Financial Analysis
Practice Exam
Course Introduction
Financial Analysis is a course designed to equip students with the foundational skills and analytical tools necessary to evaluate the financial health and performance of organizations. Through the study of financial statements, ratio analysis, cash flow evaluation, and trend assessment, students learn how to interpret key financial metrics and make informed decisions. The course covers both qualitative and quantitative techniques, examining topics such as profitability, liquidity, solvency, and market value, while also addressing the impact of broader economic and industry trends. By the end of the course, students are prepared to critically assess financial data and apply their insights to real-world business scenarios, investment decisions, and strategic planning.
Recommended Textbook Fundamentals of Corporate Finance 12th Edition by Stephen Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following is a cash flow from a corporation into the financial markets?
A) Borrowing of long-term debt
B) Payment of government taxes
C) Payment of loan interest
D) Issuance of corporate debt
E) Sale of common stock
Answer: C
Q2) A general partner:
A) is personally responsible for all partnership debts.
B) has no say over a firm's daily operations.
C) faces double taxation whereas a limited partner does not.
D) has a maximum loss equal to his or her equity investment.
E) receives a salary in lieu of a portion of the profits.
Answer: A
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) HiWay Furniture has sales of $316,000, depreciation of $47,200, interest expense of $41,400, costs of $148,200, and taxes of $16,632. The firm has net capital spending of $36,400 and a decrease in net working capital of $14,300. What is the cash flow from assets for the year?
A) $145,985
B) $129,068
C) $119,655
D) $120,810
E) $134,585
Answer: B
Q2) Webster World has sales of $13,800, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 23 percent?
A) $6,016
B) $5,969
C) $6,574
D) $7,036
E) $7,100
Answer: C
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Chapter 3: Working with Financial Statements
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Q1) A firm has a debt-equity ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?
A) $28,079
B) $19,197
C) $50,159
D) $40,451
E) $52,418
Answer: C
Q2) Stone Walls has a long-term debt ratio of .6 and a current ratio of 1.2. Current liabilities are $800, sales are $7,800, the profit margin is 6.5 percent, and return on equity is 15.5 percent. What is the amount of the firm's net fixed assets?
A) $8,880.15
B) $8,017.43
C) $7,666.67
D) $5,848.15
E) $8,977.43
Answer: B
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) Wood Products is operating at 87 percent capacity and earning a substantial profit. A sales increase is least apt to increase the firm's:
A) accounts receivable.
B) cost of goods sold.
C) accounts payable.
D) fixed assets.
E) inventory.
Q2) Porter's Corner has sales of $4,650 net income of $490, total assets of $5,820, and total debt of $2,760. Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be $5,487. What is the amount of the external financing needed?
A) $28
B) $469
C) $611
D) $1,048
E) $823
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Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
A) $1,256.43
B) $891.18
C) $1,124.60
D) $945.11
E) $1,219.02
Q2) Duane and Thad plan on retiring 27 years from today and plan to have the same amount saved at that time. In preparation for this, Duane is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Thad's deposit amount vary from Duane's if Thad also makes a deposit today but earns an annual interest rate of 6.2 percent?
A) $4,118.42 more
B) $4,333.33 less
C) $3,417.09 more
D) $4,274.12 less
E) $3,381.39 less
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Which one of the following statements related to loan interest rates is correct?
A) The annual percentage rate considers the compounding of interest.
B) When comparing loans you should compare the effective annual rates.
C) Lenders are most apt to quote the effective annual rate.
D) Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate.
E) The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.
Q2) Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?
A) Annual
B) Semi-annual
C) Monthly
D) Daily
E) Continuous
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Which one of these statements is correct?
A) Most long-term bond issues are referred to as unfunded debt.
B) Bonds often provide tax benefits to issuers.
C) The risk of a company financially failing decreases when the company issues bonds.
D) All bonds are treated equally in a bankruptcy proceeding.
E) A debenture is a senior secured debt.
Q2) A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest semiannually. What is the current yield?
A) 2.94 percent
B) 2.99 percent
C) 3.28 percent
D) 3.33 percent
E) 3.23 percent
Q3) Which one of the following is the price at which a dealer will sell a bond?
