Course Introduction
Financial Analysis
Exam Practice Tests
Financial Analysis is an essential course that equips students with the skills and knowledge to evaluate a company's financial health and performance. Through a combination of theoretical frameworks and practical applications, students learn to interpret financial statements, assess profitability, liquidity, and solvency ratios, and perform comprehensive analyses such as trend, vertical, and horizontal analysis. The course also covers financial forecasting, valuation methods, and the use of financial data in decision-making, preparing students to make informed recommendations and support strategic planning in a business context.
Recommended Textbook
Finance Applications and Theory 3rd Edition by Marcia Millon Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which of the following managers would NOT use finance?
A)Operational managers
B)Marketing managers
C)Human resource managers
D)All of these would use finance.
Answer: D
Q2) In the financial crisis that started in 2006,a significant indicator of the U.S.economic decline was:
A)a significant drop in interest rates.
B)a sharp increase in unregulated Ponzi-type security sales.
C)rising defaults by subprime mortgage borrowers.
D)a large increase in loan default due to unemployment.
Answer: C
Q3) Which of the following statements is incorrect?
A)Sole proprietorships are subject to less regulation.
B)Both angel investors and venture capitalists exchange capital for ownership.
C)Shareholders are responsible for paying off the corporate bonds in the event of a bankruptcy.
D)All of these statements are correct.
Answer: C
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Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Corporate Taxes The AOK Corporation had a 2013 taxable income of $2,200,000 from operations after all operating costs but before (1)interest charges of $90,000, (2)dividends received of $750,000, (3)dividends paid of $80,000,and (4)income taxes.
Using the tax schedule in Table 2.3,what is AOK's income tax liability?
What are AOK's average and marginal tax rates on taxable income from operations?
A)$793,900, 34%, 34%, respectively
B)$793,900, 36.0864%, 34%, respectively
C)$972,400, 34%, 34%, respectively
D)$972,400, 44.2%, 34%, respectively
Answer: B
Q2) Net operating profit after taxes (NOPAT)is defined as which of the following?
A)Net profit a firm earns before taxes, but after any financing costs
B)Net profit a firm earns after taxes, and after any financing cots
C)Net profit a firm earns after taxes, but before any financing costs
D)Net profit a firm earns before taxes, and before any financing cost
Answer: C
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Page 4
Chapter 3: Analyzing Financial Statements
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Sample
Questions
Q1) Explain what managers,analysts and investors might use to understand how ratios are interrelated.
Answer: Many of the ratios we review are interrelated.That is,a change in one ratio may affect the value of several ratios.To see how these interrelations help evaluate a firm performance,managers,analysts and investors often perform a detailed analysis of ROA and ROE using the DuPont system of analysis.DuPont system of analysis uses the balance sheet and income statement to break ROA and ROE ratios into component pieces.
Q2) A firm has a debt ratio of 45 percent,capital intensity ratio is 1.3 times,profit margin is 10 percent,and dividend payout ratio is 30 percent.Calculate the sustainable growth rate for the firm.
A)1.56 percent
B)2.96 percent
C)3.05 percent
D)4.79 percent
Answer: C
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Chapter 4: Time Value of Money
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Sample Questions
Q1) A $400 investment has doubled to $800 in six years because of a 12.25 percent return.How much longer will it take for the investment to reach $1100 if it continues to earn 12.25 percent?
A)2.56 years
B)2.76 years
C)3.46 years
D)5 years
Q2) Assume you borrow $500 from a payday lender.The terms are that you must pay a fee of $75 in advance (today)and one year from now you need to repay $750.What implied interest rate are you paying?
A)43.09 percent
B)55.78 percent
C)76.47 percent
D)81.03 percent
Q3) Solving for Time How long will it take $3,000 to reach $5,000 when it grows at 7 percent per year?
A)7.00 years
B)7.55 years
C)9.52 years
D)10.29 years
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Investing for Retirement Monica has decided that she wants to build enough retirement wealth that,if invested at 7 percent per year,will provide her with $3,000 monthly income for 30 years.To date,she has saved nothing,but she still has 20 years until she retires.How much money does she need to contribute per month to reach her goal?
