Financial Analysis
Exam Questions
Course Introduction
Financial Analysis is a foundational course that equips students with the skills to evaluate and interpret financial statements and reports in order to assess an organizations performance, stability, and profitability. The course covers essential concepts such as ratio analysis, trend analysis, cash flow analysis, and the use of financial metrics to make informed business decisions. Students will learn to identify key financial indicators, analyze company financial health, and apply analytical tools for budgeting, forecasting, and risk assessment. Practical exercises and case studies are used to reinforce understanding and prepare students for real-world application in finance and accounting roles.
Recommended Textbook Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Chapter 1: Corporate Finance and the Financial Manager
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Q1) Tofino Toffee is a corporation that earned $5 per share before it paid any taxes.The firm retained $2.50 of after-tax earnings for reinvestment,and distributed what remained in dividend payments.You hold 6,000 shares of Tofino Toffee in a tax-free savings account,and 4,000 shares outside of a tax-free savings account.If the corporate tax rate was 25% and dividend earnings were taxed at 15%,what was the value of your dividend earnings received after all taxes are paid?
A) $12,500
B) $11,750
C) $10,625
D) $23,500
E) $13,175
Answer: B
Q2) What is the general relation of the two types of prices quoted for a stock on a exchange?
Answer: The two prices are bid price and ask price.The ask price is higher than the bid price to deter a buyer from buying a stock and selling it back immediately,assuming everything else remains unchanged.
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Refer to the income statement above.Luther's net profit margin for the year ending December 31,2014 is closest to:
A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%
E) 18.3%
Answer: A
Q2) Consider the above statement of cash flows.What were AOS Industries' major means of raising money in 2015?
A) from investment activities
B) by sale of stock
C) from its operations
D) by issuing debt
E) from short-term bank loans
Answer: D
Q3) What role do external auditors play in the firm's financial reporting process?
Answer: As the name implies,external auditors act as third party monitors to the firms' financial reporting process.
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) If the interest rate is 5%,the one-year discount factor is equal to:
A) 0.050
B) 1.050
C) 0.952
D) 1.045
E) 0.950
Answer: C
Q2) What is the present value (PV)of $66,000 received 7 years from now,assuming the interest rate is 9% per year?
A) $60,550
B) $60,000
C) $66,000
D) $36,104
E) $8,650
Answer: D
Q3) What is one of the prerequisite conditions for the Valuation Principle to work?
Answer: The availability of competitive market prices is a prerequisite for the Valuation Principle to be effective and efficient.
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Chapter 4: The Time Value of Money
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Q1) If $10,000 is invested in a certain business at the start of the year,the investor will receive $3000 at the end of each of the next four years.What is the net present value (NPV)of this business opportunity if the interest rate is 7% per year?
A) $148.53
B) $161.63
C) $172.45
D) $178.88
E) $183.43
Q2) Damon is contemplating taking a deal with his uncle,who is a very successful entrepreneur.He must pay his uncle $50,000 this year and an additional $50,000 at the end of both the fifth and tenth year.This would allow him to receive a perpetual annual cashflow of $12,000.What is the NPV of this offer if the interest rate is 10%?
A) $120,000
B) $30,000
C) $220,323.23
D) $69,676.77
E) $19,676.77
Q3) What is the difference between a perpetuity and an annuity?
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Chapter 5: Interest Rates
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Q1) Which of the following is/are TRUE? I.The EAR can never exceed the APR.
II)The APR can never exceed the EAR.
III)The APR and EAR can never be equal.
A) Only I is true.
B) Only II is true.
C) Only II & III are true.
D) Only I & III are true.
E) Only III is true.
Q2) Drew receives an inheritance that pays him $50,000 every three months for the next two years.Which of the following is closest to the present value (PV)of this inheritance if the interest rate is 8.5% (EAR)?
A) $354,223
B) $364,309
C) $365,322
D) $400,000
E) $339,782
Q3) The annual percentage rate indicates the amount of interest,including the effect of any compounding.
A)True
B)False
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Chapter 6: Bonds
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Q1) A risk-free,zero-coupon bond with a $5000 face value has ten years to maturity.The bond currently trades at $3650.What is the yield to maturity of this bond?
A) 3.197%
B) 3.284%
C) 3.465%
D) 3.699%
E) 3.747%
Q2) An investor purchases a 30-year,zero-coupon bond with a face value of $1000 and a yield to maturity of 6.5%.He sells this bond ten years later.What is the internal rate of return (IRR)on his investment,assuming yield to maturity does not change?
