Financial Analysis
Final Exam Questions
Course Introduction
Financial Analysis is an essential course that equips students with the skills to interpret and evaluate financial statements, assess company performance, and make informed decisions based on quantitative and qualitative data. The course covers key concepts such as ratio analysis, cash flow evaluation, trend analysis, forecasting, and valuation techniques. Through case studies and practical exercises, students learn to analyze real-world financial reports, identify strengths and weaknesses in business operations, and communicate findings effectively to stakeholders. This foundational knowledge prepares students for careers in accounting, finance, consulting, and business management.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the securities and exchange administration, even if they are not publicly owned.
B) in a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.
C) a fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
D) partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.
E) a major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.
Answer: D
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3
Chapter 2: Risk and Return-Part I
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Q1) Which of the following statements is CORRECT
A) the higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
B) an investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks.
C) once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
D) an investor can eliminate almost all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.
E) an investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.
Answer: D
Q2) The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
A)True
B)False
Answer: False
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Chapter 3: Risk and Return-Part II
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Q1) The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.
A)True
B)False
Answer: False
Q2) For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),
A) the past realized rate of return must be equal to the expected rate of return; that is, .
B) the required rate of return must equal the realized rate of return; that is, r = .
C) all companies must pay dividends.
D) no companies can be in danger of declaring bankruptcy.
E) the expected rate of return must be equal to the required rate of return; that is, = r.
Answer: E
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Chapter 4: Bond Valuation
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Q1) Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
A)True
B)False
Q2) Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that
A) the economy is not in a recession.
B) long-term bonds are a better buy than short-term bonds.
C) maturity risk premiums could help to explain the yield curve's upward slope.
D) long-term interest rates are more volatile than short-term rates.
E) inflation is expected to decline in the future.
Q3) If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.
A)True
B)False
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Chapter 5: Financial Options
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Q1) If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero.
A)True
B)False
Q2) BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?
A) the exercise price of the option is increased.
B) the life of the option is increased, i.e., the time until it expires is lengthened.
C) the federal reserve takes actions that increase the risk-free rate.
D) blw's stock price becomes more risky (higher variance).
E) blw's stock price suddenly increases.
Q3) Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.
A)True
B)False
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Page 7
Chapter 6: Accounting for Financial Management
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Q1) Which of the following statements is CORRECT?
A) depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.
B) the more depreciation a firm reports, the higher its tax bill, other things held constant.
C) people sometimes talk about the firm's net cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
D) depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
E) net cash flow (ncf) is often defined as follows:net cash flow = net income + depreciation and amortization charges.
Q2) Which of the following items is NOT included in current assets
A) short-term, highly liquid, marketable securities.
B) accounts receivable.
C) inventory.
D) bonds.
E) cash.
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Chapter 7: Analysis of Financial Statements
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Q1) Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?
A) $267.34
B) $281.41
C) $296.22
D) $311.81
E) $328.22
Q2) Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
A) 12.79%
B) 13.47%
C) 14.18%
D) 14.88%
E) 15.63%
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Page 9
Chapter 8: Basic Stock Valuation
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Q1) Which of the following statements is CORRECT?
A) if a company has a wacc = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
B) the free cash flow valuation model for constant growth, vop = fcf1/(wacc - g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate.
C) the value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
D) the constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time.
E) the constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
Q2) Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
A)True B)False
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) The term "additional funds needed (AFN)" is generally defined as follows:
A) funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
B) the amount of assets required per dollar of sales.
C) the amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
D) a forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E) funds that are obtained automatically from routine business transactions.
Q2) Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) one tool of corporate governance is the threat of removing current management.
B) the commission required by the federal housing agency for a small business loan is an example of an agency cost.
C) one tool of corporate governance is the choice of how much dividends to pay.
D) corporate governance is when an officer of a corporation is elected to public office.
E) one tool of corporate governance is the location of the company headquarters.
Q2) Which one of the following statements is TRUE?
A) personal use of the corporate jet is an example of a nonpecuniary benefit.
B) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
C) an agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
D) an agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
E) a quarter-end bonus is an example of a nonpecuniary benefit.
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Page 12
Chapter 11: Determining the Cost of Capital
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Q1) Which of the following statements is CORRECT?
A) the wacc is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used.
B) an increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity.
C) the relevant wacc can change depending on the amount of funds a firm raises during a given year. moreover, the wacc at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm's target capital structure.
