Financial Analysis
Final Test Solutions
Course Introduction
Financial Analysis provides students with the essential tools and concepts used to evaluate the financial health and performance of businesses. The course covers key topics such as financial statement analysis, ratio analysis, cash flow assessment, and the interpretation of balance sheets and income statements. Students will learn how to assess profitability, liquidity, efficiency, and solvency, and gain experience applying analytical frameworks to real-world cases. Through a combination of theoretical foundations and practical exercises, the course prepares students to make informed business decisions and offers a solid grounding for careers in finance, accounting, and business management.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) Capital structure refers to the financing of long-term investments.
A)True
B)False
Answer: True
Q2) The major sources of financing for corporations are
A)partners contributions.
B)exchanges between shareholders.
C)interest and dividends.
D)debt and equity.
Answer: D
Q3) How could you compensate an investor for taking on a significant amount of risk?
A)Increase the expected rate of return
B)Raise more debt capital
C)Offer stock at a higher price
D)Increase sales
Answer: A
Q4) In an efficient market,prices will quickly adjust to new information.
A)True
B)False
Answer: True
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Bonds are less risky than are stocks because their return is more predictable.
A)True
B)False
Answer: True
Q2) All of the following are classified as non-bank financial intermediaries except A)stock brokerages.
B)investment banks.
C)insurance companies.
D)hedge funds.
Answer: A
Q3) Insurance companies have a great deal of money to invest because A)there profit margins are so high.
B)because they are reluctant to cover insurable losses.
C)because they must hold large reserves to pay potential claims.
D)insurance do not actually have large sums to invest.
Answer: C
Q4) A bond matures in less than 10 years.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?
A)Balance sheet
B)Cash flow statement
C)Income statement
D)None of the above
Answer: C
Q2) Which of the basic financial statements is best used to answer the questions "What does the company own and how is it financed?"
A)Balance sheet
B)Statement of shareholder's equity
C)Income statement
D)Cash flow statement
Answer: A
Q3) In a growing business,negative cash flow from investing activities is normal.
A)True
B)False
Answer: True
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.
A)True
B)False
Q2) Corbin,Inc.had net income of $150,000 on sales of $5,000,000 during 1995.In addition,the firm's total assets were $2,500,000,and its capital structure is comprised of 40% debt and 60% equity.What was Corbin's return on equity in 1995?
A)15%
B)2.5%
C)10%
D)Return on equity cannot be determined with the information provided.
Q3) In 2014,the improvement in ABC's return on equity occurred because
A)ABC used more debt than in 1994.
B)ABC lowered its expenses in 1995 and was,therefore,more profitable.
C)ABC utilized its total assets more efficiently in 1995.
D)None of the above explain the improvement in ABC's return on equity.
Q4) Ratios are used to standardize financial information.
A)True
B)False
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) If you deposit $1,000 each year in a savings account earning 4%,compounded annually,how much will you have in 10 years?
Q2) When using a financial calculator,which of the following is the correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 3% ?
A)N=4,i=.03,PV=-200,PMT=0,solve for FV
B)N=4,i=3,PV=-200,PMT=0,solve for FV
C)N=4,i=3,PV=0,PMT = $200,solve for FV
D)N=4,i=3,FV=200,PMT=0,solve for PV
Q3) At 8%,compounded annually,how long will it take $750 to double?
A)9 years
B)8 years
C)12 years
D)4 years
E)6 years
Q4) High discount rates favor
A)neither long-term nor short-term investments.
B)both long-term and short-term investments.
C)long-term investments.
D)short-term investments.
Page 7
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) Assume that two investments have a three-year life and generate the cash flows shown below.Which of the two would you prefer?
Year Investment A Investment B
1 $5,000 $8,000
2 $5,000 $5,000
3 $5,000 $2,000
A)Investment A,since it has the most even cash flows
B)Investment B,since it gives you the largest cash flows in earlier years
C)Neither,since they both have equal lives
D)Both investments are equally attractive
Q2) You have borrowed $70,000 to buy a sports car.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate compounded monthly.Calculate the total amount of interest dollars you will pay the bank over the life of the loan.Round to the nearest dollar and assume end-of-month payments.
A)$47,451
B)$51,644
C)$54,776
D)$57,798
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Madison was hired to design and decorate the offices of a large pharmaceutical company.She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration.She immediately bought the company's stock which doubled in price over the following week.This outcome is inconsistent with A)the weak-form efficient market hypothesis.
B)the semi-strong form efficient market hypothesis.
C)the strong form efficient market hypothesis.Her action was probably illegal.
D)all of the above.
Q2) Which of the following best measures an asset's risk?
