Financial Analysis
Chapter Exam Questions
Course Introduction
Financial Analysis provides students with the foundational tools and techniques necessary to evaluate the financial health and performance of organizations. This course covers key concepts such as interpreting financial statements, analyzing ratio trends, assessing profitability, liquidity, solvency, and efficiency, and utilizing quantitative methods to make informed business decisions. Through real-world case studies and hands-on exercises, students learn to critically assess financial data, identify risks and opportunities, and communicate their findings to stakeholders, preparing them for careers in corporate finance, investment analysis, and strategic planning.
Recommended Textbook
Corporate Finance 2nd Canadian by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) You are a shareholder in a publicly owned corporation.This corporation earns $4 per share before taxes.After it has paid taxes,it will distribute the remainder of its earnings to you as a dividend.The dividend is income to you,so you will then pay taxes on these earnings.The corporate tax rate is 35% and your tax rate on dividend income is 15%.The effective tax rate on your share of the corporations earnings is closest to:
A) 15%
B) 35%
C) 45%
D) 50%
Answer: C
Q2) Which of the following statements regarding limited partnerships is true?
A) There is no limit on a limited partner's liability.
B) A limited partner's liability is limited by the amount of their investment.
C) A limited partner is not liable until all of the assets of the general partners have been exhausted.
D) A general partner's liability is limited by the amount of their investment. Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) What is the role of an auditor in financial statement analysis?
Answer: Key points:
1.To ensure that the annual financial statements are prepared accurately.
2.To ensure that the annual financial statements are prepared according to the Canadian GAAP.
3.To verify that the information used in preparing the annual financial statements is reliable.
Q2) Luther's Net Profit Margin for the year ending December 31,2005 is closest to:
A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%
Answer: A
Q3) Luther's return on equity (ROE)for the year ending December 31,2006 is closest to: A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
Answer: C
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Page 4
Chapter 3: Arbitrage and Financial Decision Making
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Q1) Consider an ETF that is made up of one share each of IBM,MRK,and C.The current quote for this ETF currently is $167.85 (bid)$167.95 (ask).What should you do?
Answer: Nothing; there is no arbitrage opportunity here.The ask price must fall below $167.90 or the bid price must be above $168.10 for there to be an arbitrage.
Q2) A normal market where there are no arbitrage opportunities can be considered as A) a perfect market.
B) a fair market.
C) a competitive market.
D) a free market.
Answer: A
Q3) Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
Answer: B
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Chapter 4: The Time Value of Money
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Q1) A Canadian company issues an 8-year term bond with face value of $1,000 and 6% coupon rate.If the market prevailing effective rate of interest is 5.75%,what is the price an investor will have to pay?
A) $1,015.85
B) $1,200.00
C) $1,150.00
D) $1,215.00
Q2) You are saving for retirement.To live comfortably,you decide that you will need $2.5 million dollars by the time you are 65.Today is your 30th birthday,and you decide that,starting today,on every birthday up to and including your 65th birthday you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each and every year on your birthday is closest to:
A) $71,430
B) $27,680
C) $26,100
D) $26,260
Q3) If the interest rate is 10%,then which investment(s),if any,would you take and why?
Q4) The future value at retirement (age 65)of your savings is:
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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%
Q2) In Canada,one of the reasons that the rates of bonds issued by Telus and provincial governments is different is because of
A) the prime rate.
B) the real rate of interest.
C) the risk level of investment.
D) the rate of inflation.
Q3) If your income tax rate is 30%,then the after-tax return you receive on your money market fund is closest to:
A) 3.7%
B) 5.1%
C) 3.6%
D) 4.2%
Q4) Should you purchase the delivery truck or lease it? Why?
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Chapter 6: Investment Decision Rules
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Q1) The payback period for this project is closest to:
A) 2.1 years
B) 3.0 years
C) 2 years
D) 2.2 years
Q2) The IRR for Larry's three movie deal offer is closest to:
A) 3.5%
B) 1.6%
C) -3.5%
D) -1.6%
Q3) The NPV of Larry's three-movie Larry Boy offer is closest to:
A) 3.5 million
B) -1.6 million
C) 1.6 million
D) -1.0 million
Q4) The IRR for Boulderado's snowboard project is closest to:
A) 10.4%
B) 10.0%
C) 11.0%
D) 15.1%
Page 8
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Chapter 7: Fundamentals of Capital Budgeting
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Q1) Ignoring the original investment of $5 million,what is THSI's free cash flow for the first and only year of operation?