D) beta measures market risk, which is generally the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. however, this is not true unless all of the firm's stockholders are well diversified.
E) the bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company's own long-term bonds. the size of the risk premium for bonds with different ratings is published daily in the wall street journal.
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. \(\begin{array} { l c c c c } &r = 10.00 \%\\
\text { Year } & 0 & 1 & 2 & 3 \\ \text { Cash Elows } & - \$ 1,000 & \$ 400 & \$ 400& \$ 450 \end{array}\)
A) 9.32%
B) 10.35%
C) 11.50%
D) 12.78%
E) 14.20%
Q2) Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.
A)True
B)False
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Page 14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following factors should be included in the cash flows used to estimate a project's NPV?
A) interest on funds borrowed to help finance the project.
B) the end-of-project recovery of any working capital required to operate the project.
C) cannibalization effects, but only if those effects increase the project's projected cash flows.
D) expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
E) all costs associated with the project that have been incurred prior to the time the analysis is being conducted.
Q2) Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
A)True
B)False
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15
Chapter 14: Real Options
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Q1) Refer to the data for Drilling Experts. Calculate the project's coefficient of variation. (Hint: Use the expected NPV.)
A) 5.87
B) 6.52
C) 7.25
D) 7.97
E) 8.77
Q2) Which of the following is NOT a real option?
A) the option to buy shares of stock if its price goes up.
B) the option to expand into a new geographic region.
C) the option to abandon a project.
D) the option to switch the type of fuel used in an industrial furnace.
E) the option to expand production if the product is successful.
Q3) Real options affect the size, but not the risk, of a project's expected cash flows.
A)True
B)False
Q4) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
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Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following actions will best enable a company to raise additional equity capital?
A) declare a stock split.
B) begin an open-market purchase dividend reinvestment plan.
C) initiate a stock repurchase program.
D) begin a new-stock dividend reinvestment plan.
E) refund long-term debt with lower cost short-term debt.
Q2) Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
A) $240,000
B) $228,000
C) $216,600
D) $205,770
E) $0
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
Page 17
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Chapter 16: Capital Structure Decisions
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Q1) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) the factors that affect a firm's business risk are affected by industry characteristics and economic conditions. unfortunately, these factors are generally beyond the control of the firm's management.
B) one of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
C) a firm's financial risk can be minimized by diversification.
D) the amount of debt in its capital structure can under no circumstances affect a company's business risk.
E) a firm's business risk is determined solely by the financial characteristics of its industry.
Q3) Whenever a firm borrows money, it is using financial leverage.
A)True
B)False
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
A)True
B)False
Q2) Refer to data for Glassmaker Corporation. According to the compressed adjusted present value model, what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?
A) 10.01%
B) 10.06%
C) 11.29%
D) 11.44%
E) 13.49%
Q3) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
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Q1) Which of the following statements about listing on a stock exchange is most CORRECT?
A) any firm can be listed on the nyse as long as it pays the listing fee.
B) listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
C) listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the sec.
D) the otc is the second largest market for listed stock, and it is exceeded only by the nyse.
E) listing is a decision of more significance to a firm than going public.
Q2) Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
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Page 20
Chapter 19: Lease Financing
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Q1) Heavy use of off-balance sheet lease financing will tend to
A) make a company appear less risky than it actually is because its stated debt ratio will appear lower.
B) affect a company's cash flows but not its degree of risk.
C) have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
D) affect the lessee's cash flows but only due to tax effects.
E) make a company appear more risky than it actually is because its stated debt ratio will be increased.
Q2) If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
A)True
B)False
Q3) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Refer to the data for the Neuman Corporation's convertible bonds. What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?
A) $698.15
B) $734.89
C) $773.57
D) $814.29
E) $857.14
Q2) Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion value?
A) $698.15
B) $734.89
C) $773.57
D) $814.29
E) $857.14
Q3) The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.
A)True
B)False
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Hinkle Corporation buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
A) $90,411
B) $94,932
C) $99,678
D) $104,662
E) $109,895
Q2) A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.
A)True
B)False
Q3) The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.
A)True
B)False
Page 23
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Chapter 22: Providing and Obtaining Credit
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Q1) Refer to Exhibit Van Doren. What would be the cost to Van Doren of the discounts taken?
A) $116,750
B)$108,750
C) $155,000
D) $225,000
E) $260,500
Q2) The Somerset Bank offered Blakemore Inc. the following loan alternatives in response to its request for a $75,000, 1-year loan.
