Intermediate Finance
Test Preparation
Course Introduction
Intermediate Finance builds on foundational financial principles to provide a deeper understanding of financial management and decision-making within organizations. The course covers topics such as capital budgeting, risk and return analysis, valuation of securities, cost of capital, and financial planning. Students will also explore intermediate concepts in asset pricing, capital structure, dividend policy, and options and derivatives. Through theoretical frameworks and practical case studies, the course equips students with the analytical tools necessary to evaluate financial strategies, manage investments, and interpret financial market behavior in a global context.
Recommended Textbook
Foundations of Financial Management 10th Canadian Edition by Stanley B. Block
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21 Chapters
2599 Verified Questions
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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106 Verified Questions
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Sample Questions
Q1) According to agency theory,other than maximizing shareholder wealth what other self-interests do financial managers have?
Answer: Financial managers are interested in:
Maintaining their jobs (may discourage value-enhancing takeovers)
Protecting "private spheres of influence"
Maximizing their own compensation package
Arbitrating among the firm's different stakeholders (shareholders,creditors,employees,unions,environmentalists,consumer groups,Canada Revenue Agency,government regulatory bodies,customers)
Pursuit of these interests may emphasize short-term results over long-term wealth building.Management may also perceive the risk of investment decisions differently from shareholders,leading to different points of view as to the best decision regarding the investment of the firm's resources.
Q2) One of the major disadvantages of a sole proprietorship is:
A) that there is unlimited liability to the owner.
B) the simplicity of decision making.
C) low organizational costs.
D) low operating costs.
Answer: A
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Chapter 2: Review of Accounting
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Sample Questions
Q1) The statement of cash flows includes the effects of dividends paid and amortization expense.
A)True
B)False
Answer: True
Q2) The change in accumulated amortization is usually equal to the amortization expense charged in the income statement.
A)True
B)False
Answer: True
Q3) The Balance Sheet cannot show:
A) the current ratio.
B) the value of common stock outstanding.
C) the change in retained earnings.
D) the price earnings relationship.
Answer: D
Q4) Amortization expense is charged in the income statement.
A)True
B)False
Answer: True
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Chapter 3: Financial Analysis
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124 Verified Questions
124 Flashcards
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Sample Questions
Q1) As defined by the text,list each of the 2 liquidity ratios and explain the information they provide about a firm.
Answer: Current ratio,quick ratio
Emphasize the ability to pay off short-term obligations as they fall due Quickly impact day-to-day operations
Focus bankers and creditors on the ability to generate timely cash flows
Q2) Intangible assets are becoming an important part of the assets in company financial statements because accountants are recognizing the growing impact of brand names.
A)True
B)False
Answer: False
Q3) XYZ's receivables turnover is 10x.The accounts receivable at year-end are $600,000.What was the sales figure for the year?
A) $60,000
B) $6,000,000
C) $7,200,000
D) $6,600,000
Answer: B
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) A firm has beginning inventory of 400 units at a cost of $11 each.Production during the period was 650 units at $12 each.If sales were 700 units,what is the cost of goods sold (assume FIFO)?
A) $9,000
B) $8,000
C) $7,700
D) $8,100
Q2) Pro forma financial statements are not:
A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) part of the year end filing with the securities regulator.
Q3) The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
Q4) A lower dividend payout ratio will decrease the firm's need for borrowing.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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106 Flashcards
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Sample Questions
Q1) If sales volume exceeds the break-even point,the firm will experience:
A) an operating loss.
B) an operating profit.
C) an increase in plant and equipment.
D) an increase in share price.
Q2) Operating Leverage is the use of fixed costs to magnify returns at high levels of operation.
A)True
B)False
Q3) The degree of operating leverage is a number indicating the relationship between the percentage changes in sales to the percentage change in earnings per share.
A)True
B)False
Q4) Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) Stable industry.
B) Cyclical demand for the firm's products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets.
