Financial Analysis
Exam Materials
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the skills needed to interpret and evaluate financial statements and performance metrics of organizations. Through the exploration of financial ratios, trend analysis, cash flow assessment, and profitability measures, students learn to assess a company's financial health and make informed decisions. The course also covers topics such as forecasting, budgeting, and valuation techniques, providing a solid foundation for careers in finance, accounting, consulting, and business management. Practical case studies and real-world applications ensure that students gain hands-on experience in analyzing financial data and formulating strategic financial recommendations.
Recommended Textbook Fundamentals of Corporate Finance 7th Edition by
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Page 2
Richard A. Brealey
Chapter 1: Goals and Governance of the Corporation
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Q1) The best criterion for success in a capital budgeting decision would be to:
A) minimize the cost of the investment.
B) maximize the number of capital budgeting projects.
C) maximize the difference between cash inflows and cost.
D) finance all capital budgeting projects with debt.
Answer: C
Q2) How may a reduction in cash dividends be in the best interests of current shareholders?
A) A reduction of cash dividends is always in the best interests of current shareholders.
B) The firm will have available cash to increase current investment and future profits.
C) Reduced dividends increase managerial compensation, thus increasing their motivation.
D) A reduction of cash dividends cannot be in the best interests of current shareholders. Answer: B
Q3) Tabulate and compare the differences among corporations,sole proprietorships,and partnerships.
Answer: 11ea6d2d_32af_812b_b460_c395971d03f5_TB2304_00
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Chapter 2: Financial Markets and Institutions
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Q1) What is an exchange traded fund? What are some popular choices of exchange traded funds?
Answer: Exchange traded funds (ETFs)are portfolios of stocks that can be bought or sold in a single trade.These include Standard & Poor's Depository Receipts (SPDRs,or "spiders"),which are portfolios matching Standard & Poor's stock market indexes.The total amount invested in the spider tracking the benchmark S&P 500 index was about $94 billion by early 2011.You can also buy DIAMONDS,which track the Dow Jones Industrial Average; QUBES or QQQQs,which track the NASDAQ 100 index; and Vanguard ETFs,which track the Vanguard Total Stock Market index,a basket of almost all the stocks traded in the United States.You can also buy ETFs that track foreign stock markets,bonds,or commodities.
Q2) The cost of capital is the interest rate paid on a loan from a bank or some other financial institution.
A)True
B)False
Answer: False
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Chapter 3: Accounting and Finance
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Q1) Which of the following expenses cannot be used to reduce taxable corporate income?
A) Cash dividends
B) Depreciation expense
C) Interest expense
D)Administrative expenses
Answer: A
Q2) According to accrual accounting,when goods are not sold until the period after they were produced,then the cost of goods sold:
A) will be recognized in the first period.
B) will be recognized in the second period.
C) will be recognized when payment is received.
D)will be split between both periods
Answer: B
Q3) To calculate the cash produced by the business it is necessary to add back the depreciation charge and to subtract the expenditure on new capital equipment.
A)True
B)False
Answer: True
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Chapter 4: Measuring Corporate Performance
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Q1) XYZ Corp.has improved its average collection period from 55 to 40 days.Which one of XYZ's other ratios may appear worse as a result of the improved receivables collection?
A) Inventory turnover
B) Quick ratio
C) Net profit margin
D) Return on equity
Q2) The income statement of a firm shows the value of its assets and liabilities over a specified period of time.
A)True
B)False
Q3) A sign that a firm is efficient is a:
A) high average collection period.
B) high day's sales in inventories.
C) low asset turnover.
D) high inventory turnover.
Q4) EVA is the net profit of the firm adjusted for the cost of capital.
A)True
B)False
Q5) What are some potential pitfalls of ratio analysis based on accounting data?
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Chapter 5: The Time Value of Money
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Q1) The present value of an annuity due equals the present value of an ordinary annuity times the discount rate.