A)$671.78
B)$865.62
C)$3,000.00
D)$7,025.77
Q2) Present Value of a Perpetuity What is the present value,when interest rates are 6.5 percent,of a $100 payment made every year forever?
A)$6.50
B)$650.00
C)$1,000.00
D)$1,538.46
Q3) The interest on your home mortgage is tax deductible.Why are the early years of the mortgage more helpful in reducing taxes than the later years?
Q4) Describe how compounding affects the future value computation of an annuity.
Q5) What is the difference between an annuity due and an ordinary annuity?
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Which of the following terms is the chance that the bond issuer will not be able to make timely payments?
A)Credit quality risk
B)Interest rate risk
C)Liquidity of interest rate risk
D)Term structure of interest rates
Q2) Interest Payments Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually),6.45 percent coupon Treasury note,and a corporate zero coupon bond maturing in 10 years.(Assume a $1,000 par value.)
A)$5.50, $6.45, $0, respectively
B)$27.50, $32.25, $0, respectively
C)$27.50, $32.25, $100, respectively
D)$55.00, $64.50, $0, respectively
Q3) If a bond is selling at par value,which of the following statements is correct?
A)The current yield must equal the coupon rate.
B)The current yield must equal the yield to maturity.
C)Both of these statements are correct.
D)None of these statements is correct.
Q4) Describe the relationship between interest rate changes and bond prices.
Page 8
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Chapter 8: Valuing Stockspart
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Sample Questions
Q1) Value of Future Cash Flows A firm recently paid a $1.00 annual dividend.The dividend is expected to increase by 10 percent in each of the next four years.In the fourth year,the stock price is expected to be $100.If the required rate for this stock is 14 percent,what is its value?
A)$25.00
B)$36.60
C)$62.87
D)$72.30
Q2) Value stocks are:
A)stocks that are expected to exhibit high growth.
B)stocks that have low P/E ratios and are selling at a bargain price. C)stocks that have high valuation ratios, such as P/E.
D)none of these.
Q3) A firm's stock is selling at $75.00 per share.Its growth rate is 10 percent and investors demand 17 percent on this stock.What is the firm's expected dividend?
A)$4.75
B)$5.95
C)$6.25
D)$5.25
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Page 9
Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) The past five monthly returns for PG&E are 12.14 percent,-11.37 percent,3.77 percent,6.47 percent,and 3.58 percent.What is the average monthly return?
A)2.92 percent
B)1.21 percent
C)-3.46 percent
D)3.17 percent
Q2) You have $10,000 to invest.You want to purchase shares of Alaska Air at $50.00,Best Buy at $50.00,and Ford Motor at $10.00.How many shares of each company should you purchase so that your portfolio consists of 25 percent Alaska Air,40 percent Best Buy,and 35 percent Ford Motor? Report only whole stock shares.
A)50 shares of Alaska Air, 80 shares of Best Buy, and 300 shares of Ford Motor
B)50 shares of Alaska Air, 80 shares of Best Buy, and 350 shares of Ford Motor
C)40 shares of Alaska Air, 90 shares of Best Buy, and 300 shares of Ford Motor
D)75 shares of Alaska Air, 40 shares of Best Buy, and 350 shares of Ford Motor
Q3) The total risk of the S&P 500 Index is equal to:
A)diversifiable risk.
B)nondiversifiable risk.
C)modern portfolio risk.
D)efficient frontier risk.
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Page 10
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) Which of the following is data that includes past stock prices and volume,financial statements,corporate news,analyst opinions,etc.?
A)Audited financial statements
B)Generally accepted accounting principles
C)Privately held information
D)Public information
Q2) Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return next year.His firm has a beta of 2,the expected return on the market is 5 percent,and the risk-free rate is 2 percent.Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.
A)8 percent, undervalued
B)8 percent, overvalued
C)12 percent, undervalued
D)12 percent, overvalued
Q3) Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.