Alternative 1: 7 percent discount interest, with a 10 percent compensating balance. Alternative 2: 8 percent simple interest, with interest paid monthly.
What is the effective annual rate on the cheaper loan?
A) 8.00%
B) 7.23%
C) 7.67%
D) 8.43%
E) 8.30%
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Chapter 23: Other Topics in Working Capital Management
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Q1) A just-in-time system is designed to stretch accounts payable as long as possible.
A)True
B)False
Q2) Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?
A) from a cost standpoint, hbsd is indifferent.
B) no, the cost exceeds the benefit by $500.
C) no, the cost exceeds the benefit by $1,000.
D) yes, the benefit exceeds the cost by $500.
E) yes, the benefit exceeds the cost by $1,120.
Q3) If a company increases its safety stock, then its average inventory will go up.
A)True
B)False
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25
Chapter 24: Enterprise Risk Management
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Q1) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A) risk management can help a firm maintain its optimal capital budget.
B) risk management can reduce the expected costs of financial distress.
C) risk management can help firms minimize taxes.
D) risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
E) risk management can increase debt capacity.
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract?(Assume a $1,000 par value, and round to the nearest whole dollar.)
A) $78.00
B) $82.00
C) $86.00
D) $90.00
E) $95.00
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Chapter 7 of the Bankruptcy Act is designed to do which of the following?
A) establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
B) ensure that the firm is viable after emerging from bankruptcy.
C) allow the firm to negotiate with each creditor individually.
D) provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
E) protect shareholders against creditors.
Q2) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
Q2) Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.
A)True
B)False
Q3) One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.
A)True
B)False
Q4) Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.
A)True
B)False
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Chapter 27: Multinational Financial Management
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Q1) Multinational financial management requires that financial analysts consider the effects of changing currency values.
A)True
B)False
Q2) Which of the following statements is NOT CORRECT?
A) foreign bonds and eurobonds are two important types of international bonds.
B) foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
C) the term eurobond applies only to foreign bonds denominated in u.s. currency.
D) a foreign bond might pay a higher nominal interest rate than a u.s. bond.
E) any bond sold outside the country of the borrower is called an international bond.
Q3) Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.
A)True
B)False
Q4) A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
A)True
B)False
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Chapter 28: Time Value of Money
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Q1) You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?
A) $16,112
B) $16,918
C) $17,763
D) $18,652
E) $19,584
Q2) Cochrane Associate's net sales last year were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?
A) $845.03
B) $889.51
C) $936.33
D) $983.14
E) $1,032.30
Q3) Starting to invest early for retirement reduces the benefits of compound interest. A)True B)False
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Chapter 29: Basic Financial Tools: A review
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249 Flashcards
Source URL: https://quizplus.com/quiz/6753
Sample Questions
Q1) Which of the following statements is CORRECT?
A) if the risk-free rate rises, then the market risk premium must also rise.
B) if a company's beta is halved, then its required return will also be halved.
C) if a company's beta doubles, then its required return will also double.
D) the slope of the security market line is equal to the market risk premium, (rm rrf).
E) beta is measured by the slope of the security market line.
Q2) An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
A)True
B)False
Q3) The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.
A)True
B)False
Q4) The slope of the SML is determined by the value of beta.
A)True
B)False
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Chapter 30: Pension Plan Management
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Sample Questions
Q1) Ms. Lloyd, who is 25 and expects to retire at age 60, has just been hired by the Chambers Corporation. Ms. Lloyd's current salary is $30,000 per year, but her wages are expected to increase by 5 percent annually over the next 35 years. Chambers has a defined benefit pension plan in which workers receive 2 percent of their final year's wages for each year of employment. Assume a world of certainty. Further, assume that all payments occur at year-end. What is Ms. Lloyd's expected annual retirement benefit, rounded to the nearest thousands of dollars?
A) $35,000
B) $57,000
C) $89,000
D) $116,000
E) $132,000
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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Sample Questions
Q1) The primary goal of investor-owned firms is shareholder wealth maximization, while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example, to provide health care services to the communities served.
A)True
B)False
Q2) Which of the following statements about a not-for-profit firm's fund capital is most correct?
A) the sole source of fund capital is the excess of revenues over expenses.
B) fund capital has a zero opportunity cost.
C) fund capital can only come from donations.
D) fund capital does not change over time.
E) fund capital is equivalent to equity capital in investor-owned firms.
Q3) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
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