A)True
B)False
Q2) How should we compare interest rates quoted over different time intervals-for example,monthly versus annual rates?
Q3) How much must be saved annually,beginning 1 year from now,in order to accumulate $50,000 over the next 10 years,earning 9% annually?
A) $3,291
B) $3,587
C) $4,500
D) $4,587
Q4) Which account would be preferred by a depositor: an 8% APR with monthly compounding or 8.5% APR with semiannual compounding?
A) 8.0% with monthly compounding.
B) 8.5% with semiannual compounding.
C) The depositor would be indifferent.
D) The time period must be known to select the preferred account.
Q5) Discuss the statement,"Money has a time value."
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Chapter 6: Valuing Bonds
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Q1) What are catastrophe (or Cat)bonds?
Q2) When riskier corporations issue bonds that include a default premium,the promised yield will sometimes be:
A) less than the actual yield.
B) greater than the actual yield.
C) less than the yield on a default-free bond.
D) greater than the face value of the bond.
Q3) What are some new types of bonds? List and describe at least two of them.
Q4) The present value of a bond is positively related with:
A) a lower coupon payment.
B) greater perceived liquidity.
C) greater default risk.
D) higher interest rates.
Q5) Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?
A) The bond is selling at a discount to par value.
B) The bond has a high default premium.
C) The promised yield is not likely to materialize.
D) The bond must be a Treasury Inflation-Protected Security.
Q6) Why do bonds exhibit interest rate risk?
Page 8
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Chapter 7: Valuing Stocks
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Q1) How do you estimate expected rates of return in the constant-growth dividend discount model?
Q2) If the liquidation value of a corporation exceeds the market value of the equity,then the:
A) firm has no value as a going concern.
B) firm's stock will sell for book value.
C) firm is not taking advantage of available growth opportunities.
D) dividend payout ratio has been too high.
Q3) Research indicates that the correlation coefficient between successive days' stock price changes is:
A) quite close to +1.
B) quite close to -1.
C) quite close to zero.
D) directly related to the stock's beta.
Q4) If it proves possible to make abnormal profits based on information regarding past stock prices,then the market:
A) is weak-form efficient.
B) is not weak-form efficient.
C) is semistrong-form efficient.
D) is strong-form efficient.
Page 9
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) The profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12% is:
A) 0.139
B) 0.320
C) 0.500
D)0.861
Q2) When mutually exclusive projects have different lives,the project that should be selected will have the:
A) highest IRR.
B) longest life.
C) lowest equivalent annual cost.
D)highest NPV, discounted at the opportunity cost of capital.
Q3) Which of the following investment decision rules tends to improperly reject long-lived projects?
A) Net present value
B) Internal rate of return
C) Payback period
D)Profitability index
Q4) Why doesn't the payback rule always make shareholders better off?
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Q1) Assume that sales revenues are increasing more rapidly than product costs,but that a project's cash flows have been represented as an annuity when calculating NPV.Which of the following problems may occur?
A) Nominal cash flows are possibly being discounted with a real rate.
B) Real cash flows are possibly being discounted with a nominal rate.
C) Nominal cash flows are possibly being discounted with a nominal rate.
D) Real cash flows are possibly being discounted with a real rate.
Q2) Which of the following would be more likely to make an unacceptable project appear acceptable?
A) Discounting real cash flows with real rates
B) Discounting nominal cash flows with real rates
C) Discounting real cash flows with nominal rates
D) Discounting nominal cash flows with nominal rates
Q3) For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense,the depreciation tax shield would be:
A) $10,500
B) $30,000
C) $35,000
D) $65,000
Page 11
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Chapter 10: Project Analysis
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Q1) The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.
A)True
B)False
Q2) What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates pretax profits of $1 million and has $600,000 in depreciation expense?
A) $1.1 million
B) $2.1 million
C) $2.9 million
D) $3.9 million
Q3) If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions,then the:
A) project is ensured to be successful.