A) $5.0 million
B) $3.75 million
C) $8.0 million
D) $6.25 million
Q2) An exploration of the effect on NPV of changing multiple project parameters is called
A) scenario analysis.
B) IRR analysis.
C) accounting break-even analysis.
D) sensitivity analysis.
Q3) Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?
A) The tax savings brought about by the project's depreciation expense
B) The cost of a marketing survey you conducted to determine demand for the proposed project
C) Interest payments on debt used to finance the project
D) Research and development expenditures you have made
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Chapter 8: Valuing Bonds
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Q1) Assuming the appropriate YTM on the Sisyphean bond is 9.0%,then the price that this bond trades for will be closest to:
A) $946
B) $919
C) $1,086
D) $1,000
Q2) Assuming the appropriate YTM on the Sisyphean bond is 9%,then this bond will trade at
A) a premium.
B) a discount.
C) par.
D) none of the above.
Q3) The forward rate for year 3 (the forward rate quoted today for an investment that begins in two years and matures in three years)is closest to:
A) 4.5%
B) 5.0%
C) 5.2%
D) 4.6%
Q4) Plot the zero-coupon yield curve (for the first five years).
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Chapter 9: Valuing Stocks
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Q1) The forward price-earning ratio is based on
A) the expected earnings over the coming 12 months and predicted share price in the next 12 months.
B) the expected earnings in the previous 12 months and predicted share price in the next 12 months.
C) the expected earnings over the coming 12 months and current share price.
D) the previous earnings in the past 12 months and the predicted share price in the next 12 months.
Q2) Which of the following is NOT a way that a firm can increase its dividend?
A) By increasing its retention rate.
B) By decreasing its shares outstanding.
C) By increasing its earnings (net income).
D) By increasing its dividend payout rate.
Q3) Suppose you plan to hold Von Bora stock for only one year.Your capital gain from holding Von Bora stock for the first year is closest to:
A) $0.95
B) $1.40
C) $1.85
D) $1.25
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Page 11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) 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) 0.75%
C) 0.70%
D) -8.80%
Q2) Which of the following statements is false?
A) Beta differs from volatility.
B) The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate.
C) Stocks in cyclical industries, in which revenues tend to vary greatly over the business cycle, are likely to be more sensitive to systematic risk and have higher betas than stocks in less sensitive industries.
D) If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent unsystematic shocks to the economy.
Q3) Which pharmaceutical company faces less risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset
Pricing Model
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Q1) 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%
Q2) The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.
A) the realized return
B) the highest return
C) the lowest return
D) the expected return
Q3) Calculate the covariance between Home Depot's and IBM's returns.
Q4) Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?
Q5) The variance on a portfolio that is made up of a $6000 investment in Microsoft stock and a $4000 investment in Wal-Mart stock is closest to:
Page 13
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Chapter 12: Estimating the Cost of Capital
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Q1) Which of the following statements is false?
A) The S&P 500 and the Wilshire 5000 indexes are both well-diversified indexes that roughly correspond to the market of Canadian stocks.
B) Practitioners commonly use the S&P 500 as the market portfolio in the CAPM with the belief that this index is the market portfolio.
C) Standard & Poor's Depository Receipts (SPDR, nicknamed "spider") trade on the American Stock Exchange and represent ownership in the S&P 500.
D) The S&P 500 was the first widely publicized value-weighted index and it has become a benchmark for professional investors.
Q2) The capital market line (CML)represents the highest expected return available for ________ level of volatility.
A) any
B) a zero
C) a high
D) a low
Q3) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
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Chapter 13: Investor Behaviour and Capital Market
Efficiency
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Q1) The market value for Bernard Industries is closest to
A) $12.0 million.
B) $10.0 million.
C) $15.0 million.
D) $12.5 million.
Q2) Stock returns tend to be ________ when it is a ________ at the location of the stock exchange.
A) higher, rainy day
B) lower, sunny day
C) higher, sunny day
D) lower, rainy day
Q3) Rather than relying on the efficiency of a single portfolio (such as the market),multifactor models rely on ________ that an efficient portfolio can be constructed from a collection of well-diversified portfolios or factors.
