Introduction to Finance
Midterm Exam
Course Introduction
Introduction to Finance provides students with a foundational understanding of key financial concepts and principles essential for personal and professional decision-making. The course covers topics such as the time value of money, risk and return, financial statement analysis, investment strategies, and the functions of financial markets and institutions. Students will explore the basics of budgeting, capital allocation, and valuation while learning to interpret financial information and assess the impact of financial decisions on businesses and individuals. Through case studies and practical examples, the course aims to develop essential financial literacy skills applicable to a variety of real-world contexts.
Recommended Textbook
Essentials of Corporate Finance 7th Edition by Stephen A. Ross Westerfield
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market?
A) Dealer market
B) Over-the-counter market
C) Secondary market
D) Primary market
E) Tertiary market
Answer: C
Q2) Which type of financial market, dealer or auction, is best suited to expanding internationally and why?
Answer: A dealer market is best suited to international expansion because it is all electronic. An auction market is less adaptable to international expansion because it requires a physical trading floor.
Q3) Todd wants to start his own business and is debating between organizing the business as a sole proprietorship or a corporation. Explain the pros and cons of both forms of business organization.
Answer: 11ea6eac_0fca_a420_8f54_ef199a56b08c_TB2378_00
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3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) Which one of the following statements is correct?
A) Shareholders' equity is the residual value of a firm.
B) Net working capital must be a positive value.
C) An increase in cash reduces the liquidity of a firm.
D) Equipment is generally considered a highly liquid asset.
E) Depreciation increases total assets.
Answer: A
Q2) For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?
A) -$14,300
B) -$9,700
C) $12,300
D) $14,300
E) $18,900
Answer: A
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity?
A) 8.91 percent
B) 12.67 percent
C) 18.28 percent
D) 32.11 percent
E) 41.56 percent
Answer: E
Q2) A firm has net income of $5,890 and interest expense of $2,130. The tax rate is 34 percent. What is the firm's times interest earned ratio?
A) 4.82
B) 5.19
C) 5.38
D) 5.67
E) 6.33
Answer: B
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) The relationship between the present value and the time period is best described as: A) direct.
B) inverse.
C) unrelated.
D) ambiguous.
E) parallel.
Q2) Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?
A) $96.00
B) $101.15
C) $480.00
D) $492.16
E) $519.97
Q3) Which one of the following is a correct statement, all else held constant?
A) The present value is inversely related to the future value.
B) The future value is inversely related to the period of time.
C) The period of time is directly related to the interest rate.
D) The present value is directly related to the interest rate.
E) The future value is directly related to the interest rate.
Page 6
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) What does it mean when a loan is amortized? Explain how amortization methods can vary from one loan to another.
Q2) A local magazine is offering a $2,500 grand prize to one lucky winner. $1,000 will be paid on the day of the drawing. The remaining $1,500 will be paid in three annual payments of $500 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money?
A) $2,048.18
B) $2,164.29
C) $2,265.65
D) $2,450.14
E) $2,545.54
Q3) A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
A) will be less than 12.9 percent. B) can either be less than or equal to 12.9 percent. C) is 12.9 percent. D) can either be greater than or equal to 12.9 percent. E) will be greater than 12.9 percent.
Q4) Identify 4 ways that you can use annuity computations in your everyday life.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in 3 years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond?
A) $948.01
B) $949.60
C) $1,005.26
D) $1,008.18
E) $1,010.13
Q2) You purchase a bond with a coupon rate of 8 percent, semiannual coupons, and a clean price of $1,011. If the next coupon payment is due in five months, what is the invoice price?
A) $1,017.67
B) $1,024.33
C) $1,031.00
D) $1,037.67
E) $1,044.33
Q3) Explain the difference between a bid price and an asked price and also explain why the prices are different.
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8
Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) A stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield?
A) 2.80 percent
B) 3.24 percent
C) 4.45 percent
D) 5.34 percent
E) 5.79 percent
Q2) An individual who executes buy and sell orders on the floor of an exchange for a fee is called a:
A) floor broker.