B) project's discount rate should be reduced.
C) economic forecasts are possibly overly optimistic.
D) interaction of the variables should be considered.
Q4) Discuss decision trees,including how they can be useful and how they can be risky.
Q5) Why is managerial flexibility important in capital budgeting?
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Chapter 11: Introduction to Risk,Return,and the Opportunity
Cost of Capital
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Q1) Which of the following risks would be classified as a unique risk for an auto manufacturer?
A) Interest rates
B) Steel prices
C) Business cycles
D) Foreign exchange rates
Q2) Although unique risk is present in differing amounts,individual stocks are:
A) exposed to the same amount of market risk.
B) exposed to differing amounts of market risk also.
C) not exposed to market risk; only the general economy is subject to market risk.
D) able to diversify away their market risk.
Q3) How can you estimate the opportunity cost of capital for an "average-risk" project?
Q4) Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.
A) 2
B) 5
C) 20
D) 50
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Chapter 12: Risk,Return,and Capital Budgeting
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Q1) If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills,then the investor should expect to receive:
A) the risk-free rate plus 75% of the expected return on the market.
B) the risk-free rate plus 75% of the expected market risk premium.
C) 75% of the expected return on the market.
D) 25% of the risk-free rate plus 75% of the expected market risk premium.
Q2) A portfolio of three stocks with total market value of $1,000,000 currently has a beta of 1.4.In light of an expected market downturn,you wish to reduce the portfolio beta to no more than 1.0.Two stocks are likely candidates for sale,one with a beta of 1.8 and a market value of $200,000 and the other with a beta of 1.5 and a market value of $250,000.Assuming that you could find one appropriate stock to replace these two,what should be its beta?
Q3) Stock A has a current price of $25.00,a beta of 1.25,and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%,what should stock A sell for at the end of an investor's 2-year investment horizon?
Q4) The project cost of capital depends on how the capital is used.
A)True
B)False
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) In general,equity is considered a _____ investment than debt,because payments on debt are _____.
A) safer; lower
B) safer; less certain
C) riskier; guaranteed by the company
D) riskier; guaranteed by the federal government
Q2) A project will generate $1 million net cash flow annually in perpetuity.If the project costs $7 million,what is the lowest WACC shown below that will make the NPV negative?
A) 10%
B) 12%
C) 14%
D) 16%
Q3) An increase in a firm's debt ratio will have no effect on the required rate of return for equityholders.
A)True
B)False
Q4) Why can it be incorrect to evaluate all capital budgeting proposals at the firm's current weighted-average cost of capital?
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Chapter 14: Introduction to Corporate Financing
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Q1) When corporations default on their debt:
A) bondholders may receive the firm's assets.
B) bondholders will suffer a loss.
C) the Board of Directors is liable for the payments.
D) the corporation is forced to default on its stock also.
Q2) Protective covenants prevent bond issuers from irresponsible overborrowing behavior and are offered for the benefit of:
A) common shareholders.
B) preferred shareholders.
C) bondholders.
D) both common and preferred shareholders.
Q3) When securities are priced fairly,then financing at current market rates is a positive NPV transaction.
A)True
B)False
Q4) Bonds with the callable feature sell at lower prices than bonds without such a feature.
A)True
B)False
Q5) What does it mean to say that financing is a zero-NPV transaction?
Page 16
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Chapter 15: How Corporations Raise Venture Capital and Issue Securities
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Q1) Second-stage financing occurs:
A) prior to the initial public offering.
B) when company founders sell a portion of their shares.
C) after the best efforts of the underwriters.
D) when the IPO does not raise sufficient cash.
Q2) Second stage financing:
A) involves a substantial increase in leverage.
B) immediately proceeds first-stage financing for every new business.
C) involves issuing more stock.
D) occurs when the company is in danger of bankruptcy.
Q3) How do venture capital firms design successful deals?