A)Expected return
B)The standard deviation
C)The probability distribution
D)The cash return
Q3) During the financial crisis of 2007-2009,returns on real estate investment trusts (REITS)and stocks moved in opposite directions.
A)True
B)False
Q4) Under the efficient market hypothesis,would securities be properly priced.
Q5) Why do the arithmetic average return and the geometric return differ?
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) If an investor must choose between investing in either portfolio X or portfolio Y,then
A)she will always choose Asset X over Asset Y.
B)she will always choose Asset Y over Asset X.
C)she will be indifferent between investing in Asset X and Asset Y.
D)none of the above.
Q2) Bell Weather,Inc.has a beta of 1.25.The return on the market portfolio is 12.5%,and the risk-free rate is 5%.According to CAPM,what is the required return on this stock?
A)20.62%
B)9.37%
C)14.37%
D)15.62%
Q3) The expected return from investing in the asset is
A)9.00%.
B)9.35%.
C)10.00%.
D)10.55%.
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) When inflation rates go up,bond prices go up as well.
A)True
B)False
Q2) The Fisher effect can be expressed mathematically as
A)( nominal rate)= (the real rate of interest)( the inflation rate).
B)(1+ the nominal rate)= (1+the real rate of interest)(1 + the inflation rate).
C)the nominal rate)= the real rate of interest + the inflation rate).
D)the real rate of interest= the nominal rate - the inflation rate).
Q3) The debenture is the legal agreement between the firm issuing a bond and the bond trustee who represents the bondholders.
A)True
B)False
Q4) Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?
Q5) The interest on corporate bonds is typically paid
A)semiannually.
B)annually.
C)quarterly.
D)monthly.
Q6) What elements determine what the yield to maturity will be for a bond?
Page 11
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Acme Consolidated has a return on equity of 12%.If Acme distributes 60% of earnings as dividends,its expected growth rate will be
A)new 4.80%.
B)7.20%.
C)12%.
D)6%.
Q2) Butler,Inc.'s return on equity is 17% and management retains 75% of earnings for investment purposes.Based on this information,what will be the firm's growth rate?
A)4.25%
B)22.67%
C)44.12%
D)12.75%
Q3) Distinguish between primary stock market transactions and secondary stock market transaction.
Q4) The higher a firm's P/E ratio,the more optimistic investors feel about the firm's growth prospects.
A)True
B)False
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Which of the following techniques will always produce a single rate of return estimate?
A)IRR
B)MIRR
C)PI
D)Discounted payback
Q2) Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years.The salvage value of the ambulance will be $25,000.Assume the ambulance is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1. )
A)$(10,731)
B)$10,731
C)$(5,517)
D)$5,517
Q3) The equivalent annual cost (EAC)method is helpful for mutually exclusive projects with unequal economic lives.
A)True
B)False
Q4) Why is it so difficult for firms to find good investment ideas?
Page 13
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Which of the following cash flows should be included as incremental costs when evaluating capital projects?
A)Investment in working capital that is directly related to a project
B)Expenses that are incurred in order to modify a firm's production facility in order to invest in a project
C)Opportunity costs that are directly related to a project
D)All of the above
Q2) Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.
A)True
B)False
Q3) Because installation costs of a new asset are a current cash expense,they are excluded from the initial outlay.
A)True
B)False
Q4) The initial outlay of an asset does not include installation costs.
A)True
B)False
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) An appropriate tool to analyze the interaction of various value drivers for Orange Electronics would be
A)simulation.
B)sensitivity analysis.
C)scenario analysis.
D)either A or C
Q2) What is the approximate five year survival rate for new businesses?
A)20%
B)40%
C)60%
D)80%
Q3) When Quineboag Textile's sales revenue increased from $5.0 million to $5.25 million,net operation income increased from $500,000 to $575,000.What is Quineboag's degree of operating leverage (DOL)?
A).015
B).33
C)3.00
D)10
Q4) Briefly distinguish between sensitivity analysis,scenario analysis,and simulation.
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) The cost of newly issued common stock is greater than the current cost common equity because of
A)capital gains taxes on retained earnings.
B)flotation costs on newly issued common stock.
C)capital gains taxes on newly issued common stock.
D)all of the above
Q2) Based on current market values,Shawhan Supply 's capital structure is 30% debt,20% preferred stock,and 50% common stock.When using book values,capital structure is 25% debt,10% preferred stock,and 65% common stock.The required return on each component is: debt-10%;preferred stock-11%;and common stock-18%.The marginal tax rate is 40%.What rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
A)18.0%
B)13.0%
C)10.0%
D)14.3%
Q3) Briefly identify and describe some important uses of a firm's weighted average cost of capital.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) An optimal capital structure is achieved
A)when a firm's expected profits are maximized.
B)when a firm's expected EPS are maximized.