B) specialist.
C) floor trader.
D) proxy.
E) flow specialist.
Q3) Explain the differences between a broker market and a dealer market.
Q4) How are preferred stock dividends treated for tax purposes by the issuer, an individual shareholder, and a corporate shareholder?
Q5) How is the stated value of a preferred stock utilized?
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
A) Internal rate of return
B) Payback
C) Average accounting rate of return
D) Net present value
E) Profitability index
Q2) Which one of the following statements is correct?
A) The internal rate of return is the most reliable method of analysis for any type of investment decision.
B) The payback method is biased towards short-term projects.
C) The modified internal rate of return is most useful when projects are mutually exclusive.
D) The average accounting return is the most difficult method of analysis to compute.
E) The net present value method is only applicable if a project has conventional cash flows.
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) The tax shield approach to computing the operating cash flow, given a tax-paying firm:
A) ignores both interest expense and taxes.
B) separates cash inflows from cash outflows.
C) considers the changes in net working capital resulting from a new project.
D) is based on the fact that depreciation does not affect the operating cash flows.
E) recognizes that depreciation creates a cash inflow.
Q2) Scenario analysis:
A) determines the impact a $1 change in sales has on the internal rate of return.
B) determines which variable has the greatest impact on a project's net present value. C) helps determine the reasonable range of expectations for a project's anticipated outcome.
D) evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return.
E) determines the absolute worst and absolute best outcome that could ever occur.
Q3) Explain the concept of incremental cash flow analysis and its purpose.
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Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) A stock has produced returns of 11 percent, 18 percent, -6 percent, -13 percent, and 21 percent for the past five years, respectively. What is the standard deviation of these returns?
A) 7.75 percent
B) 8.87 percent
C) 9.23 percent
D) 14.99 percent
E) 16.64 percent
Q2) You bought a share of 6.5 percent preferred stock for $87.40 last year. The market price for your stock is now $88.10. What is your total return for last year?
A) 7.51 percent
B) 7.73 percent
C) 7.86 percent
D) 8.19 percent
E) 8.24 percent
Q3) Over the period of 1926-2008, U. S. Treasury bills had an average return of 3.8 percent while inflation averaged 3.1 percent. Based on this historical record, is it safe to assume that an investor in U.S. Treasury bills will enjoy a positive real rate of return each year? Why or why not?
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Chapter 11: Risk and Return
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Sample Questions
Q1) World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?
A) An increase in the risk-free rate
B) Decrease in the security's beta
C) Overpricing of the stock in the market place
D) Increase in the market risk-to-reward ratio
E) Decrease in the market rate of return
Q2) You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent. Currently, you own $16,700 of stock A and $24,200 of stockB. The expected return for stock A is 18.7 percent, and for stock B it is 11.2 percent.
What is the expected rate of return for stock C?
A) 13.67 percent
B) 14.14 percent
C) 15.38 percent
D) 15.87 percent
E) 16.11 percent
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Page 13
Chapter 12: Cost of Capital
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Sample Questions
Q1) You are given the following information concerning Around Town Tours: Debt: 8,500, 7.1 percent coupon bonds outstanding, with 14 years to maturity and a quoted price of 102.6. These bonds pay interest semiannually.
Common stock: 265,000 shares of common stock selling for $76 per share. The stock has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year indefinitely.
Preferred stock: 7,500 shares of 6 percent preferred stock selling at $88 per share. Market: A 13.2 percent expected return, a 4.5 percent risk-free rate, and a 34 percent tax rate.
Calculate the WACC for this firm.
A) 8.22 percent
B) 8.67 percent
C) 9.29 percent
D) 9.57 percent
E) 10.08 percent
Q2) Explain the concept of the subjective approach to assigning a required return to a project.
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Gabella's is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Travis owns 500 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Travis' annual dividend income?
A) Decrease from $2,400 to $1,840
B) Increase from $2,400 to $2,160
C) Decrease from $2,000 to $1,906
D) Increase from $2,000 to $2,094
E) No change
Q2) Delta Mowers has a debt-equity ratio of 1.2. Its WACC is 10.1 percent, and its cost of debt is 7.5 percent. There is no corporate tax. What is the firm's cost of equity capital?