A) Call price
B) Asked price
C) Bid price
D) Bid-ask spread
E) Par value
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Chapter 8: Stock Valuation
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Q1) The next dividend payment by HG Enterprises will be $1.82 per share with future increases of 2.8 percent annually. The stock currently sells for $38.70 per share. What is the dividend yield?
A) 4.20 percent
B) 4.70 percent
C) 4.81 percent
D) 4.56 percent
E) 4.41 percent
Q2) The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?
A) 10.86 percent
B) 15.82 percent
C) 9.08 percent
D) 13.39 percent
E) 12.75 percent
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) You estimate that a project will cost $33,700 and will provide cash inflows of $14,800 in Year 1 and $24,600 in Year 3. Based on the profitability index rule, should the project be accepted if the discount rate is 14.2 percent? Why or why not?
A) Yes; The PI is .87.
B) Yes; The PI is .93.
C) Yes; The PI is 1.06.
D) No; The PI is 1.06.
E) No; The PI is .87.
Q2) Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?
A) Net present value
B) Payback
C) Internal rate of return
D) Average accounting return
E) Profitability index
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Chapter 10: Making Capital Investment Decisions
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Q1) Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine for $390,000 is estimated to result in $135,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a pretax salvage value at the end of the project of $198,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. Ignore bonus depreciation. The press also requires an initial investment in inventory of $8,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop's tax rate is 21 percent and its discount rate is 16 percent. Should the firm buy and install the machine? Why or why not?
A) Yes; The net present value is $47,048.86.
B) No; The net present value is $36,329.09.
C) No; The net present value is $56,652.88.
D) Yes; The net present value is $44,319.97.
E) Yes; The net present value is $56,329.09.
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Chapter 11: Project Analysis and Evaluation
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Q1) Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?
A) Scenario
B) Simulation
C) Break-even
D) Sensitivity
E) Cash flow
Q2) A project has expected sales of 54,000 units, ±5 percent, variable cost per unit of $87, ±2 percent, fixed costs of $287,000, ±1 percent, and a sales price per unit of $219, ±2 percent. The depreciation expense is $47,000 and the tax rate is 23 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $85?
A) $132
B) $134
C) $135
D) $136
E) $133
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Chapter 12: Some Lessons from Capital Market History
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Q1) A stock had annual returns of 6 percent, 13 percent, 11 percent, 8 percent, and 3 percent for the past five years, respectively. What is the standard deviation of returns for this stock?
A) 10.79 percent
B) 12.60 percent
C) 6.48 percent
D) 14.42 percent
E) 8.28 percent
Q2) Which one of the following is most indicative of a totally efficient stock market?
A) Extraordinary returns earned on a routine basis
B) Positive net present values on stock investments over the long-term
C) Zero net present values for all stock investments
D) Arbitrage opportunities which develop on a routine basis
E) Realizing negative returns on a routine basis
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Chapter 13: Return, Risk, and the Security Market Line
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Q1) Which one of the following is a risk that applies to most securities?
A) Unsystematic
B) Diversifiable
C) Systematic
D) Asset-specific
E) Industry
Q2) Your portfolio has a beta of 1.28. The portfolio consists of 35 percent U.S. Treasury bills, 31 percent Stock A, and 34 percent Stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of Stock B?
A) 1.47
B) 1.52
C) 2.04
D) 1.84
E) 2.85
Q3) Unsystematic risk:
A) can be effectively eliminated by portfolio diversification.
B) is compensated for by the risk premium.
C) is measured by beta.
D) is measured by standard deviation.
E) is related to the overall economy.
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Chapter 14: Cost of Capital
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Q1) Fashion Wear has bonds outstanding that mature in 11 years, pay interest annually, and have a coupon rate of 6.45 percent. These bonds have a face value of $1,000 and a current market price of $994. What is the company's aftertax cost of debt if its tax rate is 21 percent?
A) 4.86 percent
B) 4.28 percent
C) 5.16 percent
D) 5.21 percent
E) 4.53 percent
Q2) The Well Derrick has 6.3 percent preferred stock outstanding that sells for $57 a share. This stock was originally issued at $45 per share and has a stated value of $100 per share. What is the cost of preferred stock if the relevant combined tax rate is 23 percent?