A) the stronger condition
B) the neutral condition
C) the weaker condition
D) the unbiased condition
Q4) What does the existence of a positive alpha investment strategy imply?
Q5) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) The market value of Luther's non-cash assets is closest to:
A) $20 billion
B) $19 billion
C) $25 billion
D) $24 billion
Q2) Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock.The number of shares of With stock you purchased is closest to:
A) 100
B) 425
C) 1650
D) 825
Q3) Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.
Q4) Suppose that you borrow only $45,000 in financing the project.According to MM proposition II,calculate the firm's equity cost of capital.
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Chapter 15: Debt and Taxes
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Q1) If Rosewood had no interest expense,its net income would be closest to:
A) $405 million
B) $160 million
C) $450 million
D) $290 million
Q2) Which of the following statements is false?
A) Once investors know the recap will occur, the share price will rise immediately to a level that reflects the value of the interest tax shield that the firm will receive from its recapitalization.
B) When securities are fairly priced, the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage.
C) In the presence of corporate taxes, we do not include the interest tax shield as one of the firm's assets on its market value balance sheet.
D) We can analyze the recapitalization using the market value balance sheet; it states that the total market value of a firm's securities must equal the total market value of the firm's assets.
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Chapter 16: Financial Distress, managerial Incentives, and Information
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Q1) Assuming perfect capital markets,the share price for BBB after this announcement is closest to:
A) $11.40
B) $10.85
C) $10.00
D) $8.60
Q2) Suppose that MI has zero-coupon debt with a $125 million face value due next year.The initial value of MI's equity is closest to:
A) $30 million
B) $15 million
C) $29 million
D) $24 million
Q3) In Canadian Corporations,more than 60% of capital expenditures are funded from
A) issuing short-term debts
B) issuing equities
C) issuing long-term debts
D) retained earnings
Q4) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) Omicron's enterprise value is closest to:
A) $500 million
B) $900 million
C) $450 million
D) $400 million
Q2) Assume that you own 4000 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to repurchase stock.Detail exactly how you could undo the dividend in a way that will provide you with the same combination of cash and stock that you would have received if Omicron had not paid the special dividend.
Q3) A Canadian investor who holds her shares for a long time period and then plans to donate her shares to a Canadian charity will not have to pay any ________ and the full amount of the donation will be eligible for a charitable tax credit.
A) capital gains tax
B) dividend income tax
C) income tax
D) earning income
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following statements is false?
A) The firm's unlevered cost of capital is equal to its pre-tax weighted average cost of capital - that is, using the pre-tax cost of debt, r<sub>d</sub> , rather than its after-tax cost, r<sub>d</sub> (1 - <sub>c</sub> ).
B) A firm's levered cost of capital is a weighted average of its equity and debt costs of capital.
C) When the firm maintains a target leverage ratio, its future interest tax shields have similar risk to the project's cash flows, so they should be discounted at the project's unlevered cost of capital.
D) The first step in the APV method is to calculate the value of free cash flows using the project's cost of capital if it were financed without leverage.
Q2) The WACC approach does not require knowledge of ________ tax rates.This fact is important because in practice,estimating the marginal tax rate of the ________ can be very difficult.
A) investors'; investor
B) shareholders'; shareholder
C) debtors'; debtor
D) creditors'; creditor
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) To assess whether an acquisition is attractive requires a careful analysis both of ________ aspects of the firm and of the ________ the deal is expected to generate and the return that should be required.
A) the operational; ultimate revenues
B) the operational; ultimate cash flows
C) the marketing; ultimate cash flows
D) the marketing; ultimate revenues
Q2) The unlevered beta for Nike is closest to:
A) 0.70
B) 1.00
C) 1.50
D) 0.60
Q3) Ideko's Accounts Receivable Days is closest to:
A) 84 days
B) 95 days
C) 90 days
D) 75 days
Q4) What is the purpose of the sensitivity analysis?
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Chapter 20: Financial Options
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Q1) Consider the following equation: C = S - K + dis(K)+ P - PV(Div)
In this equation,dis(K)+ P - PV(Div)tells us
A) the market value of the option.
