Financial Analysis
Exam Questions
Course Introduction
Financial Analysis is a foundational course designed to equip students with the skills and tools necessary to evaluate the financial health of businesses and investment opportunities. The course covers key topics such as financial statement analysis, ratio analysis, cash flow analysis, and profitability assessment. Students learn how to interpret balance sheets, income statements, and cash flow statements, and how to use this information to make informed decisions. Emphasizing practical application, the course also addresses forecasting, budgeting, and comparative analysis, preparing students for roles in corporate finance, investment analysis, and business management.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) The goal of the firm should be:
A)maximization of profits.
B)maximization of shareholder wealth.
C)maximization of consumer satisfaction.
D)maximization of sales.
Answer: B
Q2) Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:
A)a secondary market transaction.
B)an initial public offering.
C)a seasoned new issue.
D)both A and B.
Answer: B
Q3) Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship.
A)True
B)False
Answer: False
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) ABC Corporation issued and sold 10 shares of stock to Irene Investor,a private individual.This represents a secondary market transaction.
A)True
B)False
Answer: False
Q2) A security is a written instrument that represents a financial claim.
A)True
B)False
Answer: True
Q3) Financial intermediaries help bring savers and borrowers together.
A)True
B)False
Answer: True
Q4) A company has the option to pay bond interest or not.
A)True
B)False
Answer: False
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Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) Based on the information given in Table 1,calculate the dividends paid in 1996.
A)$3,750
B)$3,000
C)$750
D)$2,250
Answer: D
Q2) Holding all other variables constant,which of the following will decrease total equity?
An increase in:
A)common stock issued
B)dividends paid
C)net income
D)interest expense
Answer: B
Q3) The balance sheet provides a statement of the firm's financial position.
A)True
B)False
Answer: True
Q4) From the scrambled list of items presented in Table 4,prepare an income statement and a balance sheet for Dooley Sportswear Company.
Answer: 11ea8586_f222_7e86_a433_29ebdbff9214_TB2776_00
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Based on the information in Table 1,and using a 360-day year,the average collection period is:
A)71 days.
B)84 days.
C)64 days.
D)125 days.
Q2) Differences in accounting practices limit the use of ratio analysis.
A)True
B)False
Q3) Another name for the acid test ratio is the:
A)current ratio.
B)quick ratio.
C)inventory turnover ratio.
D)average collection period.
Q4) Financial ratios that are higher than industry averages may indicate problems which are as detrimental to the firm as ratios that are too low.
A)True
B)False
Q5) Discuss the limitations of ratio analysis.
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Quarterly compounding has a higher annual percentage yield than monthly compounding.
B)On monthly compounding loans,the annual percentage yield will be less than the nominal or quoted rate of interest.
C)Compounding essentially means earning interest on interest on an initial balance.
D)Perpetuities pay an equal payment forever.
Q2) What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?
A)$1,100.00
B)$675.30
C)$775.40
D)$424.60
Q3) Which of the following is the formula for compound value?
A)FV<sub>n</sub> = P(1 + i)<sup>n</sup>
B)FV<sub>n</sub> = (1 + i)/P
C)FV<sub>n</sub> = P/(1 + i)<sup>n</sup>
D)FV<sub>n</sub> = P(1 + i)<sup>-n</sup>
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) In order to send your oldest child to law school when the time comes,you want to accumulate $40,000 at the end of 18 years.Assuming that your savings account will pay 6% compounded annually,how much would you have to deposit if: a.you want to deposit an amount annually at the end of each year? b.you want to deposit one large lump sum today?
Q2) Suppose you are 40 years old and plan to retire in exactly 20 years.21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments.You expect to live to the age of 85.How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?
Q3) All else constant,an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually.
A)True
B)False
Q4) To evaluate and compare investment proposals,we must adjust all cash flows to a common date.
A)True
B)False
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) If there is a 20% chance we will get a 16% return,a 30% chance of getting a 14% return,a 40% chance of getting a 12% return,and a 10% chance of getting an 8% return,what is the expected rate of return?
A)12%
B)13%
C)14%
D)15%
Q2) An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.
A)True
B)False
Q3) Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?
A)0%
B)2%
C)6%
D)10%
Q4) Under the efficient market hypothesis,would securities be properly priced.
