Financial Planning and Analysis
Exam Answer Key
Course Introduction
Financial Planning and Analysis explores the essential processes and tools used to assess a company's financial health, support strategic decision-making, and drive business growth. This course covers budgeting, forecasting, variance analysis, financial modeling, and performance measurement, equipping students with the skills to interpret financial data and communicate insights to stakeholders. Through case studies and practical exercises, students learn to integrate historical and projected financial information, evaluate business opportunities, manage resources efficiently, and contribute to long-term organizational objectives in diverse industries.
Recommended Textbook
Fundamentals of Corporate Finance 9th Canadian Edition by Richard A Brealey
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Page 2
Chapter 1: Goals and Governance of the Firm
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Sample Questions
Q1) A corporation is considered to be closely held when:
A) only a few shareholders exist.
B) the market value of the shares is stable.
C) it operates in a small geographic area.
D) management also serves as the board of directors.
Answer: A
Q2) Which of the following is a capital budgeting decision?
A) Should the firm borrow money from a bank or sell bonds?
B) Should the firm shut down an unprofitable factory?
C) Should the firm buy or lease a new machine that it is committed to acquiring?
D) Should the firm issue preferred stock or common stock?
Answer: B
Q3) In a firm having both a treasurer and a controller,which of the following would most likely be handled by the controller?
A) Internal auditing
B) Credit management
C) Banking relationships
D) Insurance
Answer: A
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Which one of these may provide a financial return to some investors while not providing any financial return to other investors?
A) Mutual funds
B) Pension funds
C) Insurance companies
D) Hedge fund
Answer: C
Q2) When corporations need to raise funds through stock issues,they rely on the:
A) primary market.
B) secondary market.
C) tertiary market.
D) centralized NASDAQ exchange.
Answer: A
Q3) The cost of capital is the interest rate paid on a loan from a bank or some other financial institution.
A)True
B)False
Answer: False
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Chapter 3: Accounting and Finance
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Sample Questions
Q1) If a firm's net income is positive and its noncash expenses are positive,which of the following could account for a negative amount of cash provided by operations?
A) Current assets decrease more than current liabilities decrease.
B) Current assets increase more than current liabilities increase.
C) Current assets decrease more than current liabilities increase.
D) A large addition is made to plant and equipment.
Answer: B
Q2) Which of the following items should not be included in a listing of current assets?
A) Marketable securities
B) Accounts payable
C) Accounts receivable
D) Inventories
Answer: B
Q3) Based on generally accepted accounting principles,assets are recorded on the balance sheet at their current market value.
A)True
B)False
Answer: False
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5
Chapter 4: Measuring Corporate Performance
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Sample Questions
Q1) The current ratio is a good proxy for a firm's:
A) liquidity.
B) efficiency.
C) degree of leverage.
D) profitability.
Q2) In the past year,TVG had revenues of $3 million,cost of goods sold of $2.5 million,and depreciation expense of $200,000.The firm has a single issue of debt outstanding with a face value of $1million,market value of $.92 million,and a coupon rate of 8%.What is the firm's times interest earned ratio?
A) 3.75
B) 2.98
C) 2.80
D) 3.40
Q3) After-tax operating income for a leveraged firm is defined as:
A) net income + after-tax interest.
B) EBIT × (1 tax rate).
C) net income + depreciation.
D) profit margin × sales.
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6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) Given the future value,which of the following will contribute to a lower present value?
A) Higher discount rate
B) Fewer time periods
C) Less frequent discounting
D) Lower discount factor
Q2) A loan officer states,"Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at an interest rate of .75% a month versus a 15-year mortgage with an interest rate of .7% a month.Both mortgages are for $100,000 and have monthly payments.What is the difference in total dollars that will be paid to the lender under each loan? (Round the monthly payment amounts to 2 decimal places.)
A) $89,211
B) $98,406
C) $113,465
D) $124,300
Q3) The term "constant dollars" refers to equal payments for amortizing a loan.
A)True
B)False
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) Investors who purchase bonds having lower credit ratings should expect:
A) lower yields to maturity.
B) higher default possibilities.
C) lower coupon payments.
D) higher purchase prices.
Q2) Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's.
A)True
B)False
Q3) The current yield of a bond can be calculated by:
A) multiplying the price by the coupon rate.
B) dividing the price by the annual coupon payments.
C) dividing the price by the par value.