A) 12.60 percent
B) 13.22 percent
C) 13.83 percent
D) 14.29 percent
E) 14.80 percent
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Page 15
Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) Martin & Martin, Inc. stock is currently selling for $19 per share. The firm just made an offer to one of its major shareholders to repurchase all the shares owned by that shareholder for $25 per share. What type of offer is being made?
A) Rights offer
B) Secondary issue
C) Targeted repurchase
D) Tender offer
E) Private issue
Q2) Chelsie Enterprises declared a dividend to shareholders of record on Monday, February 8, that is payable on Friday, February 26. Carla knows that her dividend check normally arrives three business days after the check is written. On which one of the following days should she expect to receive her dividend check?
A) Wednesday, February 10
B) Thursday, February 11
C) Monday, March 1
D) Tuesday, March 2
E) Wednesday, March 3
Q3) What is the difference between a tender offer and a targeted repurchase?
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Chapter 15: Raising Capital
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Sample Questions
Q1) Nu Tech wants to raise $21 million to purchase equipment by issuing new securities. Management estimates the issue will cost the firm $320,000 for accounting, legal, and other costs. The underwriting spread is 7.5 percent and the issue price is $21 per share.
How many shares of stock must be sold if Nu Tech is to receive sufficient funds to purchase all the desired equipment?
A) 1,008,010 shares
B) 1,021,121 shares
C) 1,097,555 shares
D) 1,102,048 shares
E) 1,110,333 shares
Q2) What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering?
A) Syndicate
B) Underwriting cartel
C) Firm commitment group
D) Dutch auction group
E) Venture capitalists
Q3) What are some of the key factors an individual should consider before selecting a first-stage venture capitalist?
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) A flexible short-term financial policy will tend to have more of which of the following than a restrictive short-term financial policy will? I. uncollectable accounts receivables
II) work stoppages for lack of raw materials
III) carrying costs
IV) obsolete or out-of-date inventory
A) I and II only
B) III and IV only
C) II and III only
D) I, II, and III only
E) I, III, and IV only
Q2) Which one of the following is most apt to decrease the accounts receivable period?
A) Increasing the time granted to customers to pay for purchases
B) Shortening the cash cycle
C) Increasing the discount for cash payment
D) Selling inventory slower
E) Paying suppliers faster
Q3) Identify and briefly explain three ways in which a firm can finance its short-term assets.
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18
Chapter 17: Working Capital Management
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Sample Questions
Q1) Explain the basic structure and workings of a disbursement system that utilizes zero-balance accounts.
Q2) How quickly can a bank receive payment once it transmits a copy of a check to the bank on which the check was drawn?
A) Immediately
B) In 1 day
C) Between 1 and 2 days
D) 2 days
E) Between 2 and 3 days
Q3) Which one of the following refers to a customer's willingness to meet his or her credit obligations?
A) Capital
B) Conditions
C) Capacity
D) Character
E) Collateral
Q4) Draw a basic flowchart that depicts the components of collection time. Be sure to label all key points and explain the various components. In addition, offer one suggestion for decreasing the time required for each component.
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) Which one of the following is the suggested method of handling exchange rate risk for a large, multinational firm headquartered in the U.S.? Assume the operations in each country represent a different division of the firm.
A) At the division level
B) At a level which combines all divisions representing a separate geographical continent
C) At a level which combines divisions based on the currency used by each division
D) By segregating U.S. operations and foreign operations
E) On a centralized basis for all divisions
Q2) A U.S. firm has total assets valued at £890,000 located in London. This valuation did not change from last year. Last year, the exchange rate was £0.62 = $1. Today, the exchange rate is £0.68 = $1. By what amount did these assets change in value on the firm's U.S. financial statements?
A) -$126,660.34
B) $-113,511.03
C) $-87,248.91
D) $113,511.03
E) $126,660.34
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