Financial Analysis
Test Preparation
Course Introduction
Financial Analysis is an essential course that equips students with the tools and techniques necessary to evaluate the financial health and performance of organizations. Through the study of financial statements, ratio analysis, cash flow assessment, and trend analysis, students gain the ability to interpret key financial indicators and make informed decisions. The course emphasizes both quantitative and qualitative approaches to analyzing profitability, liquidity, solvency, and efficiency, ensuring students develop practical skills for careers in finance, accounting, investment, and management. Case studies and real-world examples are integrated to enhance analytical thinking and practical application.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer
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27 Chapters
2109 Verified Questions
2109 Flashcards
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Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to
A)separation of social responsibility and stakeholders' concerns
B)separation of ownership and control
C)separation of personal welfare and long-run profit goals
D)the granting of "golden parachute" contracts
Answer: B
Q2) According to the shareholder wealth maximization goal, management should seek to maximize the of the to_______owners.
A)present value;expected pretax cash flows
B)future value;expected pretax cash flows
C)present value;expected future returns
D)future value;expected future returns
Answer: C
Q3) What is the advantage of an LLC over an LLP business form?
Answer: An LLC (or limited liability company) has three advantages:
1.Has better access to capital to finance growth.
2.It enables broad employee ownership of the firm.
Page 3
3.It enables the firm to engage in strategic acquisitions.
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Chapter 2: The Domestic and International Financial Marketplace
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88 Verified Questions
88 Flashcards
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Sample Questions
Q1) All of the following contributed to the financial crisis of 2007-2010 EXCEPT:
A)the Gulf War
B)the securitization of mortgage loans
C)very low interest rates
D)foreign investment in the bond market
Answer: A
Q2) The U.S.financial markets are said to be highly informationally efficient.This means
A)they process stock trades accurately and quickly
B)the market provides quick access to a firm's financial statements
C)they quickly reflect information relevant to determining stock value
D)accurate stock quotes are quickly available to all investors
Answer: C
Q3) In the financial crisis of 2007 there was cheap money coming from emerging markets.Examples of emerging markets are all of the following EXCEPT:
A)South Korea
B)Australia
C)India
D)China
Answer: B
Page 4
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Chapter 3: Evaluation of Financial Performance
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109 Flashcards
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Sample Questions
Q1) What is the return on stockholders' equity for a firm with a net profit margin of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000?
A)8.48%
B)5.74%
C)15.27%
D)9.36%
Answer: C
Q2) Wall Mart Pictures and Decor Company has a net profit margin of 10% and its inventory turnover is 9, what is its annual cost of sales? You also know that Wall Mart's average inventory is $96,700 and its annual sales are $1,000,000.
A)$870,000
B)$850,000
C)$870,300
D)$790,000
Answer: C
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Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) The financial plan that is a "blueprint" detailing where the firm wants to be at some future point in time is the:
A)Executive Manifest
B)Strategic Plan
C)FASB Plan
D)Operational plan
Q2) The value of debt and equity securities is based upon:
A)The type of investment vehicle
B)The growth potential of the asset
C)The accounting method used for recording the asset
D)The present value of the cash flows that the securities are expected to provide.
Q3) Operational plans are generally conducted at two levels.Which length of time is considered long-term?
A)2 years
B)12 - 18 months
C)5 years
D)10 years
Q4) Why would a firm experience cash flow difficulties immediately after a good sales period?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) If a 16 year old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of 9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20 - 65) at 9%.
A)$442,014
B)$386,616
C)$1,767,995
D)$9,146
Q2) A zero coupon bond with a $1,000 par value (future value) is selling for $356 and matures in 12 years.What is the implied discount rate (yield to maturity)?
A)9%
B)9.36%
C)9.12%
D)9.4%
Q3) The basic future value equation is given by
A)FV<sub>n</sub> = PV<sub>0</sub>(PVIF<sub>i,n</sub>)
B)FV<sub>n</sub> = <sub>0</sub>(FVIFA<sub>i,n</sub>)
C)FV<sub>n</sub>= PV<sub>0</sub>(1/(1 + i)<sup>n</sup>)
D)FV<sub>n</sub> = PV<sub>0</sub>(FVIF<sub>i,n</sub>)
Q4) Compare the difference between compound interest and simple interest.