D) dividing the annual coupon payments by the price.
Q4) Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds.
A)True
B)False
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Page 8
Chapter 7: Valuing Stocks
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Sample Questions
Q1) Which of the following values treats the firm as a going concern?
A) Market value
B) Book value
C) Liquidation value
D) Both market and book values
Q2) The value of common stock will likely decrease if:
A) the investment horizon decreases.
B) the growth rate of dividends increases.
C) the discount rate increases.
D) dividends are discounted back to the present.
Q3) What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?
A) Its stock price will remain constant.
B) Its stock price will increase by the sustainable growth rate.
C) Its stock price will decline unless the dividend payout ratio is zero.
D) Its stock price will decline unless the plowback rate exceeds the required return.
Q4) The liquidation value of a firm is equal to the book value of the firm.
A)True
B)False
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) A project's opportunity cost of capital is:
A) the return that shareholders could expect to earn by investing in the financial markets.
B) the return earned by investing in the project.
C) equal to the average return on all company projects.
D) designed to be less than the project's IRR.
Q2) What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12%?
A) 0.139
B) 0.320
C) 0.500
D) 0.861
Q3) Soft capital rationing:
A) is costly to shareholders.
B) is used to evaluate mutually exclusive projects.
C) should be costless to the shareholders of the firm.
D) solves the problem of investment timing.
Q4) Soft rationing should never cost the firm anything.
A)True
B)False
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Sample Questions
Q1) What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power? Assume inflation is 4%.
A) 7.69%
B) 9.29%
C) 12.00%
D) 16.48%
Q2) The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.
A)True
B)False
Q3) A firm invests in a 7-year project that requires the purchase of a $135,000 machine tool.This will be depreciated using 5-year MACRS and will have no salvage value.When will this equipment affect the project's tax payments?
A) Every year for 5 years
B) At the time of purchase only
C) Every year for 6 years
D) Every year for 7 years
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Page 11
Chapter 10: Project Analysis
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Sample Questions
Q1) Analysis indicates that a project's level of success is primarily dependent upon the firm controlling the variable costs.What type of analysis was conducted?
A) Sensitivity analysis
B) Break-even analysis
C) Ratio analysis
D) Real option analysis
Q2) The option for a firm to expand future production has most value when:
A) future production will be profitable.
B) the outlook for the business is very assured.
C) the future is very uncertain.
D) today's production costs are lower than in the future.
Q3) A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.
A)True
B)False
Q4) A capital budget shows a proposed list of investments.
A)True
B)False
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Page 12
Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Sample
Questions
Q1) A share of stock currently sells for $60,pays an annual dividend of $4.00,and earned a rate of return of 20% over the past year.What did this stock sell for one year ago?
A) $42.00
B) $46.15
C) $48.46
D) $53.33
Q2) Which one of the following guarantees is offered to common stock investors?
A) Guarantee to receive dividends
B) Guarantee to receive capital gains
C) Guarantee only to receive a refund of principal
D) No guarantees of any form
Q3) Historical returns (1900-2015)suggest that in a year when Treasury bills offered 7.5 the approximate return on portfolio of common stocks should be in the region of:
A) 7.5%
B) 9.3%
C) 15%
D) 18.5%
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Chapter 12: Risk,Return,and Capital Budgeting
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Sample Questions
Q1) A project should be accepted if its return plots below the security market line.
A)True
B)False
Q2) An investor prefers to invest in companies that have high operating leverage.How can this be accomplished if the investor also requires a portfolio beta of 1.0?
A) Invest 50% in cyclical stocks and 50% in firms with high operating leverage
B) Invest 50% in a market index fund and 50% in firms with high operating leverage
C) Finance part of the portfolio with borrowing
D) Invest a portion of the portfolio in U.S. Treasury securities
Q3) The market rate of return is 12.5% and the risk-free rate is 3.1%.What will be the change in a stock's expected rate of return if its beta increases from 1.2 to 1.4?
A) 1.88%
B) 2.5%
C) 18.8%
D) 25.0%
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Sample Questions
Q1) The interest tax shield generated by a project's actual equity financing is accounted for by using the after-tax cost of equity in the WACC.
A)True
B)False
Q2) The weighted-average cost of capital for a firm with a 40/60 debt/equity split,8% cost of debt,15% cost of equity,and a 34% tax rate is:
A) 12.20%.
B) 8.63%.