Q4) Major international commercial banks are:
A) the vast majority of underwriters in the United States.
B) not allowed to engage in any form of underwriting.
C) not able to compete with U.S. investment banks.
D) engaged in underwriting a significant portion of securities.
Q5) Why does the SEC deem it necessary to require the issuance of a prospectus prior to security issuance?
Q7) What are the benefits of shelf registration to corporations? Page 17
Q6) Discuss the potential benefits to a corporation of shelf registration.
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Chapter 16: Debt Policy
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Q1) What is the return on equity for a firm with 15% return on assets,10% return on debt,and a .75 debt-equity ratio?
A) 18.75%
B) 20.00%
C) 23.75%
D) 26.25%
Q2) How much debt is outstanding in a firm that has calculated the present value of a perpetual tax shield to be $300,000 if the tax rate is 35% and the debt carries a 10% rate of return?
A) $300,000
B) $857,143
C) $3,000,000
D) $3,750,000
Q3) Costs of distress are greater when a large amount of __________ affect(s)the prosperity of the firm.
A) intangible assets
B) tangible assets
C) net working capital
D) retained earnings
Q4) Does firm value increase when more debt is used?
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Chapter 17: Payout Policy
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Q1) Under the idealized conditions of MM,which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?
A) The new shares are worth less than the old shares.
B) The old shares drop in value to equal the new price.
C) The value of the firm is reduced by the amount of the dividend.
D) The value of the firm is unaffected.
Q2) A two-for-one stock split will result in:
A) the firm acquiring new assets.
B) a decrease in the stock price, but an increase in shareholder wealth.
C) an increase in the stock price, and an increase in shareholder wealth.
D) a decrease in the stock price and no change to shareholder wealth.
Q3) A firm's dividend policy involves a trade-off between:
A) a large asset base and a small asset base.
B) high share price versus low share price.
C) internal versus external financing of investment.
D) all of these.
Q4) How might differences in the tax treatment of dividends and capital gains affect dividend policy?
Q5) Discuss the concept of dividend signaling.
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Chapter 18: Long-Term Financial Planning
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Q1) Financial planning is necessary because financing and investment decisions interact and should not be made independently.
A)True
B)False
Q2) Planners have determined that sales will increase by 20% next year,and that the profit margin will remain at 10% of sales.Which of the following statements is correct?
A) Profit will grow by 20%.
B) The profit margin will grow by 10%.
C) Profit will grow proportionately faster than sales.
D) Ten percent of the increase in sales will become net income.
Q3) Which of the following does not provide a "solution" to a projected growth rate in assets that exceeds the sustainable growth rate?
A) Increase the ROE.
B) Allow the debt-equity ratio to increase.
C) Increase the payout ratio.
D) Issue new equity.
Q4) Why is it important that financial plans incorporate adaptability?
Q5) Why is it uncommon to expect assets to change proportionately with sales?
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Chapter 19: Short-Term Financial Planning
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Q1) How does long-term financing policy affect short-term financing requirements?
Q2) Biotech firms require large amounts of cash if their drugs succeed in gaining regulatory approval.Therefore,these firms often have substantial cash holdings to fund their possible investment needs.
A)True
B)False
Q3) What happens to a firm whose uses of cash exceed its sources of cash during an accounting period?
A) It borrows on a short-term basis.
B) It declares a net loss on the income statement.
C) It experiences an increase in cash balance.
D) It experiences a decrease in cash balance.
Q4) If a firm increases its accounts payable period,other things equal,it increases the cash conversion cycle.
A)True B)False
Q5) Net working capital will decrease when a firm buys raw materials on credit. A)True
B)False
Q6) Why do firms need to invest in net working capital?
Page 22
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) The Green Transfer Co.utilizes a concentration banking system and is determining whether to request wire transfers or depository transfer checks.What would you suggest,given the following: wire transfer saves 3 days of float but increases costs by $45.The current interest rate is 10% annually.Next year,however,technological changes will occur that reduce the float savings to 2 days from 3,and the incremental costs will be reduced to $35.