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Chapter 5: A: The Time Value of Money
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Sample Questions
Q1) In the continuous compounding equation, "e" is the
A)natural log to the base 10.
B)base number in natural logarithms
C)natural log to the base 1.
D)none of the above are correct
Q2) With continuous compounding, why is the effective rate higher than the nominal rate?
Q3) The nominal interest rate and the effective interest rate are equivalent when compounding occurs:
A)once a year at the end of the year.
B)every quarter.
C)semiannually.
D)monthly.
Q4) What is the value of $10,000 invested for 1 year at 8% compounded continuously?
A)$10,800
B)$10,833
C)$10,824
D)$11,268
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8
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Sample Questions
Q1) Users of preferred stock include:
A)Utility companies
B)Acquiring firm in mergers and acquisitions
C)Large commercial banks
D)All listed answers are users
Q2) If an Allied Chemical zero coupon bond due in 12 years is selling for $420.00, what is its yield to maturity?
A)7.50%
B)4.64%
C)6.51%
D)5.26%
Q3) The indenture is a contract between the issuer and lenders that does all the following except:
A)specifies the manner in which the principal must be repaid
B)details the nature of the debt issue
C)gives management's expectations about return of the proceeds
D)lists any restrictive covenants
Q4) List the restrictions that an indenture places on the borrower of long-term debt.
Q5) Explain a sinking fund.
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) All of the following statements about common stock are correct EXCEPT:
A)common stock is a variable income security.
B)common stock prices fluctuate more than bonds.
C)common stock is callable.
D)common stockholders have preemptive rights
Q2) The returns from most common stocks are
A)positively correlated with each other
B)negatively correlated with each other C)uncorrelated with each other
D)correlated to future forecasted earnings
Q3) Over the past 5 years, Dippity Doo-Dah Party Dips' common stock earnings per share have grown from $0.62 to $0.91.If an investor in Dippity's stock is assumed to have a required rate of return of 14%, what is the current value of Dippity if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.
A)$2.16
B)$1.62
C)$4.94
D)$2.00
Q4) List the various rights of common stockholders.
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) The return expected from a risky investment is 24 percent, and the standard deviation of this return is 17 percent.If returns from this investment are normally distributed, what is the probability that the investment may earn a negative rate of return? (Note: Table V is required to work this problem.)
A)8.33%
B)7.93%
C)6.88%
D)5.44%
Q2) Beta is defined as:
A)a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities.
B)the ratio of the variance of market returns to the covariance of returns on a security with the market
C)the inverse of the slope of the security regression line
D)all of these
Q3) Why is risk an increasing function of time?
Q4) List types of events that influence systematic (non-diversifiable) risk.
Q5) Explain marketability risk and marketability premium.
Q6) What is an efficient portfolio?
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) A contractor has a team of plumbers and assigns those plumbers to a new construction site.The fact that the plumbers are unavailable for any other job makes the construction site project a/an:
A)independent project
B)qualified project
C)mutually exclusive project
D)contingent project
Q2) The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed.The old milling machine has been fully depreciated but can be sold for $15,000.The new machine will be depreciated on a straight line basis over its 10 year economic life to an estimated salvage value of $10,000.If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.
A)$15,000
B)$18,000
C)$27,000
D)$21,000
Q3) List the steps that a firm uses in the capital budgeting process:
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) Calculate the profitability index for a project that has a net present value equal to -$10,000.The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate.
A)-0.5
B)0
C)0.8
D)None of these
Q2) The disadvantages of the payback approach include:
A)cash flows after the payback period are ignored in the calculation
B)payback ignores the time value of money
C)payback fails to provide an objective decision-making criterion
D)all of these
Q3) In considering the payback method,
A)It is a method of determining the financial exposure of a firm for a project.
B)It is a complicated but accurate capital budgeting method.
C)Both a and b are correct.