C) 11.11%.
D) 13.80%.
Q3) What is the expected growth rate in dividends for a firm in which shareholders require an 18% rate of return and the dividend yield is 10%?
A) 1.8%
B) 5.2%
C) 8.0%
D) 28.0%
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Chapter 14: Introduction to Corporate Financing and Governance
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Sample Questions
Q1) Different classes of stock often have different voting rights.
A)True
B)False
Q2) Corporations that annually retire a set portion of their long-term debt are said to be using:
A) indexed bonds.
B) sinking funds.
C) convertible debt.
D) secured debt.
Q3) The value of retained earnings on the corporate balance sheet represents the amount of earnings:
A) not paid out in dividends this period.
B) that are being held in cash.
C) over and above corporate income taxes.
D) reinvested in the firm since its inception.
Q4) A capital surplus is created when the selling price of new shares is greater than the par value.
A)True
B)False
Page 16
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Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Sample Questions
Q1) Plasti-tech Inc.has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share.The underwriter then sold them to the public for $22 each.Plasti-tech also encountered $0.5 million in administrative fees.Soon after the issue,the stock price rose to $25.Find Plasti-tech Inc.'s total cost of this issue including any underpricing.
A) $4.5 million
B) $9.5 million
C) $10.5 million
D) $14.5 million
Q2) The most important function of an underwriter is to:
A) assess the firm's capital needs.
B) approve the prospectus before distribution to the public.
C) provide private placement of the firm's debt.
D) buy the securities issue from the firm and resell the securities to the public.
Q3) Crowdfunding is primarily used as a means for a publicly-traded company to raise additional capital.
A)True
B)False
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17
Chapter 16: Debt Policy
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Sample Questions
Q1) When asked about key factors of debt policy,financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating.
A)True
B)False
Q2) Costs of financial distress are greater when a firm increases its:
A) intangible assets as a percentage of total assets.
B) tangible assets as a percentage of total assets.
C) net working capital.
D) retained earnings.
Q3) Financial leverage describes debt financing's amplification of the effects of changes in operating income on the returns to stockholders.
A)True
B)False
Q4) According to the pecking-order theory,managers will often choose to finance with:
A) new equity rather than debt, due to bankruptcy costs.
B) debt rather than new equity, to avoid a fall in the share price.
C) debt rather than retained earnings, to lower the WACC.
D) new equity rather than debt, to strengthen EPS.
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Page 18
Chapter 17: Payout Policy
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Q1) A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:
A) causes share price to decline.
B) causes share price to remain constant.
C) creates the same tax liability for the investor.
D) reduces the assets of the firm by the same amount.
Q2) Stock repurchases may be interpreted by investors as a signal that:
A) future repurchases will be forthcoming.
B) the firm's shares are underpriced.
C) the firm has an increasing number of positive-NPV opportunities.
D) stock repurchases will gradually replace the stock dividends.
Q3) Many companies offer their shareholders an automatic dividend reinvestment plan.This means that the shareholders automatically receive the dividend on the payment date.
A)True
B)False
Q4) The most common way that companies buy back their stock is to buy it in the market just like any other investor.
A)True
B)False
Page 19
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Chapter 18: Long-Term Financial Planning
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Sample Questions
Q1) A firm's internal growth rate is all of the following except:
A) the rate below which external financing is needed.
B) the ratio of reinvested earnings to assets.
C) the maximum growth rate without requiring external sources of new capital.
D) the product of the plowback ratio, ROE, and the ratio of equity to assets.
Q2) A firm can achieve a higher growth rate without raising external capital if it:
A) has a high dividend payout ratio.
B) has a low ROE.
C) has a low debt-to-asset ratio.
D) has a low profit margin.
Q3) Financial planning just means formulating the company's response to the most likely events.
A)True
B)False
Q4) If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of 0.75 then:
A) debt must increase by $300,000.
B) equity must increase by the full $400,000.
C) debt must increase by $171,429.
D) equity must increase by $100,000.
Page 20
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Chapter 19: Short-Term Financial Planning
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Sample Questions
Q1) A firm's permanent working capital refers to the:
A) difference between fixed assets and current assets.
B) maximum difference between current assets and current liabilities.
C) portion of net working capital that is financed from long-term sources.
D) amounts that must be held to meet debt covenants.
