.
D)By adopting a poison pill, a company effectively entrenches its management by making it much more difficult for shareholders to replace bad managers, thereby potentially destroying value.
Q2) In practice, most acquirers pay a substantial acquisition premium, which is the percentage difference between the acquisition price and the premerger price of the target firm.
A)True
B)False
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Chapter 22: International Corporate Finance
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Sample Questions
Q1) If a foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.
A)True
B)False
Q2) A 'cash-and-carry strategy' replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.
A)True
B)False
Q3) What is 'covered interest parity'?
Q4) Consider the following equation: The term in this equation refers to
A)the risk-free rate of interest on the yen.
B)the cost of capital for the firm in terms of yen.
C)the risk-free rate of interest on the dollar.
D)the cost of capital in terms of dollars.
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Page 24
Chapter 23: Insurance and Risk Management
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Q1) An operator of an oil rig has a 0.5% chance of experiencing a catastrophic failure. This failure will cost the operator $500 million. If the risk-free rate is 2%, the expected return on the market is 8%, and the beta of the risk is -1.2, what is the actuarially fair insurance premium?
A)$2 550 000
B)$2 500 000
C)$2 637 131
D)$2 753 304
Q2) If your firm is fully insured, the NPV of implementing the new safety policies is closest to:
A)$2.15 million
B)$-2.25 million
C)$2.5 million
D)-$.35 million
Q3) The duration of a five-year bond with 7% annual coupons and a yield-to-maturity of 8% is closest to:
A)6.2 years
B)2.5 years
C)4.4 years
D)5.0 years
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