Q2) A firm with unpredictable cash flows is trying to set upper and lower limits for cash balances.Which of the following factors will result in upper and lower limits being closer to each other?
A) Variance of the cash flows is low.
B) Cost of trading securities is high.
C) Interest rate is low.
D) Current cash balance is low.
Q3) The more liberal the terms of the collection policy,the less the potential for bad debts and unprofitable sales.
A)True
B)False
Q4) Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?
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Chapter 21: Mergers, Acquisitions, and Corporate Control
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Q1) The major cost of a merger is the:
A) legal fees.
B) cost of restructuring the acquired firm.
C) premium the acquirer pays to the target firm.
D) reduction in free cash flow.
Q2) Contrary to logic,firms that enjoy complementary resources in the production process are rarely good candidates for merger.
A)True
B)False
Q3) In 2010,how has the dynamic of the proxy contest changed?
Q4) In 2005 China National Offshore Oil Corporation (CNOOC)felt obliged to withdraw its bid for Unocal,after what is described as "unprecedented political opposition" in Congress.
A)True
B)False
Q5) In vertical mergers,the goal is to benefit from the economies of scale.
A)True
B)False
Q6) How should the gains and costs of mergers to the acquiring firm be measured?
Q7) Who is (are)typically the primary beneficiary(ies)in a merger?
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Chapter 22: International Financial Management
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Q1) A U.S.firm owes ¥10 million 3 months from now.The spot exchange rate is ¥95/$ and the forward rate is ¥96/$.Is the yen selling at a forward premium or discount,related to the dollar? Does the firm face exchange risk? Would you suggest that it buy now or later?
Q2) What is the expected German inflation rate if 3% inflation is expected in the United States,the spot exchange rate is 1.5/$ and the expected spot rate is 1.6/$?
A) 2.81%
B) 7.10%
C) 9.87%
D) 11.43%
Q3) If interest rates are higher in Italy than in the United States,the market expects that the Euro will:
A) appreciate against the dollar.
B) depreciate against the dollar.
C) offer a higher real rate of return than the dollar.
D) be selling at a forward discount.
Q4) Transaction risk is easily identified and hedged.
A)True
B)False
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Chapter 23: Options
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Q1) Which of the following conditions will typically be present when a firm calls a bond prior to maturity?
A) The firm is in poor financial health.
B) Interest rates have risen substantially since the bond was issued.
C) Interest rates have fallen substantially since the bond was issued.
D) The call option is ready to expire.
Q2) The major difference between options on real assets and options on financial assets is that options on:
A) financial assets are costly.
B) financial assets have a higher probability of positive payoff.
C) real assets are implicit, rather than explicit.
D) real assets are not influenced by price volatility.
Q3) Corporations that attach warrants to their bonds are hoping to:
A) sell equity without paying flotation costs.
B) convert the bonds into stock at a later date.
C) reduce the cost of debt by increasing bond prices.
D) increase the price of their shares.
Q4) The price of a call option increases while its exercise price decreases.
A)True
B)False
Page 26
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Chapter 24: Risk Management
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Q1) An oil producer would sell,rather than buy,crude oil futures for protection from falling prices.
A)True
B)False
Q2) A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by:
A) buying call options on copper.
B) selling copper futures.
C) buying copper futures.
D) selling copper call options.
Q3) Discuss what it means for a futures contract to be marked to market.If you provide an example,assume that the hedger has purchased a 5,000 bushel wheat contract at a price of $3.90 per bushel.
Q4) Which of the following statements is correct for an interest rate swap?
A) There is an exchange on principal between counterparties.
B) There is no exchange of principal between counterparties.
C) There is an exchange of currencies between counterparties.
D) There is no exchange of cash between counterparties.
Q5) What is the basic difference between hedgers and speculators?
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