Q2) When internally generated cash is temporarily insufficient to meet a firm's cash need,the firm following a middle-of-the-road policy for long- versus short-term financing will:
A) borrow short term.
B) borrow long term.
C) hold marketable securities.
D) payoff all debts.
Q3) A firm starts the week with payables of $172,000.It pays $80,000 of outstanding bills,and purchases $44,000 of raw materials on one month's credit.What is the level of payables at the end of the week?
A) $136,000.
B) $208,000.
C) $96,000.
D) $216,000.
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Page 21
Chapter 20: Working Capital Management
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Sample Questions
Q1) Short-term securities have high interest-rate risk.
A)True
B)False
Q2) Term loans:
A) may be parceled out among a syndicate of banks.
B) are commonly self-liquidating.
C) are traded on the New York Stock Exchange are traded on the New York Stock Exchange.
D) are commonly repaid within 270 days.
Q3) Why should the possibility of a repeat order increase a firm's willingness to grant credit?
A) The expected cash flow from two orders is twice that from one order.
B) The sales rep would earn increased commission.
C) The customer can be given more time to pay.
D) Payment on the first order increases the chance of payment on subsequent orders.
Q4) Most money market instruments have a high degree of liquidity.
A)True
B)False
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Chapter 21: Mergers,Acquisitions,and Corporate Control
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Sample Questions
Q1) Conglomerate mergers involve companies in:
A) similar lines of business.
B) different stages of the corporate life cycle.
C) unrelated lines of business.
D) different countries.
Q2) Economies of vertical integration are one possible source of synergy in mergers.
A)True
B)False
Q3) If Georgia Pacific (lumber products)were to acquire a national homebuilding firm,the combination would be termed a:
A) horizontal merger.
B) vertical merger.
C) conglomerate merger.
D) spin-off by the national homebuilding firm.
Q4) Changing management is the only reason that firms make acquisitions.
A)True
B)False
Q5) In general,shareholders of the target firm benefit from takeovers.
A)True
B)False
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Chapter 22: International Financial Management
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Sample Questions
Q1) If the spot exchange rate of Mexican pesos for U.S.dollars is MXN9.8=USD1 and the peso is trading at a forward premium of 3%,then you will receive:
A) more than 9.8 pesos per dollar in the future.
B) less than 9.8 pesos per dollar in the future.
C) 9.83 pesos per dollar in the future.
D) 10.09 pesos per dollar in the future.
Q2) One of the drawbacks of using forward contracts to hedge foreign exchange risk from payables is that the:
A) transaction costs in the forward market are high.
B) forward rates are always lower than spot rates.
C) hedged currency could appreciate during the period.
D) hedged currency could depreciate during the period.
Q3) If managers are worried about the political risks involved in an overseas investment,they should probably adjust:
A) the discount rate.
B) the projected cash flows.
C) both the discount rate and the cash flows.
D) the exchange rate.
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Chapter 23: Options
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Q1) The value of a call option increases as the time to expiration increases because: A) the exercise price continually decreases.
B) the opportunity increases for the stock price to exceed the exercise price.
C) the dividends accumulate while waiting to be paid.
D) the option can be repeatedly exercised.
Q2) If you own a call and a put on a stock with the same exercise price and exercise date,your payoffs:
A) will be positive only if the stock price rises.
B) will be positive only if the stock price declines.
C) will always be positive and will increase with the size of the stock price change.
D) will always be positive but will be larger if the stock price is relatively stable.
Q3) Only at the expiration date can an investor expect to find the value of call options above their lower bound.
A)True
B)False
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Chapter 24: Risk Management
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Q1) Unless the corporation has reason to believe that the odds are stacked in its favor,it should use derivatives for speculation,not for hedging.
A)True
B)False
Q2) The seller of a pork bellies futures contract at $1.41 per pound noted that the closing price of pork bellies was $1.44 today.What will happen to this contract,which requires delivery of 40,000 pounds of pork bellies at expiration?
A) A loss of $400 is posted to the account.
B) A gain of $400 is posted to the account.
C) A loss of $1,200 is posted to the account.
D) A gain of $1,200 is posted to the account.
Q3) Which one of the following futures contract holders is speculating?
A) A wheat farmer who sells wheat futures
B) A cattle rancher who buys live cattle futures
C) A candy maker who buys sugar futures
D) An oil producer who sells crude oil futures
Q4) Firms use options to speculate not to reduce risk.
A)True
B)False
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