D)Neither a nor b is correct.
Q4) Explain why the internal rate of return method is more popular than the net present value method.What are some potential problems with relying on the IRR method?
Page 13
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) The best way to measure projects with unequal lives is:
A)the Gordon Model
B)the payback period
C)the net present value method
D)equivalent annual annuity approach
Q2) What would be the equal annual annuity for Wallflowers Florist, Inc.if the cost of capital is 10% and the initial investment is $50,000 (rounded)?
\[\begin{array} { | c | c | }
\hline \text { Year } & \text { Cash Inflows } \\
\hline 1 & \$ 25,000 \\
\hline 2 & \$ 30,000 \\
\hline 3 & \$ 10,000 \\
\hline
\end{array}\]
A)$2,024
B)$5,033
C)$1,257
D)$8,358
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
Page 14
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) A firm's leveraged beta will always be its unleveraged beta.
A)less than
B)greater than C)the same as D)could be all of these
Q2) When analyzing a sensitivity curve, the the slope, the more sensitive the net present value is to a change in the computed variable.
A)more negative
B)steeper
C)more general
D)smaller
Q3) The basic capital budgeting decision models, that is, NPV and IRR, handle risk by A)ignoring it
B)assuming all cash flows are known with certainty
C)assuming all projects are of average risk and evaluating them based on expected values
D)using risk-adjusted discount rates to evaluate projects
Q4) What is the reason companies utilize the certainty equivalent approach in evaluating projects?
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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104 Verified Questions
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Sample Questions
Q1) The optimal capital budget is indicated by the point at which the and the intersect.
A)depreciation schedule;investment opportunity schedule
B)investment opportunity curve;marginal cost of capital curve
C)investment opportunity curve;average cost of capital curve
D)efficient portfolio curve;marginal cost of capital curve
Q2) The total return to stockholders, ke, is composed of the
A)opportunity cost plus a risk premium
B)dividend yield plus the price appreciation of the security
C)opportunity cost plus an inflation premium
D)dividend yield minus the risk premium
Q3) All of the following methods may be used to determine the cost of equity capital (ke) for a non-dividend-paying stock except
A)the risk premium on debt approach
B)the Capital Asset Pricing Model approach
C)comparing with similar dividend-paying stocks in the industry
D)the simulation with growth expectations approach
Q4) How is the marginal cost of the various component capital sources determined?
Q5) What does the optimal capital budget maximize? How it is determined?
Q6) What is the investment opportunity curve and how is it accomplished?
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) The tax deductibility of the interest payments on corporate debt is known as:
A)the tax structure
B)the tax shield
C)the optimal capital structure
D)Section 402a of the IRS tax code.
Q2) In determining the capital structure for an international firm, the managerial objective is to
A)minimize exchange rate risk
B)minimize the risk of expropriation
C)minimize the overall cost of capital
D)minimize available local low-cost financing
Q3) Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will
A)increase
B)decrease
C)remain unchanged;there is no relationship between the two
D)initially rise rapidly, then increase slowly beyond some point
Q4) Explain how industry effects need to be considered in the capital structure decision.
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17
Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30.The firm has $10 million in bonds outstanding with a coupon interest rate of 9%.KH has 200,000 shares of common stock outstanding.The firm has revenues of $32.2 million and its marginal tax rate is 40%.Compute KH's degree of financial leverage.
A)1.22
B)2.07
C)1.09
D)1.04
Q2) Cash insolvency analysis evaluates the adequacy of a firm's cash position in a
A)bankruptcy proceeding
B)non-normal environment
C)highly competitive environment
D)recessionary environment
Q3) Financial leverage causes a firm's to change at a rate greater than the change in .
A)EBIT;EPS
B)EPS;EBIT
C)EBIT;sales
D)sales;EBIT
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Chapter 14: A: Capital Structure Management in Practice
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Sample Questions
Q1) Breakeven analysis can be used to assess risk.
A)financial
B)operating
C)sales
D)volume
Q2) The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.The company has operating costs of $1,050,000.What is the firm's breakeven point in dollars?