A) 6.04%
B) 6.24%
C) 6.50%
D) 6.62%
E) 6.74%
Q3) Under what situation can a zero-coupon bond be selling at a premium?
Q4) Why do bond traders typically quote bond yields rather than bond prices?
Q5) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Valuing Stocks
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Q1) What is Gonzales Corporation's expected current share price?
A) $16.42
B) $13.85
C) $14.42
D) $18.42
E) $19.34
Q2) The net present value (NPV)of a stock is calculated by discounting cash flows arising from this stock using the risk-free interest rate.
A)True
B)False
Q3) If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the
A) enterprise value model.
B) dividend-discount model.
C) total payout model.
D) discounted free cash flow model.
E) net present value model.
Q4) Why is the disposition effect costly from a tax perspective?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) Two mutually exclusive investment opportunities require an initial investment of $5 million.Investment A then generates $1.5 million per year in perpetuity,while investment B pays $1 million in the first year,with cash flows increasing by 3% per year after that.At what cost of capital would an investor regard both opportunities as being equivalent?
A) 3%
B) 6%
C) 9%
D) 10%
E) 12%
Q2) A brewery is considering adding a new line of craft beers to its product mix.The new beer will require additional brewing and bottling capacity at a cost of $15 million,but is expected to generate new sales of $5 million per year for the next 5 years.If the brewery has a cost of capital of 6%,what is the NPV of this investment?
A) $6.1 million
B) $10 million
C) -$15 million
D) $8.6 million
E) $3.7 million
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) Panjandrum Industries,a manufacturer of industrial piping,is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems.It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars).It is thought that if marketing expenses are increased by 40%,then revenues will rise.By how much will revenues have to rise for the net present value (NPV)of the project to increase?
A) at least 2.0%
B) at least 2.9%
C) at least 3.2%
D) at least 3.8%
E) at least 4.1%
Q2) Why does capital budgeting focus on incremental revenues and costs,instead of the projected total revenues and costs of the firm?
Q3) The free cash flow for the first year of Epiphany's project is closest to:
A) $43,000
B) $25,000
C) $32,225
D) $45,000
E) $35,532
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Chapter 10: Risk and Return in Capital Markets
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Q1) In Canada over the long term,small stocks on the S&P/TSX have provided the highest return followed by long-term Government of Canada bonds.
A)True
B)False
Q2) Independent risk is more closely related to
A) unsystematic risk.
B) systematic risk.
C) common risk.
D) diversification risk.
E) unwanted risk.
Q3) The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?
A) -15%,25%
B) -20%,40%
C) -30%, 50%
D) -30%,40%
E) -10%, 30%
Q4) Is volatility a reasonable measure of risk when evaluating large portfolios?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) Historically,the average excess return of the S&P/TSX Composite Index over the return of Government of Canada bonds has been ________ and is a proxy for the market risk premium.
A) between 10% and 12%
B) between 14% and 16%
C) between 5% and 7%
D) between 11% and 13%
E) between 4% and 6%
Q2) A stock market comprises 1000 shares of stock A and 3000 shares of stock B.The share prices for stocks A and B are $25 and $30,respectively.What is the capitalization of the market portfolio?
A) $115,000
B) $100,000
C) $98,000
D) $125,000
E) $90,000
Q3) In a two-asset portfolio,what happens to the portfolio weight of the better performing asset?
Q4) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 12: Determining the Cost of Capital
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Q1) One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.
A)True
B)False
Q2) What is the assumption about risk when using WACC to evaluate a project?
Q3) An all-equity firm produced a dividend flow of $40,000 last year.The market value of the firm is $800,000 and the dividend is expected to increase at 5% each year.What is the cost of equity capital for this firm?
A) 9.18%
B) 9.75%
C) 10.25%
D) 11.89%
E) 12.05%
Q4) What is the difference between the effective cost of debt and the cost of debt?
Q5) When a firm is evaluating the purchase of a business that is unrelated to its current business,it is appropriate to use the current WACC of the firm that is purchasing the business.
A)True
B)False
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Chapter 13: Risk and the Pricing of Options
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Q1) The price of a European put option on Scotiabank stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.60.If the exercise price of the options is $45,and the risk-free rate is 5%,what must be the current price of Scotiabank stock?