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Only the segmentation theory has any significant impact on interest rates.
A)True
B)False
Q2) The expected yield on a 2 year security is 7.8%.If the yield on a T-bill maturing in 1 year is 7.2%,what is the yield on a T-bill maturing in 2 years?
A) 7.2%
B) 9.8%
C) 15%
D) 7.8%
Q3) The financial manager generally needs to devote little time to management of working capital.
A)True
B)False
Q4) A yield curve is also referred to as the term structure of interest rates.
A)True
B)False
Q5) What is the cash conversion cycle? What does the cash conversion cycle consist of?
Q6) What influences the amount of liquidity in the firm?
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Chapter 7: Current Asset Management
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Sample Questions
Q1) SWIFT stands for the Society for Worldwide International Funds Transfer.
Q2) For modern corporations,the more cash they have,the better off they are.
A)True
B)False
Q3) Novelty Gifts,Inc.is experiencing some inventory control problems.The manager,Wanda LaRue,currently orders 5,000 units four times each year to handle annual demand of 20,000 units.Each order costs $15 and each unit costs $1.50 to carry.Ms.LaRue maintains a safety stock of 200 units.
A)What is Novelty Gifts' current total annual inventory cost?
B)Calculate the economic ordering quantity (EOQ).
C)What is average inventory under EOQ if Ms.LaRue maintains a safety stock of 200 units?
D)Calculate total annual inventory cost under EOQ.
Q4) Lower ordering costs would tend to increase a firm's economic order quantity.
A)True
B)False
Q5) Explain what a float is and what causes it to occur.
Q6) For most firms,the primary motive for holding cash is the transaction motive.
A)True
B)False
Page 9
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Chapter 8: Sources of Short-Term Financing
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118 Flashcards
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Sample Questions
Q1) The effective annual rate on a loan will always be higher than the stated rate because the effective annual rate takes into account compounding.
A)True
B)False
Q2) Asset-backed securities often have superior credit ratings because of coverage from deposit insurance.
A)True
B)False
Q3) Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate.
A)True
B)False
Q4) In times of tight credit in Canada,Eurodollar loans become difficult to obtain. A)True
B)False
Q5) Commercial paper represents secured short-term borrowing by large companies.
A)True B)False
Q6) Why is commercial paper an attractive alternative to short-term bank financing?
Page 10
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Joe Nautilus has $120,000 and wants to retire.What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?
A) 12%
B) Between 12% and 13%
C) 14%
D) Greater than 15%
Q2) Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year,to begin 10 years from now.To find the present value of this contract,which table or tables should you use?
A) The future value of $1
B) The future value of an annuity of $1 and the future value of $1
C) The present value of an annuity of $1 and the present value of $1
D) The present value of an annuity of $1
Q3) In January,2005 Harold Black bought 100 shares of Country homes for $37.50 per share.He sold them in January,2015 for a total of $9,727.50.Calculate Harold's annual rate of return.
Q4) The formula FV = PV (1 + n)<sup>i</sup> will determine the present value of $1.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year.Its growth rate is equal to 8%.If the required rate of return is 13%,what is its current price?
A) $103.68
B) $36.92
C) $96.00
D) $48.00
Q2) The variable growth dividend model can be used for both constant and variable growth stocks.
A)True
B)False
Q3) A 20-year bond pays 12% annual interest in semi-annual payments.The current market yield to maturity is 10%.The appropriate interest factors should use 5% for 40 periods (by tables or calculator).
A)True
B)False
Q4) Washington Corporation has a $1,000 par value bond outstanding paying annual interest of 8%.The bond matures in 20 years.If the present yield to maturity for this bond is 10%,calculate the current price of the bond.
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Each project should be judged against:
A) the specific means of financing used to support its implementation.
B) the going interest rate at that point in time.
C) the cost of new common stock equity.
D) the risk and return to the shareholder.
Q2) The use of common stock equity in the weighted average cost of capital is always (K<sub>e</sub>)and not (K<sub>n</sub>),the cost of new common stock.