B) the difference in the price of an American option over a European option because of dividend capture.
C) the intrinsic value of the option.
D) the time value of the option.
Q2) Assume you want to buy one option contract with an exercise price closest to being at-the-money and that expires January 2009.The current price that you would have to pay for such a contract is:
A) $680
B) $380
C) $650
D) $420
Q3) Which of the following will NOT increase the value of a put option?
A) An increase in the time to maturity
B) A decrease in the stock price
C) A decrease in the stock's volatility
D) An increase in the exercise price
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Chapter 21: Option Valuation
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Q1) Risk-neutral probabilities are also known as all of the following EXCEPT:
A) Contingent probabilities
B) State-contingent prices
C) Martingale prices
D) State prices
Q2) Using risk-neutral probabilities,calculate the price of a two-year call option on Kinston stock with a strike price of $9.
Q3) The risk-neutral probability of an up state for KD industries is closest to:
A) 37.5%
B) 60.0%
C) 40.0%
D) 62.5%
Q4) Using risk-neutral probabilities,calculate the price of a two-year put option on Kinston stock with a strike price of $9.
Q5) ________ on a positive beta stock have very large ________ betas,respectively.
A) Calls and puts; negative and positive
B) Calls and puts; positive and negative
C) Puts and calls; positive and negative
D) None of the above
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Chapter 22: Real Options
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Q1) Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.Draw a decision tree detailing this problem.
Q2) Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.The value of the option to abandon production will be closest to:
A) $1.0 million
B) $0.5 million
C) -$1.0 million
D) $3.0 million
Q3) The hurdle rate rule uses ________ than ________ to compute the NPV,but then applies the regular NPV rule.
A) a lower discount rate; the cost of capital
B) a higher discount rate; the required rate of return
C) a lower discount rate; the required rate of return
D) a higher discount rate, the cost of capital
Q4) List three kinds of real options that are most frequently encountered in practice.
Q5) Using the equivalent annual benefit method,which project would you select and why?
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Chapter 23: The Mechanics of Raising Equity Capital
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Q1) Which of the following statements is NOT true regarding venture capitalists?
A) They can provide substantial capital for young companies.
B) The firms offer limited partners a number of advantages over investing directly in start-ups themselves as angel investors.
C) They use their control to protect their investments, so they may therefore perform a key nurturing and monitoring role for the firm.
D) They might invest for strategic objectives in addition to the desire for investment returns.
Q2) Assuming that this is the venture capitalist's first investment in your firm,what percentage of the firm will you own?
A) 50%
B) 40%
C) 33%
D) 25%
Q3) How much money did the venture capitalists receive?
Q4) When referring to IPOs,what is book building?
Q5) How much money did Luther raise?
Q6) What will the offer price of these shares be if Luther is selling 800,000 shares?
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Chapter 24: Debt Financing
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Q1) Which of the following statements regarding municipal bonds is false?
A) A single municipal bond issue will often contain a number of different maturity dates. Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years.
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue.
C) Municipal bonds are sometimes also referred to as tax-exempt bonds.
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government.
Q2) Which of the following statements regarding the private debt market is false?
A) Private debt has the advantage that it avoids the cost of registration.
B) Bank loans are an example of private debt, debt that is not publicly traded.
C) Private debt has the disadvantage of being illiquid.
D) The public debt market is larger than the private debt market.
Q3) What is the Yield to Call (YTC)on this bond?
Q4) What is the Yield to Call (YTC)on this bond?
Q5) What is the Yield to Maturity (YTM)on this bond?
Q6) What is the Yield to Maturity (YTM)on this bond?
Page 26
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Chapter 25: Leasing
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Q1) A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a
A) fair market value cap lease.
B) fair market value lease.
C) $1.00 out lease.
D) fixed price lease.
Q2) Which of the following statements is false?
A) A lease is a contract between two parties: the lessee and the lessor.
B) Most leases involve little or no upfront payment.
C) The lessee is the owner of the asset, who is entitled to the lease payments in exchange for lending the asset.
D) At the end of the contract term, the lease specifies who will retain ownership of the asset and on what terms.
Q3) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
Q4) Calculate the monthly lease payments for a four-year $1.00 out lease of the bulldozer.
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Chapter 26: Working Capital Management
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Q1) Which of the following statements is false?