A) 11.22 percent
B) 10.94 percent
C) 10.45 percent
D) 11.05 percent
E) 11.37 percent
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Chapter 15: Raising Capital
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Q1) Which one of the following statements is correct concerning the direct costs of issuing securities?
A) Domestic bonds are generally more expensive to issue than equity IPOs.
B) The gross spread as a percentage of proceeds is the same for similar-sized IPOs and SEOs.
C) A seasoned offering is always more expensive on a percentage basis than an IPO.
D) There tends to be substantial economies of scale when issuing any type of security.
E) The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt.
Q2) Which one of the following statements is correct?
A) The quiet period commences when a registration statement is filed with the SEC and ends on the day the IPO shares commence trading.
B) Lockup agreements outline how oversubscribed IPO shares will be allocated.
C) Additional IPO shares can be issued in accordance with the lockup agreement.
D) Quiet period restrictions only apply to the issuer of new securities.
E) A public interview with an issuer's CFO could cause a forced delay in the issuer's IPO.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Which one of the following statements related to Chapter 7 bankruptcy is correct?
A) A company in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern.
B) Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.
C) Chapter 7 bankruptcies are always involuntary on the part of the firm.
D) Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy.
E) Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock can be issued.
Q2) The capital structure that maximizes the value of a company also:
A) minimizes financial distress costs.
B) minimizes the cost of capital.
C) maximizes the present value of the tax shield on debt.
D) maximizes the value of the debt.
E) maximizes the present value of the bankruptcy costs.
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Chapter 17: Dividends and Payout Policy
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Q1) South Shore Limited has 14,500 shares of stock outstanding with a par value of $1 per share and a market price of $54.10 a share. The firm just announced a stock split of seven-for-two. What will be the par value of the stock after the split?
A) $.29
B) $.58
C) $1.00
D) $7.00
E) $3.50
Q2) Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?
A) Ex-rights date
B) Ex-dividend date
C) Date of record
D) Date of payment
E) Declaration date
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Chapter 18: Short Term Finance and Planning
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Q1) Which one of the following managers determines when a supplier will be paid?
A) Controller
B) Payables manager
C) Credit manager
D) Purchasing manager
E) Production manager
Q2) AC Corporation has beginning inventory of $11,062, accounts payable of $8,010, and accounts receivable of $7,844. The end of year values are $11,362 for inventory, $7,898 for accounts payable, and $8,029 for accounts receivable. Net sales are $109,100 and costs of goods sold are $56,220. How many days are in the cash cycle?
A) 47.7 days
B) 80.2 days
C) 55.8 days
D) 97.9 days
E) 67.8 days
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Chapter 19: Cash and Liquidity Management
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Q1) On average, LB Inc. receives 138 payments each day with an average value of $42 each. These payments clear the bank in an average of 1.3 days. In addition, it disburses 2.2 checks a day with an average amount of $2,250. These checks clear the bank in two days. What is the average amount of the collection float?
A) $18,473
B) $3,401
C) $7,535
D) $41,965
E) $49,500
Q2) The BAT model:
A) computes the fixed costs of securities trading based on the current U.S. Treasury bill rate.
B) accounts for daily fluctuations in cash outflows.
C) assumes cash is replenished when the cash level falls to its average balance. D) ignores the opportunity costs of holding cash.
E) can be used to determine the target cash balance for a firm.
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Chapter 20: Credit and Inventory Management
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Q1) New Products currently sells a product with a variable cost per unit of $23 and a unit selling price of $49. At the present time, the firm only sells on a cash basis with monthly sales of 733 units. The monthly interest rate is .48 percent. What is the value of Q' at the switch break-even point if the firm adopted a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.
A) 739.66 units
B) 736.34 units
C) 728.47 units
D) 740.29 units
E) 743.18 units
Q2) The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:
A) conditions, control, cessation, capital, and capacity.
B) conditions, character, capital, control, and capacity.
C) capital, collateral, control, character, and capacity.
D) character, capacity, control, cessation, and collateral.
E) capacity, character, collateral, capital, and conditions.
