Introduction to Finance Exam Preparation Guide
Course Introduction
Introduction to Finance provides students with a foundational understanding of financial principles and practices essential for both personal and business decision-making. Topics covered include the time value of money, financial markets and institutions, risk and return, valuation of assets, and the basics of capital budgeting. By exploring these core concepts, students gain insights into how financial decisions are made, how financial systems operate, and the role of finance in the broader economy. This course equips learners with the analytical tools and knowledge necessary to interpret financial information, evaluate investment opportunities, and understand the economic forces that influence financial decisions.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley Eugene F. Brigham
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17 Chapters
1876 Verified Questions
1876 Flashcards
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Chapter 1: An Overview of Finance
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) Why is it important for persons in marketing,accounting,production,and other areas in the firm to understand finance?
A) Funds availability affects the firm's ability to increase inventory,change plant capacity,and so forth.
B) Financial decisions are based on data provided by other functional areas of the firm;thus,it is in the best interests of such areas to provide the most optimistic information possible so that their projects seem most favorable.
C) There is a good chance persons in marketing,accounting,production,and other areas will have to work in the finance area someday if they want to move up the corporate ladder.
D) Payments of salaries and other expenses always pass through the finance area of the firm.
E) All of the above are correct answers.
Answer: A
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Chapter 2: Financial Assets Instruments
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) An investor purchased a call option that allows her to purchase 100 shares of Dell Computer common stock for $45 per share any time during the next six months.The price she paid for the option was $2.50 per share,or $250 total,and the current market price of Dell's stock is $42.50.If the price of Dell increases to $50 and the investor decides to exercise it,what will be the gain or loss that results from the option position that was held? Ignore taxes and commissions.
A) $500 gain
B) $250 loss
C) $750 gain
D) $250 gain
E) None of the above.
Answer: D
Q2) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
Answer: True
Q3) A financial asset is tangible;it is a physically observable and touchable item.
A)True
B)False
Answer: False
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Chapter 3: Financial Markets and the Investment Banking Process
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) One reason investment bankers form syndicates is to spread the risk of potential losses.
A)True
B)False
Answer: True
Q2) On average,stock markets in emerging economies have grown much more rapidly than stock markets in developed economies during the past decade.
A)True
B)False
Answer: True
Q3) The conversion of stock exchanges from not-for-profit mutual ownership organizations to for profit organizations is called what?
A) Going public
B) Privatization
C) Demutualization
D) Communion
Answer: C
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Page 5
Chapter 4: Financial Intermediaries and the Banking System
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98 Verified Questions
98 Flashcards
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Sample Questions
Q1) Which of the following is not a major provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?
A) New organizations to protect and inform consumers will be created
B) greater transparency for trading exotic securities will be required
C) stockholders will be permitted to have a say on corporate governance,including executive compensation,through nonbinding votes
D) Fannie Mae and Freddie Mac will be liquidated
Q2) The Federal Open Market Committee basically establishes our nation's monetary policy.
A)True
B)False
Q3) The Fed banks are supervised by a central governing body called
A) the Board of Governors
B) the Federal Open Market Committee
C) the Chairman of the Fed
D) the Federal Banking Committee
Q4) Federal deposit insurance has prevented widespread bank failures and panics.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) Suppose your firm must raise funds immediately,and it has decided to use debt financing to do so.If you believe that the economy is at the peak of a boom,but it is just about to enter a recession,your firm would probably be better off if it issued long-term debt rather than short-term debt.
A)True
B)False
Q2) In the textbook,the nominal interest rate is defined as being equal to the real risk-free rate,plus an inflation premium,plus a default risk premium,plus a liquidity premium,plus a maturity risk premium.
A)True
B)False
Q3) Default risk premiums
A) are unrelated to the issuer of the security.
B) are higher for U.S.Treasury securities than for most corporate securities.
C) are higher for AAA bonds than for CCC bonds.
D) vary somewhat over time.
Q4) Expectations of high inflation lead to low interest rates and vice versa.