A)$1,750,000
B)$4,670,000
C)$2,625,000
D)$3,875,566
Q3) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
Q4) List the limitations of breakeven analysis:
Q5) What are the possible uses for breakeven analysis?
Q6) How can a firm have more than one breakeven output point?
Page 19
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Chapter 15: Dividend Policy
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Sample Questions
Q1) All of the following are alternative dividend policies EXCEPT:
A)constant payout
B)stable dollar
C)constant earnings
D)passive residual
Q2) A firm with stable earnings is usually more willing to
A)retain more earnings
B)have a higher dividend payout ratio
C)have a sinking fund agreement
D)seek aggressive growth
Q3) A foreign subsidiary with good access to capital within the host country, tends to pay dividends to the parent than subsidiaries with poor access to local capital.
A)smaller
B)larger
C)no
D)none of these answers is correct;dividends are not related to availability of capital
Q4) What effect does a stock split have on outstanding shares of stock and what is its purpose?
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Lenders normally feel that the relative risk associated with short-term debt is the risk associated with long- term debt.
A)lower than B)equal to C)higher than D)none of these
Q2) What are accrued expenses and how are they handled as unsecured short-term credit?
Q3) Runners Ink, Inc.had sales last year of $700,000 and 35 percent of its sales are for cash, with the remainder buying on terms of net 30 days.If the receivables conversion period is actually 38 days, what is Runners Ink's accounts receivable?
A)$72,877
B)$25,507
C)$47,370
D)none of these
Q4) Explain trade credit.
Q5) What is "stretching accounts payable" and what are the advantages and disadvantages of doing it?
Q6) What are the classifications for short-term lenders and how do they differ?
Page 21
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Chapter 17: The Management of Cash and Marketable Securities
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Sample Questions
Q1) The costs of a lockbox collection system include
A)foregone returns on the required compensating balances
B)service fees charged by the bank
C)increased bad-debt expenses
D)foregone returns on the required compensating balances and service fees charged by the bank
Q2) are short-term debt instruments issued as part of a commercial transaction, with payment guaranteed by a commercial bank.
A)Negotiable certificates of deposit
B)Commercial paper
C)Repurchase agreements
D)Bankers' acceptances
Q3) The objective of cash collection and disbursement policies is to
A)minimize storage costs
B)speed up collections and slow down disbursements
C)maximize the return on near cash equivalents
D)avoid using float
Q4) Explain how companies can slow disbursements in order to keep funds in the bank for longer periods of time.
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Chapter 18: The Management of Accounts Receivable and Inventories
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Sample Questions
Q1) Bluegrass Distilleries, Inc.refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them.This policy results in lost sales of $10 million annually.Based on past experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6 percent.The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20.Bluegrass Distilleries' required pretax return (i.e., opportunity cost) on receivables investments is 20 percent.When converting from annual to daily data or vice versa, assume there are 365 days per year.Determine the net effect on Bluegrass Distilleries' pretax profits of extending credit to these (previously delinquent) customers
A)$906,849
B)$2,000,000
C)$306,849
D)$1,500,000
Q2) Relaxing (i.e., lowering) the firm's credit standards is likely to result in
A)lower sales
B)smaller bad-debt losses
C)a shorter average collection period
D)possible higher pre-tax profits
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) Which of the following leases is not likely to be viewed as a lease from the perspective of the Internal Revenue Service?
A)a 20 year lease for an asset having an economic life estimated to be 40 years
B)a lease offering a renewal option based on the asset's remaining value at the time of the renewal
C)a lease providing for a purchase option at the end of the lease period for a nominal sum
D)a leveraged lease in which the lessor contributes 40 percent equity
Q2) Unilog is considering leasing a computer from UniNet under a 6-year lease.The computer costs $200,000 and will be depreciated as a 5-year MACRS asset.The expected salvage value of the computer after 6 years is $20,000.UniNet's marginal tax rate is 35 percent and its average tax rate is 30%.UniNet requires a 13 percent after-tax rate of return on leases of this type.What annual, pretax, beginning-of-the-year lease payment must Unilog make to UniNet? (Problem requires MACRS depreciation tables.)