A)True
B)False
Q3) According to the original approach of Modigliani and Miller (M&M),a firm's value is:
A) unaffected by its capital structure.
B) positively related to its use of debt.
C) negatively related to its use of debt.
D) positively related to its use of debt,but only up to some maximum debt/equity mix.
Q4) In determining the cost of debt,yields and prices of outstanding bonds are used.
A)True
B)False
Q5) Why are the options for raising capital in a small business limited?
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) If an asset is sold for a price above its book value and the asset pool ends,the difference is considered taxable income for the firm.
A)True
B)False
Q2) Capital budgeting is primarily concerned with:
A) capital formation in the economy.
B) planning future financing needs.
C) evaluating investment alternatives.
D) minimizing the cost of capital.
Q3) Tabletop Ranches,Inc.is considering the purchase of a new helicopter for $325,000.The firm's old helicopter has a book value of $85,000,but can only be sold for $60,000.
The new helicopter will be subject to 25% CCA.It is expected to save $62,000 for 7 years after taxes through reduced fuel and maintenance expenses.Tabletop Ranch is in the 40% tax bracket and has a 12% cost of capital.
Calculate the net present value of the helicopter purchase and state whether or not the firm should buy it.
Q4) List the 5 methods for evaluating cash flows as described in the text.
Q5) Explain the Profitability Index (PI)method of evaluating investment proposals.
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The portfolio effect in capital budgeting refers to:
A) the relationship of stocks to bonds.
B) the degree of correlation between various investments.
C) the coefficient of variation.
D) the risk-adjusted discount rate.
Q2) Projects with high positive correlation are sometimes valuable because they allow us to smooth out the overall performance of the firm during a business cycle.
A)True
B)False
Q3) Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's share price.
A)True
B)False
Q4) In order to reduce risk in a firm,the firm would seek to enter a business that:
A) has high positive correlation with its present business.
B) has zero correlation with its present business.
C) has high negative correlation with its present business.
D) has high negative variation with its present business.
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15
Chapter 14: Capital Markets
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128 Verified Questions
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Sample Questions
Q1) Compared to the value of trading on the Toronto Stock Market the bond market is:
A) at least 10 times as big.
B) at least 3 times as big.
C) about the same size.
D) about half the size.
Q2) The efficient market hypothesis has several forms.The weak form states that:
A) past price data is unrelated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) market efficiency is weakest during an economic downturn.
Q3) The TSX lists approximately 1,600 companies.
A)True
B)False
Q4) Without financial intermediaries the cost of funds would be about the same as with financial intermediaries.
A)True
B)False
Q5) List and briefly describe the 4 key components of a good organized exchange?
Q6) List 5 funding sources of nonfinancial institutions as described in the text.
Page 16
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) Which of the following is considered an advantage (for the corporation)of going public?
A) The president becomes a public relations man.
B) Extensive and time-consuming reporting requirements.
C) Access to large amounts of capital.
D) Low cost of going public.
Q2) Private placement eliminates the expensive registration process with the securities commission.
A)True
B)False
Q3) New share listings peaked on the Toronto Stock Exchange in 2007 before the market downturn.
A)True
B)False
Q4) The amount of securities funding by private placement in the last decade has been:
A) about the same as public offerings.
B) about the same as rights offerings.
C) somewhere between public offerings and rights offerings.
D) less than public and rights offerings.
Page 17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Describe the characteristics of a Strip Bond.
Q2) The prices of strip bonds tend to react violently to large swings in interest rates.
A)True
B)False
Q3) The value of the bond redeemed on the maturity date is the:
A) par value.
B) coupon value.
C) bond indenture.
D) market value.
Q4) List and describe the 3 bases on which bond yields are quoted.Use a $1,000 bond paying $100/year for 10 years and currently selling in the market for $900 as the basis for your example.
Q5) RC nominal coupon rate is ______.
