Financial Analysis and Planning Practice
Questions
Course Introduction
Financial Analysis and Planning is a comprehensive course designed to equip students with the essential tools and techniques for evaluating an organizations financial health and making informed business decisions. The course covers the analysis of financial statements, ratio analysis, cash flow assessment, and financial forecasting. Students will learn to interpret financial data, assess risk, evaluate investment opportunities, and develop practical financial plans to support business strategies. Emphasis is placed on both short-term and long-term financial planning, enabling students to identify strengths and weaknesses within organizations and contribute to effective financial management.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael
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1391 Verified Questions
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Page 2
C. Ehrhardt
Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy.They change the bid and ask prices of the securities so as to keep supply and demand in balance.
A)True
B)False
Answer: True
Q2) You recently sold 200 shares of Apple stock to your brother.The transfer was made through a broker, and the trade occurred on the NYSE.This is an example of:
A) A futures market transaction.
B) A primary market transaction.
C) A secondary market transaction.
D) A money market transaction.
E) An over-the-counter market transaction.
Answer: C
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Chapter 2: Financial statements, cash flow, and taxes
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Sample Questions
Q1) Wells Water Systems recently reported $8, 250 of sales, $4, 500 of operating costs other than depreciation, and $950 of depreciation.The company had no amortization charges, it had $3, 250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?
A) $1, 770.00
B) $1, 858.50
C) $1, 951.43
D) $2, 049.00
E) $2, 151.45
Answer: A
Q2) The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.
A)True
B)False
Answer: True
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Chapter 3: Analysis of financial statements
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104 Flashcards
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Sample Questions
Q1) Arshadi Corp.'s sales last year were $52, 000, and its total assets were $22, 000.What was its total assets turnover ratio (TATO)?
A) 2.03
B) 2.13
C) 2.25
D) 2.36
E) 2.48
Answer: D
Q2) Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price.Which of the following statements is CORRECT?
A) Company A trades at a higher P/E ratio.
B) Company A probably has fewer growth opportunities.
C) Company A is probably judged by investors to be riskier.
D) Company A must have a higher market-to-book ratio.
E) Company A must pay a lower dividend.
Answer: A
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Page 5
Chapter 4: Time value of money
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
B) The cash flows for an ordinary (or deferred)annuity all occur at the beginning of the periods.
C) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
D) The cash flows for an annuity due must all occur at the beginning of the periods.
E) The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
Q2) If the discount (or interest)rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
A)True
B)False
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Chapter 5: Bonds, bond valuation, and interest rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
B) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
C) If a coupon bond is selling at par, its current yield equals its yield to maturity.
D) The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.
E) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
Q2) Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
A)True
B)False
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Chapter 6: Risk and return
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
B) If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
C) If investors become more risk averse, then (1)the slope of the SML would increase and (2)the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
D) An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.
E) A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
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Chapter 7: Valuation of stocks and corporations
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Sample Questions
Q1) Which of the following statements is NOT CORRECT?
A) The corporate valuation model discounts free cash flows by the required return on equity.
B) The corporate valuation model can be used to find the value of a division.
C) An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.
D) Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.
E) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.
Q2) According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
A)True
B)False
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Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Call options generally sell at a price less than their exercise value.
B) If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
C) Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E) If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.
Q2) The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.
A)True B)False
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Page 10
Chapter 9: The cost of capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) WACC calculations should be based on the before-tax costs of all the individual capital components.
B) Flotation costs associated with issuing new common stock normally reduce the WACC.
C) If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.
D) An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.
E) A change in a company's target capital structure cannot affect its WACC.
Q2) If investors' aversion to risk rose, causing the slope of the SML to increase, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms.Other things held constant, this would lead to an increase in the use of debt and a decrease in the use of equity.However, other things would not stay constant if firms used a lot more debt, as that would increase the riskiness of both debt and equity and thus limit the shift toward debt.
A)True
B)False
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Chapter 10: The basics of capital budgeting: evaluating cash flows
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Sample Questions
Q1) The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason why the NPV method is generally preferred over the IRR method.
A)True
B)False
Q2) When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.
A)True
B)False
Q3) If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal)Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.
A)True
B)False
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Page 12
Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?
A) A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm's current products.
B) A firm must obtain new equipment for the project, and $1 million is required for shipping and installing the new machinery.
C) A firm has spent $2 million on R&D associated with a new product.These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected.
D) A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm's other products.
E) A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes.
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Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q2) Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?
A) $170.09
B) $179.04
C) $188.46
D) $197.88
E) $207.78
Q3) If a firm's capital intensity ratio (A?*/S?)decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
A)True B)False
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Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q3) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
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15
Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.
A)True
B)False
Q2) Getler Inc.'s projected capital budget is $2, 000, 000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1, 000, 000.If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?
Dividends Stock Issued
A) $514, 425 $162, 901
B) $541, 500 $171, 475
C) $570, 000 $180, 500
D) $600, 000 $190, 000
E) $0 $200, 000
Q3) Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
A)True
B)False
Page 16
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Chapter 15: Capital structure decisions
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Sample Questions
Q1) Refer to Exhibit 15.3.Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity.This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576, 923.Assume BB raises $259, 615 in new debt and purchases T-bills to hold until it makes the stock repurchase.What is the stock price per share immediately after issuing the debt but prior to the repurchase?
A) $14.42
B) $19.36
C) $23.91
D) $28.85
E) $35.62
Q2) Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ____.
A) stock price.
B) cost of equity.
C) cost of debt.
D) cost of preferred stock. E) earnings per share (EPS).
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Page 17
Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) If a firm sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.
A)True
B)False
Q2) Noddings Inc.needs to raise more capital because its business is booming.The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount.One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)
A) 10.59%
B) 11.15%
C) 11.74%
D) 12.36%
E) 13.01%
Q3) The calculated cost of trade credit can be reduced by paying late.
A)True B)False
Page 18
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Chapter 17: Multinational financial management
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Sample Questions
Q1) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q2) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
Q3) Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.
A)True
B)False
Q4) The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.
A)True
B)False
Q5) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
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