A) The main components of net working capital are cash, inventory, receivables, and payables.
B) The firm's cash cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product.
C) Working capital includes the cash that is needed to run the firm on a day-to-day basis. It does not include excess cash, which is cash that is not required to run the business and can be invested at a market rate.
D) If the firm pays cash for its inventory, the firm's operating cycle is identical to the firm's cash cycle
Q2) Which of the following money market investments is short-term debt issued by a bank with a minimum denomination of $100,000?
A) Treasury Bill
B) Banker's Acceptance
C) Repurchase Agreement
D) Commercial Paper
E) Certificates of Deposit (CD)
Q3) Calculate the number of days in Luther's Operating Cycle.
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Chapter 27: Short-Term Financial Planning
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Q1) Which of the following statements is false?
A) A public warehouse is a business that exists for the sole purpose of storing and tracking the inflow and outflow of the inventory.
B) A warehouse arrangement is the riskiest collateral arrangement from the standpoint of the lender.
C) Because the warehouser is a professional at inventory control, there is likely to be little loss due to damaged goods or theft, which in turn lowers insurance costs.
D) A field warehouse is operated by a third party, but is set up on the borrower's premises in a separate area so that the inventory collateralizing the loan is kept apart from the borrower's main plant.
Q2) When a company analyzes its short-term financing needs,it typically examines cash flows at ________.
A) annual intervals
B) semiannual intervals
C) quarterly intervals
D) monthly intervals
Q3) Calculate the temporary working capital needs for each of the four quarters for Hasbeen Toys.
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Chapter 28: Mergers and Acquisitions
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52 Verified Questions
52 Flashcards
Source URL: https://quizplus.com/quiz/65850
Sample Questions
Q1) Which of the following statements is false?
A) Cost-reduction synergies are hard to predict and achieve.
B) Because the CEOs of small firms receive information so quickly, small firms are often able to react in a timely way to changes in the economic environment.
C) Synergies usually fall into two categories: cost reductions and revenue enhancements.
D) There may be costs associated with size.
Q2) A rights offering that gives existing target shareholders the right to buy shares in either the target or the acquirer at a deeply discounted price once certain conditions are met is called a
A) golden parachute.
B) poison pill.
C) classified board.
D) white knight.
Q3) For most investors an investment in the stock market is a ________ investment.
A) risk-free
B) positive-NPV
C) zero-NPV
D) negative-NPV
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Page 30
Chapter 29: Corporate Governance
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48 Verified Questions
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Source URL: https://quizplus.com/quiz/65851
Sample Questions
Q1) In Canada and Europe,many corporations are run by families that own controlling blocks of shares.The central conflict is between what are called ________ and
A) controlling shareholders; minority shareholders
B) controlling stakeholders; minority stakeholders
C) controlling investors; minority investors
D) controlling creditors; minority creditors
Q2) Which of the following statements is false?
A) The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity.
B) The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure.
C) While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects.
D) In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy.
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Chapter 30: Risk Management
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Sample
Questions
Q1) Hedging involves contracts or transactions that provide the firm with ________ that offset its losses from price changes.
A) profits
B) incomes
C) cash flows
D) net earnings
Q2) Which of the following statements is false?
A) Firms generally do not possess better information than outside investors regarding the risk of future commodity price changes, nor can they influence that risk through their actions.
B) Cash flows are exchanged on a monthly basis, rather than waiting until the end of the contract, through a procedure called marking to market.
C) The firm may speculate by entering into contracts that do not offset its actual risks.
D) When a firm authorizes managers to trade contracts to hedge, it opens the door to the possibility of speculation.
Q3) What is the actuarially fair cost of full insurance?
Q4) What are some of the disadvantages of long-term supply contracts?
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32
Chapter 31: International Corporate Finance
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Sample Questions
Q1) The present value of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
Q2) The amount of the taxes paid in dollars for the Japanese operations is closest to:
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
Q3) Calculate the pound denominated cost of capital for Luther's project.
Q4) Because obtaining forward rate quotes for as long as four years in the future is difficult,managers normally use the covered ________ to compute ________.
A) interest rate parity; the forward rates
B) price parity; the forward rates
C) interest rate parity; the spot rates
D) price parity; the spot rates
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