A) 4.0%
B) 3.50%
C) 2.30%
D) 5.60%
Q6) Describe the characteristics of a zero-coupon rate bond.
Q7) Describe the characteristics of a Floating-Rate Bond.
Page 18
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) To the corporate investor,preferred stock offers which of the following advantages?
A) A slightly higher yield than debt.
B) 25% of preferred dividends are tax-exempt.
C) 100% of preferred dividends are tax-exempt.
D) Less risk than bonds due to ownership.
Q2) A share is said to sell "ex-rights":
A) when the period in which the subscription privilege is to be exercised has expired. B) when transfer of share ownership no longer carries with it the privilege of subscription.
C) after the rights have all been exercised and the new issue is completely sold.
D) after the terms of the subscription have been made public.
Q3) A preferred stock issue contains a number of stipulations and provisions that define the shareholder's claim to income and assets.List and briefly describe these stipulations and provisions.
Q4) If the shareholder is no better off in terms of total valuation,why undertake a rights offering? What are the advantages of a rights offering?
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) A stock split:
A) is treated by accountants just like a stock dividend.
B) reduces the retained earnings account.
C) does not change the amount in the common stock account.
D) increases shareholder wealth.
Q2) The major stock repurchase plans often revolve around companies wanting to create demand for their shares.
A)True
B)False
Q3) The repurchase of a corporation's own stock will generally have a negative impact on its price.
A)True
B)False
Q4) No tax is payable on stock dividends.
A)True
B)False
Q5) Generally,dividends should be changed when a corporation reaches a new level of permanent income.
A)True
B)False
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Chapter 19: Convertibles, Warrants and Derivatives
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Sample Questions
Q1) If the time to expire of an option increases:
A) the value of a call option will increase,but a put option will decrease.
B) the value of a call option will decrease,but a put option will increase.
C) the value of a call option will decrease,and a put option will decrease.
D) the value of a call option will increase,and a put option will increase.
Q2) The principle device used by the corporation to force conversion:
A) is setting the conversion price above the current market price.
B) is reducing the amount of interest payments.
C) is buying bonds back at below par value.
D) is a call provision.
Q3) The downside protection of a convertible bond's floor value will protect the investor against loss.
A)True B)False
Q4) Earnings per share (basic)includes all convertible bonds outstanding.
A)True
B)False
Q5) At issuance,convertible bonds usually have a conversion premium of about 12%.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Which of the following would be true concerning the EPS of Company A.in 5 years? Company A's EPS would be:
A) higher due to the merger.
B) the same with or without the merger.
C) lower without the merger.
D) lower with the merger.
Q2) One advantage of receiving stock instead of cash in a buy-out is the deferment of the tax payment until the stock received is actually sold.
A)True
B)False
Q3) Leveraged buyout occur to firms that have an unusually large cash/total assets position.
A)True
B)False
Q4) If the potential buyer cannot come to agreement on merger terms with the potential seller's management and board of directors describe which two alternatives are still open to the potential buyer.
Q5) Discuss briefly the diversification benefits and pitfalls of a merger.
Q6) List and describe nonfinancial motives for mergers.
Page 22
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Chapter 21: International Financial Management
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Sample Questions
Q1) A firm exposed to exchange rate risk can hedge its risk by all of the following except:
A) using the forward exchange market.
B) borrowing in international money markets.
C) utilizing foreign currency futures markets.
D) speculating in foreign currency.
Q2) Assume that you had dollar quotes for the Japanese yen and the British pound.If you want to know the yen/pound exchange rate,you would rely on:
A) forward rates.
B) cross rates.
C) spot rates.
D) hedge ratios.
Q3) Foreign capital investments are undertaken for reasons that include all of the following except?
A) Broader diversification possibilities
B) Strategic advantages
C) Higher potential returns
D) Reduction of exchange rate exposure
Q4) List and discuss in detail the main factors that influence exchange rates.
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Page 23