C)when a firm's break-even point is achieved.
D)when a firm's weighted average cost of capital is minimized.
Q2) Rising bankruptcy costs should cause most firms to use less debt and more equity.
A)True
B)False
Q3) Which of the following will happen if the original Modigliani and Miller Theorem is relaxed to include taxes,but not bankruptcy costs?
A)Increased usage of financial leverage will increase a firm's composite cost of capital indefinitely.
B)Increased usage of financial leverage will lower a firm's composite cost of capital indefinitely.
C)Increased usage of financial leverage will not affect a firm's composite cost of capital.
D)Increased usage of operating leverage will increase a firm's composite cost of capital indefinitely.
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Chapter 16: Dividend Policy
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Sample Questions
Q1) In practice,firms tend to increase their dividend
A)when the stock seems to be underpriced in the market.
B)reducing cash to force executives to focus on efficient investment decisions.
C)only when they believe they can sustain the increased payout indefinitely.
D)when company is holding more cash than it would like.
Q2) ZZZ Corporation had net income of $100 million last year and 50 million common shares outstanding.They declared an 8% stock dividend.Calculate EPS before and after the stock dividend.
A)EPS before would be $2;after the dividend,EPS would be $1.85.
B)There is not enough information to make this calculation.
C)EPS before would be $0.50;after the dividend,EPS would be $0.46.
D)Since they made $100 million in net income,the EPS cannot change.
Q3) Firms can use stock repurchases as a dividend substitute.
A)True
B)False
Q4) A reverse stock split,1 for 10 for example,should result in a higher price per share.
A)True
B)False
Q5) What is meant by "dividend clienteles"? Give specific examples.
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Which of the following will decrease discretionary funds needed?
A)An increase in projected accounts receivable
B)An increase in projected accounts payable
C)An increase in projected dividends
D)Both A and C
Q2) Which of the following is the correct method of determining discretionary financing needed (DFN)?
A)Projected change in assets,divided by projected change in liabilities,plus projected change in owner's equity
B)Projected change in assets,times projected change in owner's equity,minus projected change in liabilities
C)Projected change in owner's equity,minus projected change in liabilities,plus projected change in assets
D)Projected change in assets,minus projected change in liabilities,minus projected change in owner's equity
Q3) The cash budget ignores discretionary financing.
A)True
B)False
Q4) What is meant by discretionary financing?
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Chapter 18: Working Capital Management
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Sample Questions
Q1) If Quick foregoes the discount but does not pay for its purchases until day 40,what is Quick's effective cost of using this source of credit? Assume that no penalty is incurred for late payment.
A)38.37%
B)36.73%
C)26.67%
D)24.49%
Q2) Accrued wages are considered an unsecured,non-spontaneous source of financing. A)True
B)False
Q3) Frosty's Frozen Food Inc.'s inventory balance is $1.22 million.Frosty's Cost of Good's Sold is $30.4 million.Its inventory conversion period is A)12 days.
B)24.92 days.
C)14.65 days.
D)299.2 days.
Q4) Briefly describe at least three useful tools for maintaining control over accounts receivable.
Q5) Describe the differences between secured and unsecured short-term credit.
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Chapter 19: International Business Finance
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Sample Questions
Q1) What is the role of arbitrage in the foreign exchange markets?
Q2) Expropriation of plant and equipment without compensation is an example of financial risk from direct foreign investments.
A)True
B)False
Q3) The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar.The Host Hotel Company will be able to repatriate profits from its luxury resort hotel in Phuket in 5 years.It has estimated the 5 year forward rate at 38 bhat to the dollar.The risk-free rate in the U.S.is 4% and Host uses an 11 % risk premium for investments of this type.If the expected accumulated profits after 5 years are 100 million bhat,what is their present value in U.S.dollars.
Q4) According to the domestic Fisher effect,if the inflation rate is 5%,and the nominal rate of interest is 7%,the real rate of interest is A)2.00%.
B)1.904%.
C)4.65%.
D)0.5252%.
Q5) What is the law of one price? How does it apply to foreign exchange rates?
Q6) What is meant by interest rate parity?
Page 21
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Unlike the owner of a(n)________ contract,the owner of a(n)________ contract does not have to exercise it.
A)put,call
B)option,futures
C)futures,option
D)long,short
Q2) Assume that government and insurance providers pressure physicians to prescribe generic drugs whenever possible.For the producers of branded drugs,this change represents
A)insurable risk.
B)operational risk.
C)demand risk.
D)hedgeable risk.
Q3) As the volatility of a stock's price increases,the value of call and put options on the stock decreases.
A)True
B)False
Q4) Options can only be purchased for individual stocks,not for funds or indexes.
A)True
B)False
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