Q4) How can one account for movements in the economy when evaluating a firm's stock return performance?
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Page 11
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Which of the following makes this a true statement? Ideally,when searching for a beta for a new line of business:
A)one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.
B)one would like to find at least three or four pure-play proxies.
C)two (or even one) proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.
D)All the answers make this a true statement.
Q2) Explain why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division.
Q3) A proxy beta is:
A)the average beta of firms that are only engaged in the proposed new line of business.
B)the industry average beta that is used in lieu of the firm's beta because the firm has not existed long enough to have a beta calculated.
C)the beta used when the firm has a great deal of business risk.
D)None of these answers is correct.
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) KADS,Inc.,has spent $400,000 on research to develop a new computer game.The firm is planning to spend $50,000 on a machine to produce the new game.Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000.The machine has an expected life of three years,a $10,000 estimated resale value,and falls under the MACRS five-year class life.Revenue from the new game is expected to be $500,000 per year,with costs of $200,000 per year.The firm has a tax rate of 35 percent,an opportunity cost of capital of 15 percent,and it expects net working capital to increase by $25,000 at the beginning of the project.What will the year 3 free cash flow for this project be?
A)$222,600
B)$197,400
C)$212,200
D)$243,300
Q2) Which of these is used as a measure of the total amount of available cash flow from a project?
A)Free cash flow
B)Operating cash flow
C)Investment in operating capital
D)Sunk cash flow
Q3) How do replacement projects' cash flows differ from new projects' cash flows?
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting
Criteria
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Sample Questions
Q1) All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:
A)MIRR.
B)profitability index.
C)discounted payback.
D)NPV.
Q2) Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?
A)Payback
B)Discounted payback
C)Net present value
D)Profitability index
Q3) Neither payback period nor discounted payback period techniques for evaluating capital projects account for:
A)time value of money.
B)market rates of return.
C)cash flows that occur after payback.
D)cash flows that occur during payback.
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Q4) Use NPV profiles to reconcile sources of conflict between NPV and IRR methods.
Chapter 14: Working Capital and Policies
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Q1) What effect does increasing the standard deviation in daily cash flows have on the cash return point in the Miller-Orr model?
A)It will cause the cash return point to increase.
B)It will cause the cash return point to decrease.
C)It has no impact on the cash return point.
D)It will cause the cash return point to first increase, then decrease.
Q2) What must the rate be less than to be worth it to incur a compensating balance of $20,000 in order to get a 2 percent lower interest rate on a one-year,pure discount loan of $200,000?
A)The rate must be less than 78 percent.
B)The rate must be greater than 78 percent.
C)The rate must be greater than -78 percent.
D)The rate must be less than -78 percent.
Q3) The inventory order quantity that minimizes total holding and ordering costs is which of the following?
A)Barabas economic order quantity (EOQ)
B)Cornett economic order quantity (EOQ)
C)Operations management
D)Production management
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Page 15
Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) Silly Putty Inc.has had sales of $12 million,$17 million,and $16 million for each of the last three years.What would be the MAPE if the actual sales were $15 million using the average approach?
A)0.24 percent
B)1.01 percent
C)0 percent
D)-0.43 percent
Q2) Which of the following are considered "chunky" or "lumpy" assets?
A)Total assets
B)Current assets
C)Fixed assets
D)Additional funds needed (AFN)
Q3) Which of the following can be computed as: necessary increase in assets minus spontaneous increase in liabilities minus projected increase in retained earnings?
A)Additional funds needed
B)Capital intensity ratio
C)Current ratio
D)Spontaneous assets
Q4) Is forecasting more important for small firms or large firms? Why?
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Chapter 16: Assessing Long-Term Debt, equity, and Capital Structure
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Q1) An all-equity financed firm has $500 in assets and the stock price is $20.If the firm restructures with 15 percent debt which creates interest expense of $30 per year and the firm's tax rate is 40 percent,what is the break-even EBIT?
A)$37.50
B)$31.50
C)$200
D)$42.50
Q2) If an investor wanted to reduce the risk of a levered stock in their portfolio,how could they go about doing so while still retaining shares in the company?