Page 9
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) Currently,the expected return on the market is 12.5% and the required rate of return for Alpha,Inc.is 12.5%.Therefore,Alpha's beta must be:
A)less than 1.0.
B)greater than 1.0.
C)equal to 1.0.
D)unknown based on the information provided.
Q2) If there is a 20% chance we will get a 16% return,a 30% chance of getting a 14% return,a 40% chance of getting a 12% return,and a 10% chance of getting an 8% return,what is the expected rate of return?
A)12%
B)13%
C)14%
D)15%
Q3) Investing in foreign stocks is one way to improve diversification of a portfolio.
A)True
B)False
Q4) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) On any given day,a bond can be issued at:
A)a discount.
B)a premium.
C)par.
D)all of the above.
Q2) Six years ago,Colt,Inc.sold an issue of 30-year,$1,000 par value bonds.The coupon rate of 5.25% is payable annually.Investors presently require a rate of return of 8.375%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.
A)$1,050
B)$932
C)$681
D)$1,111
Q3) As the maturity date of a bond approaches,the bond's market value approaches its par value.
A)True
B)False
Q4) Bond ratings measure the interest rate risk of a given bond issue.
A)True
B)False
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Chapter 10: Stock Valuation
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Sample Questions
Q1) The growth rate of future earnings is determined by return on equity and the profit-retention rate.
A)True
B)False
Q2) You can purchase one share of Sumter Company common stock for $80 today.You expect the price of the common stock to increase to $85 per share in one year.The company pays an annual dividend of $3.00 per share.What is your expected rate of return for Sumter stock?
Q3) Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50.The stock pays a dividend of 7.875%.Assume that shares are currently selling for $62.50.What is the preferred stockholder's expected rate of return? Round to the nearest 0.01%.
A)6.30%
B)7.88%
C)10.25%
D)5.02%
Q4) Tannerly Worldwide's common stock is currently selling for $48 a share.If the expected dividend at the end of the year is $2.40 and last year's dividend was $2.00,what is the rate of return implicit in the current stock price?
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Page 12
Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.
Q2) The IRR is the discount rate that equates the present value of the project's future net cash flows with the project's initial outlay.
A)True
B)False
Q3) The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $150,000 today,and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year,1/365th each day.What is the discounted payback period for this investment?
A)5.23 years
B)4.86 years
C)4.35 years
D)3.72 years
Q4) Why are capital budgeting decisions among the most important decisions made by any company? Give a few examples from recent business developments.
Q5) Briefly describe the actual capital budgeting methods of large U.S.corporations.
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) A firm purchased an asset with a 5-year life for $90,000,and it cost $10,000 for shipping and installation.According to the current tax laws the cost basis of the asset at time of purchase is:
A)$100,000.
B)$95,000.
C)$80,000.
D)$70,000.
Q2) Depreciation expenses affect capital budgeting analysis by increasing: A)taxes paid.
B)incremental cash flows.
C)the initial outlay.
D)working capital.
Q3) A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.
A)True
B)False
Q4) What is meant by "real dollars" and the "real" discount rate? How can they be used to account for inflation when evaluating capital budgeting proposals?
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14
Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) The form of risk analysis intended to identify the most important forces for the success or failure of a project is known as:
A)scenario analysis.
B)sensitivity analysis.
C)value driver analysis.
D)expected value analysis.
Q2) Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?
A)Sensitivity analysis
B)Simulation
C)Value driver analysis
D)Scenario analysis
Q3) Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by: A)15%.
B)17.5%.
C)1.43%.
D)3.5%.
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15
Chapter 14: The Cost of Capital
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Sample Questions
Q1) Capital structure represents the mix of long-term sources of funds used by a firm.
A)True
B)False
Q2) The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
A)True
B)False
Q3) Assuming an after-tax cost of preferred stock of 12% and a corporate tax rate of 40%,a firm must earn at least $20 before tax on every $100 invested.
A)True
B)False
Q4) The after-tax cost of debt is:
A)6.20%.
B)5.40%.
C)4.60%.
D)3.80%.
Q5) Briefly identify and describe some important uses of a firm's weighted average cost of capital.
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Page 16
Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The pecking order theory of capital structure indicates that firms prefer to finance investment opportunities with external financial capital first,then with internally generated funds.