A)$48,786
B)$31,711
C)$50,500
D)$16,848
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Chapter 20: Financing with Derivatives
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Sample Questions
Q1) JDH, Inc.presently has warrants outstanding that expire 5 years from today.Each warrant entitles the holder to purchase 2 shares of the company's common stock at an exercise price of $30 a share.The warrants currently are trading at $4 each, and the JDH common stock currently is trading at $28 a share.Calculate the warrants' formula value.
A)-$4.00
B)-$2.00
C)$0.00
D)$2.00
Q2) Graybar recently sold a convertible bond with a $1,000 par value for a flotation cost of 2 percent (each bond produced $980 for the firm).What is the conversion price if the conversion ratio is 22?
A)$44.55
B)$45.45
C)$50.00
D)$4.45
Q3) List some securities that have option features.
Q4) Explain how conversion of a convertible security affects earnings and how does a firm handle this on its financial statements?
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Chapter 20: A: Financing with Derivatives
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Q1) Demetres is refunding an outstanding $75 million, 9.35% debenture with a $75 million 7.80% debenture.Both issues will be outstanding for a 3-week period.If Demetres' marginal tax rate is 40%, what is the overlapping interest?
A)$337,500
B)$242,740
C)$404,567
D)$202,500
Q2) Why is the after-tax cost of debt used in bond refunding analysis?
Q3) Bond occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.
A)redemption
B)retirement
C)recall
D)refunding
Q4) Bond refunding occurs when a company redeems a callable issue and
A)sells an equity issue, thereby reducing outstanding debt
B)sells a new issue with a lower coupon rate
C)sells a preferred issue with a low dividend rate
D)none of these is correct
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Chapter 21: Risk Management
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Q1) A risk that shareholder wealth-maximizing managers should seek to offset in the firm that they are managing is:
A)dividend payout risk
B)exchange rate risk
C)research and development risk
D)leasing risk
Q2) A firm can reduce risk by gaining control over the operating environment.Which of the following is an example?
A)Using general purpose assets.
B)Hedging through a futures contract.
C)Increasing the customer base.
D)Using patents and copyrights.
Q3) To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?
A)Manufacture the product overseas.
B)Develop more raw material suppliers.
C)Test-market a product.
D)Change advertising.
Q4) How does hedging reduce or eliminate business risks?
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Chapter 22: International Financial Management
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Sample Questions
Q1) Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment for these telephones will be in Japanese yen.What type of foreign exchange risk does Motorola face?
A)economic exposure
B)operating exposure
C)transaction exposure
D)translation exposure
Q2) Vroom Motors purchased several Mercedes Benz automobiles from its West German broker.The contract was for 10,000,000 euros, due in 180 days.The present exchange rate is $0.51 per euro and the 180 day forward rate is $0.514.If the rate actually goes to $0.50 in 180 days, what is the dollar gain or loss incurred if no hedge is taken relative to a hedged position?
A)$392,157 gain
B)$40,000 loss
C)$100,000 gain
D)$140,000 gain
Q3) There are two methods used to forecast future exchange rates.What are they and how do companies use them to protect against risk?
Q4) How do market forces support the relative purchasing power parity?
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Chapter 23: Corporate Restructuring
Available Study Resources on Quizplus for this Chatper
75 Verified Questions
75 Flashcards
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Sample Questions
Q1) One reason for a company to spin-off a division is to:
A)consolidate expenses.
B)remove an underperforming unit.
C)create a better distribution unit.
D)achieve synergy.
Q2) In the method of combining financial accounts in a merger, the acquired company's assets are recorded on the acquiring company's books at their cost (net of depreciation) when originally acquired.
A)goodwill consolidation
B)purchase
C)pooling of interests
D)EVA
Q3) equals the proceeds that would be received from the sale of the firm's assets minus its liabilities.
A)Market value
B)Equity value
C)Going-concern value
D)Liquidation value
Q4) There are three methods for valuing merger candidates.Briefly explain each of them.
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