A)They could sell some of their shares and use the proceeds to buy the firm's bonds.
B)They could sell some of their bonds and use the proceeds to buy the firm's stock.
C)They could use borrowed funds to buy more of the firm's stock.
D)None of these.
Q3) Explain why,in a world with both corporate taxes and the chance of bankruptcy,a small firm with volatile EBIT is unlikely to have much debt?
Q4) Explain why utility firms tend to have fairly high debt ratios.
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Page 17
Chapter 17: Sharing Firm Wealth: Dividends, share
Repurchases and Other Payouts
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Q1) Which of the following is the date the firm sends dividends out to the shareholders?
A)Declaration date
B)Ex-dividend date
C)Record date
D)Payment date
Q2) JEN Corp.is expected to pay a dividend of $2.00 per year indefinitely.If the appropriate rate of return on this stock is 12 percent per year,and the stock consistently goes ex-dividend 25 days before dividend payment date,what will be the expected maximum price in light of the dividend payment logistics?
A)$1.14
B)$16.54
C)$16.67
D)$18.52
Q3) Which of the following firms is more likely to use extraordinary dividends?
A)One with cyclical sales
B)One with stable sales
C)Firms with either cyclical or stable sales
D)Firms with neither cyclical nor stable sales
Q4) Note the advantages and disadvantages of a firm's stock repurchases.
Page 18
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Chapter 18: Issuing Capital and the Investment Banking Process
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Q1) Calculating Costs of Issuing Stock Your company needs to raise $10 million to finance plant expansion.In discussions with its investment bank,you learn that the bankers recommend a gross price of $45 per share and that 240,000 shares of stock be sold.If the net proceeds on the stock sale leave your company with $10 million,what is the underwriter's spread on the stock issue?
A)$3.33
B)$6.66
C)$45.00
D)$41.67
Q2) Calculate the total fees a firm would have to pay when its bank offers the firm the following loan commitment: A loan commitment of $1,500,000 with an up-front fee of 95 basis points and a back-end fee of 25 basis points.The take-down on the loan is 50 percent.
A)$15,550
B)$16,125
C)$18,125
D)$15,955
Q3) Differentiate among sources of capital funding for public firms.
Q4) How does a best effort underwriting differ from a firm commitment underwriting?
Q5) Explain the process by which securities are underwritten.
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Chapter 19: International Corporate Finance
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Sample Questions
Q1) Currency Exchange Compute the number of dollars that can be bought with 1 million of foreign currency units:
$1 = 3.8249 Saudi Arabian riyal
A)$261,444.7437
B)$4,824,900.00
C)$382,490.00
D)$1,000,000
Q2) Law of One Price If the price of silver in England is £7.10 per ounce,what is the expected price of silver in the United States if the spot exchange rate is $1 = £0.5275?
A)$7.6275 per ounce
B)$7.429 per ounce
C)$3.74525 per ounce
D)$13.4597 per ounce
Q3) If more dollars are required to buy a unit of foreign currency,then the dollar is:
A)strengthening.
B)weakening.
C)violating the law of one price.
D)not in equilibrium.
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Q1) How can managers' personal incentives result in value-destroying mergers and acquisitions?
Q2) Calculation of Average Costs with Economies of Scope Crib World is considering a merger with Tots Supply Stores.Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million.Tots' total operating costs of producing services are $210,000 for a sales volume (J<sub>P</sub>)of $900,000.Calculate the average cost of production for the Crib and Tots firms,respectively.
A)20 percent, 23.33 percent
B)23.33 percent, 20 percent
C)27.78 percent, 16.8 percent
D)21.4 percent, 21.4 percent
Q3) The main reason for a vertical merger is:
A)avoidance of fixed costs.
B)elimination of costs of searching for input prices.
C)control over input prices.
D)All of these.
Q4) List and explain the three dimensions of the revenue-enhancement argument.
Q5) What is a credit-scoring model?
Q6) The Altman's Z-score model has several weaknesses.What are they?
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