A)True
B)False
Q2) Zybeck Corp.projects operating income of $4 million next year.The firm's income tax rate is 40%.Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share,no preferred stock,and no debt.The firm is considering two alternatives to finance a new product: (a)the issuance of $6 million of 10% bonds,or (b)the issuance of 60,000 new shares of common stock.There are no issuance costs for either the bonds or the stock.If Zybeck issues common stock this year,what will projected EPS be next year?
A)$2.10
B)$2.96
C)$2.33
D)$1.67
Q3) Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory.
Q4) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Which of the following is least important to repurchase decisions of large American corporations?
A)The stock seems to be underpriced in the market.
B)Reducing cash to force executives to focus on efficient investment decisions.
C)Lack of good investment opportunities for cash retained in the firm.
D)The company is holding more cash than it would like.
Q2) Immediately after the stock split,the stock price will be approximately:
A)$42.
B)$84.
C)$2.00.
D)$8.00.
Q3) A stock split will cause changes in the dollar value of which of the following?
A)The total value of an investment in the company's stock
B)The book value of common equity
C)The market value of common equity
D)The price of the stock
Q4) List the benefits of a firm repurchasing its own stock.
Q5) Dividends tend to be higher for firms with stable earnings.
A)True
B)False
Page 18
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) The percent-of-sales method is more detailed than the cash budget method.
A)True
B)False
Q2) Short-term financial planning results in:
A)a cash budget.
B)pro forma financial statements.
C)a sales forecast for the next 1 to 3 years.
D)a general narrative detailing near-term scenarios.
Q3) Broad Cloth,Inc.'s average collection period is 15 days.The vice-president of marketing has projected credit sales of $2.million for October,$2.5 million for November and $3 million for December.Compute cash collections for November and December.Assume that all months have 30 days.
Q4) Because accounts payable and accrued expenses increase with sales,they represent sources of spontaneous financing.
A)True
B)False
Q5) Discuss the basic functions that budgets perform for a firm.
Q6) Pro forma statements provide single point estimates of each budgeted item.
A)True
B)False
Page 19
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Chapter 18: Working Capital Management
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Sample Questions
Q1) The First Webster Bank requires borrowers to maintain a balance of 10% of the line of credit in a non-interest paying account as compensation for providing the line of credit.If the borrower would not normally have deposits in such an account,the APR will be:
A)the amount borrowed will be higher than the amount needed.
B)the APR will be less than the stated rate.
C)the amount borrowed will be lower than the amount needed.
D)neither the amount borrowed nor the APR will be affected by the required balance.
Q2) Net working capital refers to which of the following?
A)Current assets
B)Current assets minus current liabilities
C)Current assets minus inventory
D)Current assets divided by current liabilities
E)Current assets minus inventory divided by current liabilities
Q3) What is the annual percentage cost of the loan?
A)15.67%
B)14.00%
C)13.33%
D).83%
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Chapter 19: International Business Finance
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Sample Questions
Q1) Forward exchange rates:
A)reduce uncertainty about future value of currencies.
B)are always slightly lower than the spot rate.
C)reflect expectations about the future value of currencies.
D)both A and C.
Q2) Which of the following international business activities constitutes a foreign direct investment? All firms mentioned are U.S.based.
A)Yanqui Spirits imports a 1000 cases of rum from the Dominican Republic.
B)WMT Inc.opens a big-box retail facility in Nicaragua.
C)Condor University runs training sessions for Indonesian civil servants on its California Campus.
D)Merkizer Pharmaceuticals licenses an Indian company to manufacture a drug under its patents.
Q3) Some complexities of conducting international business include:
A)multiple currencies.
B)differing legal requirements.
C)restrictions on repatriating earnings.
D)all of the above.
Q4) What is the law of one price? How does it apply to foreign exchange rates?
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Annika has purchased put options on 1000 shares of Amazon stock with a striking price of $170 per share.The option premium was $6.00 per share.
a.Compute Annika's profit or loss if the market value of Amazon's stock is $180 at expiration.
b.Compute Annika's profit or loss if the market value of Amazon's stock is $160 at expiration.
c.Compute Annika's profit or loss if the market value of Amazon's stock is $172 at expiration.
Q2) A futures contract provides the holder with the option to buy or sell a stated contract involving a commodity or financial claim at a specified price over a stated time period. A)True
B)False
Q3) An options contract gives its owner the right to buy or sell a fixed number of shares at a specified price over a limited time period. A)True
B)False
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