A) $42.75
B) $45.00
C) $43.51
D) $42.21
E) $43.40
Q2) Suppose a stock is currently trading for $12,and in one period it will either increase to $15 or decrease to $8.If the one-period risk-free rate is 4%,what is the price of a European call option that expires in one period and has an exercise price of $7?
A) $4.68
B) $4.50
C) $5.27
D) $5.00
E) $7.00
Q3) What are American options?
Q4) What is the short position of an options contract?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements regarding SEOs is most accurate?
A) SEO rights offers have higher costs than cash offers.
B) The decision to raise financing externally usually implies that a firm has run out of investment opportunities.
C) Although not as costly as IPOs, seasoned offerings are still expensive.
D) Researchers have found that, on average, the market greets the news of an SEO with a price increase.
E) SEOs, unlike IPOs, do not have underwriting fees.
Q2) What will the offer price of these shares be if Luther is selling 1 million shares?
A) $17.00
B) $17.50
C) $17.25
D) $16.75
E) $18.00
Q3) What is the difference between preferred stocks issued by a private company and a mature company?
Q4) The firm commitment process is the most common practice for IPOs.
A)True
B)False
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Chapter 15: Debt Financing
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Q1) A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm makes a final payment of $68 million on the tenth and final coupon date.If the firm uses a sinking fund to repurchase some of the bond issue on each coupon payment date,what percentage of the issue must they repurchase each year?
A) 10%
B) 7.2%
C) 7.33%
D) 6%
E) 8%
Q2) Alberta Energy issues $110 million in straight bonds at par with a coupon rate of 8%.The firm also pays underwriting fees of 1.5% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?
A) $99.55 million
B) $110 million
C) $108.35 million
D) $101.2 million
E) $99.68 million
Q3) What is the difference between Eurobonds and Foreign bonds?
Q4) What is bond seniority?
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Chapter 16: Capital Structure
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Q1) Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.If the company borrows $10,000 at 5% to make the investment,what is the return to equity holders if demand is weak?
A) 8.0%
B) -37.5%
C) -58.6%
D) -35.3%
E) -12.5%
Q2) A new business will generate a one-time cash flow of $20,000 after one year.The business will be financed with 50% equity and 50% debt.If the firm's unlevered equity cost of capital is 10%,what is the levered value of the firm with perfect capital markets?
A) $18,182
B) $20,000
C) $19,000
D) $22,000
E) $18,000
Q3) What are the issues in determining the optimal leverage for a firm?
Q4) What are direct costs of financial distress?
Q5) What are indirect costs of financial distress?
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Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the regular yearly dividends in the future is closest to:
A) $4.50
B) $5.00
C) $4.00
D) $9.00
E) $3.00
Q2) Why might a firm choose a spinoff instead of selling a division and distributing the cash?
Q3) BC Brewery has a current share price of $37.50,and has announced a dividend payment of $1.25 per share.Assuming perfect capital markets,what should the price of BC Brewery be once the stock begins trading ex-dividend?
A) $37.50
B) $36.25
C) $38.75
D) $35
E) $38
Q4) What is the difference between a regular dividend and a liquidating dividend?
Q5) What is the effect on the stock price when a firm repurchases its shares?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) The amount of the increase in net working capital for Ideko in 2016 is closest to:
A) $4090
B) $4685
C) $3665
D) $5230
E) $5790
Q2) A firm has ROA of 30%,ROE of 40%,and a payout ratio of 10%.What is the firm's sustainable growth rate?
A) 12%
B) 3%
C) 4%
D) 27%
E) 36%
Q3) Is total net working capital or incremental net working capital more relevant for calculation of free cash flow?
Q4) What is the major shortcoming of the percent of sales method for firms experiencing rapid growth?
Q5) The amount of net working capital for Ideko in 2016 is closest to:
Q6) What is net new financing?
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Chapter 19: Working Capital Management
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Q1) Luther's cash conversion cycle is closest to:
A) 51 days
B) 66 days
C) 71 days
D) 129 days
E) 89 days
Q2) Gencom International has inventory days of 33,accounts receivable days of 24,and accounts payable days of 41.What is its cash conversion cycle?
A) 17 days
B) 118 days
C) 22 days
D) 50 days
E) 16 days
Q3) What is the collection float?