A)True
B)False
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Chapter 6: Business Organizations and the Tax Environment
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96 Verified Questions
96 Flashcards
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Sample Questions
Q1) Because political risk is seldom negotiable,it cannot be explicitly addressed in multinational corporate financial analysis.
A)True
B)False
Q2) Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial markets.
A)True
B)False
Q3) The two major advantages of a limited liability company are flexibility of ownership structure and the ability to elect to be taxed either as a corporation or as a partnership while maintaining limited liability for the owners.
A)True
B)False
Q4) Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.
A)True
B)False
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Chapter 7: Analysis of Financial Statements
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123 Verified Questions
123 Flashcards
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Sample Questions
Q1) Using the direct method to determine cash flows from operations,start with net income,then add back all expenses not paid in cash and subtract all revenues that do not provide cash.
A)True
B)False
Q2) From an investor's standpoint,predicting the future is the purpose of financial statement analysis.
A)True
B)False
Q3) The retained earnings account on the balance sheet does not represent cash and in fact,represents a claim against the existing assets of the firm.This implies that retained earnings are in fact the reinvested earnings of stockholders.
A)True
B)False
Q4) The balance sheet lists ant their fair market value as of midnight on the annual fiscal end date for the firm.
A)True
B)False
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Chapter 8: Financial Planning and Control
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122 Verified Questions
122 Flashcards
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Sample Questions
Q1) The use of a high level of operating leverage can enable a firm to maintain a steady operating income despite large changes in the level of sales.
A)True
B)False
Q2) The degree of financial leverage has which of the following characteristics?
A) The closer the firm is operating to its financial breakeven point,the smaller the DFL.
B) Other things held constant,if a firm has fixed financial costs,such as interest,a change in EBIT will result in an equivalent change in EPS.
C) For a particular firm,the DFL is not a fixed number its value depends on the level of operations and the fixed financial costs associated with those operations.
D) The DFL relates the change in EBIT to the change in sales.
E) If a firm has common stock,it is impossible for its DFL to equal 1.0.
Q3) If a firm has a high degree of leverage then a small change in sales results in
A) an unpredictable change in expected profits
B) a very small change in expected profits
C) no change in expected profits
D) a large change in expected profits.
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Page 10
Chapter 9: Time Value of Money
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132 Verified Questions
132 Flashcards
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Sample Questions
Q1) Two firms evaluated the same capital budgeting project to determine whether to purchase it.The CFO of Anchor Weights Corporation (AWC)reported that she determined that the project's internal rate of return equals 9 percent,and she recommended that the project be purchased.The CFO of Sectional Spas Incorporated (SSI)simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that consider the time value of money.Given this information,which of the following statements is correct?
A) The net present value of the project must be positive for both firms.
B) If the SSI's CFO computes the IRR for the project,he will find that it is less than 9 percent for his company.
C) AWC's CFO must have used the traditional payback period method to evaluate the project.
D) If the project is acceptable (unacceptable)to one firm,it must be acceptable (unacceptable)to both firms.As a result,one of the CFOs made a mistake when evaluating the project.
E) SSI's must have a required rate of return that is greater than 9 percent.
Q2) Perpetuities represent a series of even cash flows over a finite period of time.
A)True
B)False
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Chapter 10: Valuation Concepts
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126 Verified Questions
126 Flashcards
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Sample Questions
Q1) A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50,what is the simple annual rate of return?
A) 12%
B) 18%
C) 20%
D) 23%
E) 28%
Q2) A share of preferred stock pays a dividend of $0.50 each quarter.If you are willing to pay $20.00 for this preferred stock,what is your simple (not effective)annual rate of return?
A) 10%
B) 8%
C) 6%
D) 12%
E) 14%
Q3) The prices of outstanding bonds are typically very close to the par value of the bond. A)True B)False
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12
Chapter 11: Risk and Rates of Return
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) Businesses earn returns for security holders by purchasing and operating physical assets.The relevant risk of any physical asset must be measured in terms of its effect on the risk of the firm's securities.
A)True
B)False
Q2) Which of the following is not a difficulty concerning beta and its estimation?
A) Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
B) Sometimes,during a period when the company is undergoing a change such as toward more leverage or riskier assets,the calculated beta will be drastically different than the "true" or "expected future" beta.
C) The beta of an "average stock," or "the market," can change over time,sometimes drastically.
D) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
E) All of the above are potentially serious difficulties.
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13
Chapter 12: The Cost of Capital
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) Typically,according to the text,the MCC schedule is either horizontal or rising,which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital.The rising section of MCC schedule
A) Is caused by economies of scale in financing.
B) Would be eliminated (that is,the MCC schedule would be horizontal)if the firm retained all of its earnings.
C) Results from a change in the debt-to-assets ratio as the firm expands.
D) Occurs because the firm must,if it is to expand,be willing to take on riskier and riskier projects,and this causes an increase in the cost of capital.
E) Results from flotation costs associated with the sale of new common and preferred stock,along with higher debt costs,as the firm's rate of expansion increases.
Q2) A breakpoint will occur in the MCC schedule whenever the cost of one of the capital components rises.
A)True
B)False
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Chapter 13: Capital Budgeting
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192 Verified Questions
192 Flashcards
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Sample Questions
Q1) Which of the following is not a cash flow that results from the decision to accept a project?
A) Changes in working capital.
B) Shipping and installation costs.
C) Sunk costs.
D) Opportunity costs.
E) Externalities.
Q2) Externalities present in projects being considered in capital budgeting are very difficult to quantify and as a result of this,they should be excluded from the financial analyses.
A)True
B)False
Q3) Quantification of risk is the easiest part of incorporating risk into capital budgeting;treatment of that calculated risk measure is more difficult.
A)True
B)False
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Chapter 14: Capital Structure and Dividend Policy Decisions
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120 Verified Questions
120 Flashcards
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Sample Questions
Q1) A decrease in a firm's willingness to pay dividends might result from an increase in its
A) Earnings stability.
B) Access to capital markets.
C) Profitable investment opportunities.
D) Collection of accounts receivable.
E) Stock price.
Q2) If Miller and Modigliani had considered the cost of bankruptcy,it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.
A)True
B)False
Q3) Business risk is the single most important determinant of a firm's capital structure. A)True
B)False
Q4) If a firm uses no debt,the uncertainty inherent in projections of future returns on equity can be described as business risk.
A)True
B)False
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Page 16
Chapter 15: Working Capital Management
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174 Verified Questions
174 Flashcards
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Sample Questions
Q1) The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).
A)True
B)False
Q2) The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.
A)True
B)False
Q3) Refer to Aberwald Corporation.At the EOQ,what is Aberwald's cost of ordering and carrying inventory?
A) $23,820
B) $7,940
C) $15,940
D) $34,220
E) $47,693
Q4) The aging schedule is a commonly used method of monitoring receivables.
A)True
B)False
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Chapter 16: Investment and Securities
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) The simple arithmetic average return and the geometric average return will be equal only if the annual returns are increasing over time.
A)True
B)False
Q2) The ____ index measures the aggregate return for the 30 largest industrial firms in the United States.
A) S&P 500
B) Dow Jones Industrial
C) NYSE composite
D) AMEX
E) NASDAQ small cap
Q3) The relative amount of personal funds,or initial equity,an investor can borrow from the broker when purchasing stocks on margin is called the initial margin requirement.
A)True
B)False
Q4) The primary reason people invest is to supplement current income.
A)True
B)False
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Page 18
Chapter 17: Investment Analysis and Valuation Techniques
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) A mispriced stock exists when the market value and intrinsic value are not the same.
A)True
B)False
Q2) Individuals who prefer investments that offer current income (i.e. ,dividends)probably should purchase stocks that are in the mature stage of their industry life cycle.Such investors most likely would avoid companies that are in the introductory stage of their life cycle.
A)True
B)False
Q3) If the financial markets are strong-form efficient,then stock analysis would be a waste of time because investors would not be able to earn abnormal returns,no matter how well the valuation models they use perform.
A)True
B)False
Q4) Investors who search for "value" stocks are trying to find stocks that are mispriced in the markets.
A)True
B)False
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