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Chapter 21: International Corporate Finance
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Q1) Assume the current spot rate is C$1.0875 and the one-year forward rate is C$1.0724. Also assume the nominal risk-free rate in Canada is 3.9 percent while it is 4.1 percent in the U.S. How much additional income can you earn by using covered interest arbitrage as compared to investing $1 in the U.S for one year?
A) $.0118
B) $.0126
C) $.0020
D) $.0110
E) $.0087
Q2) Assume $1 is currently equal to £.7658. Also assume the expected inflation rate in the U.K. is 3.6 percent while it is 3.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?
A) £.7750
B) £.7635
C) £.7681
D) £.7623
E) £.7567
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) A tendency to be overly conservative when faced with new information is referred to as:
A) anchoring and adjustment.
B) heuristics.
C) self-attribution.
D) loss aversion.
E) regret aversion.
Q2) Bill feels that he possesses a good dose of "street smarts." Thus, he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project. This type of behavior is referred to as:
A) overconfidence.
B) endowment effect.
C) money illusion.
D) affect heuristic.
E) sentiment-based risk.
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Chapter 23: Enterprise Risk Management
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Q1) You expect to deliver 50,000 bushels of wheat to the market in July. Assume you hedged your position by selling futures contracts on half of your expected delivery at a price of 443.25. The futures contracts are based on 5,000 bushels and are priced in cents per bushel. Assume the market price turns out to be 445.75 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts?
A) $1,250 less
B) $625 less
C) $0
D) $625 more
E) $1,250 more
Q2) Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a commodity swap contract?
A) Setting a permanent price at which a commodity will be traded
B) Setting the price at the minimum spot price during a given period of time
C) Setting the price equal to the spot price on the delivery date
D) Using the average market price over a given period of time
E) Setting the contract price equal to some percentage, less than 100 percent, of the market price on any given day
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Chapter 24: Options and Corporate Finance
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Q1) A November $40 call has a premium of $4.60 a share while the underlying stock is priced at $44.15. What is the intrinsic value of this call?
A) $0
B) $1.45
C) $.45
D) $4.15
E) $4.60
Q2) Employee stock options:
A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.
Q3) Employee stock options are primarily designed to do which one of the following?
A) Provide employees with put options on their shares of company stock
B) Provide an immediately vested benefit to key employees
C) Influence the actions and priorities of employees
D) Distribute excess cash to key employees to avoid corporate taxation
E) Provide an immediate capital gain to certain employees
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Chapter 25: Option Valuation
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Q1) All of the following affect the value of a call option except the:
A) strike price.
B) stock price.
C) standard deviation of the returns on a risk-free asset.
D) continuously compounded risk-free rate.
E) time to maturity.
Q2) A decrease in which of the following will increase the value of a put option on a stock?
A) Strike price and standard deviation of the returns on the underlying stock
B) Stock price and risk-free rate
C) Time to expiration and strike price
D) Risk-free rate and standard deviation of the returns on the underlying stock
E) Time to expiration and stock price
Q3) If the price of the underlying stock decreases, then the value of the call options ________ and the value of the put options ________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
E) increase; remain unchanged
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Chapter 26: Mergers and Acquisitions
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Q1) If a firm sells its crown jewels when threatened with a takeover attempt, the firm is employing a strategy commonly referred to as a ________ strategy.
A) scorched earth
B) shark repellent
C) bear hug
D) white knight
E) lockup
Q2) Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a separate entity. This acquisition is best described as a:
A) merger.
B) consolidation.
C) tender offer.
D) spinoff.
E) divestiture.
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Chapter 27: Leasing
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Q1) Assume the initial present value of the payments on a lease are equal to the cost of the leased asset. This capital lease is recorded as an asset on the balance sheet of the lessee in an amount equal to the:
A) dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement.
B) dollar amount of each lease payment multiplied by the number of lease payments remaining.
C) dollar amount of each lease payment multiplied by the number of lease payments per year.
D) present value of the remaining lease payments.
E) lesser of the present value of the remaining lease payments or the present value of the lease payments for a one-year period.
Q2) An operating lease has which one of the following characteristics?
A) The economic life of the asset equals the lease term.
B) The lessee has responsibility for the maintenance and insurance.
C) The lease payments recover the full cost of the asset.
D) The lessee can cancel the lease prior to the expiration date.
E) The lease term is relatively long term.
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