Q4) Luther's Accounts Receivable days is closest to:
A) 42 days
B) 39 days
C) 32 days
D) 59 days
E) 47 days
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Chapter 20: Short Term Financial Planning
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Q1) Which of the following best describes the agreement where all of a firm's inventory is used to secure a loan?
A) pledging of accounts receivable
B) factoring of accounts receivable with recourse
C) factoring of accounts receivable without recourse
D) floating lien
E) trust receipt
Q2) How can the application of the matching principle increase firm value?
Q3) Which short-term financing policy states that short-term cash needs should be financed with short-term debt and long-term cash needs should be financed with long-term sources of funds?
A) aggressive policy
B) evergreen credit
C) matching principle
D) conservatism principle
E) duration policy
Q4) What are loan origination fees and what effect does it have on the loan?
Q5) How can positive cash flow shocks affect short-term financing needs?
Q6) Why should permanent working capital be financed with long-term sources of funds?
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Chapter 21: Risk Management
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Q1) Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called
A) key personnel insurance.
B) business liability insurance.
C) property insurance.
D) business interruption insurance.
E) damage insurance.
Q2) A firm can borrow at a floating rate of LIBOR - 1% on short-term loans.If it swaps its short-term payments so that it receives LIBOR + 1.5% and pays a fixed rate of 5%,what is the rate of interest on its borrowing?
A) 4.5%
B) 2.5%
C) 5.0%
D) 5.5%
E) 7.5%
Q3) What is the purpose of a deductible?
Q4) What is key personnel insurance?
Q5) What is a duration mismatch?
Q6) What are some of the disadvantages of long-term supply contracts?
Q7) How do futures contracts eliminate credit risk?
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Chapter 22: International Corporate Finance
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Q1) Why do purely domestic businesses,with no international operations and no imports or exports,still need to be aware of FX markets?
Q2) Pooling of all foreign tax liabilities on earnings allows corporations to A) reduce income.
B) repatriate income.
C) reduce their overall taxes.
D) increase their tax liabilities.
E) achieve economies of scale.
Q3) Your firm needs to pay its British supplier 1,000,000 British pounds.If the exchange rate is 1.61 CAD/GBP,how many dollars will you need to pay the British supplier?
A) $1,610,000
B) $621,118
C) $385,787
D) $1,000,000
E) $1,320,000
Q4) What are internationally integrated capital markets?
Q5) A currency forward contract passes exchange rate risk from a firm to the bank that has written the forward contract.Why is the bank willing to bear this risk?
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Chapter 23: Leasing
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Q1) The monthly lease payments for a four-year lease of the bulldozer are closest to:
A) $1,870
B) $1,825
C) $1,750
D) $2,115
E) $1,945
Q2) Which of the following is a valid argument for leasing?
A) avoiding capital expenditure controls
B) transferring risk
C) preserving capital
D) reducing leverage through off-balance-sheet financing
E) increased resale costs
Q3) A lease that is designed to obtain specific accounting and tax treatment is called a
A) sales-type lease.
B) direct lease.
C) sale and leaseback.
D) leveraged lease.
E) synthetic lease.
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Chapter 24: Mergers and Acquisitions
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Q1) What is the difference between economies of scale and economies of scope?
Q2) Consider two firms,Blue and Berry.Both companies will either make $25 million or lose $5 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $25 million and the other loses $5 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 30% and no tax loss carryback or carryforward?
A) $1.5 million
B) $7.75 million
C) $0.75 million
D) -$5.5 million
E) $0
Q3) What is a conglomerate merger?
Q4) The takeover market is characterized by peaks of heavy activity followed by quiet troughs of few transactions.
A)True
B)False
Q5) Explain the difference between a horizontal merger and a vertical merger.
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Chapter 25: Corporate Governance
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Q1) The optimal level of sensitivity of a manager's compensation to the firm's performance depends on the manager's level of risk aversion.
A)True
B)False
Q2) ________ is a person making a trade based on privileged information.
A) Rogue trading
B) Illegal trading
C) Standard trading
D) Insider trading
E) Exchange trading
Q3) Tammy is a member of the Board of Directors of Moon Corporation.Her husband is the manager of a large division.What type of director is Tammy?
A) inside director
B) outside director
C) grey director
D) resident director
E) unelected director
Q4) What is the cost of aligning managers' interests with those of shareholders?
Q5) Describe the "stakeholder" model of corporate governance.
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