Introduction to Finance Question
Bank
Course Introduction
Introduction to Finance provides a foundational overview of the core principles and concepts that underpin the financial systems used by individuals, businesses, and governments. The course explores topics such as the time value of money, financial markets and instruments, investment analysis, risk management, and the basics of corporate finance. Students will learn to interpret financial statements, understand the role of financial institutions, and analyze essential financial decision-making processes. By the end of the course, students will have developed the analytical skills needed to make informed financial decisions and an appreciation for the importance of finance in both personal and professional contexts.
Recommended Textbook
Corporate Finance 9th Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which form of business structure faces the greatest agency problems?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
Q2) A business formed by two or more individuals who each have unlimited liability for business debts is called a:
A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)limited liability company.
Answer: C
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Chapter 2: Financial Statements and Cash Flow
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Q1) Cash flow to stockholders must be positive when:
A)the dividends paid exceed the net new equity raised.
B)the net sale of common stock exceeds the amount of dividends paid.
C)no income is distributed but new shares of stock are sold.
D)both the cash flow to assets and the cash flow to creditors are negative.
E)both the cash flow to assets and the cash flow to creditors are positive.
Answer: A
Q2) Refer to the above Table.What are the sales for 2008?
A)$4,225
B)$4,385
C)$4,600
D)$4,815
E)$5,000
Answer: C
Q3) What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liquid assets?
Answer: Liquid assets are those that can be sold quickly with little or no loss in value.A firm that has sufficient liquidity will be less likely to experience financial distress.
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Chapter 3: Financial Statements Analysis and Long-Term Planning
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Q1) A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current assets of $300.The firm has $100 in inventory.What is the common-size statement value of inventory?
A)8.3%
B)12.5%
C)20.0%
D)33.3%
E)50.0%
Answer: B
Q2) Which one of the following statements is correct if a firm has a receivables turnover measure of 10?
A)It takes a firm 10 days to collect payment from its customers.
B)It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.
C)It takes a firm 36.5 days to pay its creditors.
D)The firm has an average collection period of 36.5 days.
E)The firm has ten times more in accounts receivable than it does in cash.
Answer: D
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Chapter 4: Discounted Cash Flow Valuation
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Q1) You want to have $10,000 saved ten years from now.How much less do you have to deposit today to reach this goal if you can earn 6% rather than 5% on your savings?
A)$555.18
B)$609.81
C)$615.48
D)$928.73
E)$1,046.22
Q2) You need some money today and the only friend you have that has any is your 'miserly' friend.He agrees to loan you the money you need, if you make payments of $20 a month for the next six months.In keeping with his reputation, he requires that the first payment be paid today.He also charges you 1.5% interest per month.How much money are you borrowing?
A)$113.94
B)$115.65
C)$119.34
D)$119.63
E)$119.96
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
A)net present value.
B)internal rate of return.
C)average accounting return.
D)profitability index.
E)profile period.
Q2) Modified internal rate of return:
A)handles the multiple IRR problem by combining cash flows until only one change in sign change remains.
B)requires the use of a discount rate.
C)does not require the use of a discount rate.
D)Both A and B.
E)Both A and C.
Q3) Explain the differences and similarities between net present value (NPV) and the profitability index (PI).
Q4) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule.
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Chapter 6: Making Capital Investment Decisions
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Q1) The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:
A)after-tax depreciation savings.
B)depreciable basis.
C)depreciation tax shield.
D)operating cash flow.
E)after-tax salvage value.
Q2) What is the value of the depreciation tax shield in year 2 of the project?
A)$134,000
B)$240,000
C)$334,000
D)$400,000
E)$1,000,000
Q3) A project's operating cash flow will increase when:
A)the depreciation expense increases.
B)the sales projections are lowered.
C)the interest expense is lowered.
D)the net working capital requirement increases.
E)the earnings before interest and taxes decreases.
Q4) Explain the half year convention used in MACRS depreciation.
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Chapter 7: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Fixed costs:
I.are variable over long periods of time.
II.must be paid even if production is halted.
III.are generally affected by the amount of fixed assets owned by a firm.
IV.per unit remain constant over a given range of production output.
A)I and III only
B)II and IV only
C)I, II, and III only
D)I, II, and IV only
E)I, II, III, and IV
Q2) Discuss two shortcomings in the standard decision tree analysis that a financial manager should be cognizant of?
Q3) All else equal, the contribution margin must increase as:
A)both the sales price and variable cost per unit increase.
B)the fixed cost per unit declines.
C)the variable cost per unit declines.
D)sales price per unit declines.
E)the sales price minus the fixed cost per unit increases.
Q4) What is the benefit of scenario analysis if it does not produce an accept or reject decision for a proposed project?
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Chapter 8: Interest Rates and Bond Valuation
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Q1) A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009.This bond pays:
A)$127.50 in July and January.
B)$63.75 in July and January.
C)$127.50 in July.
D)$63.75 in July.
E)None of the above.
Q2) The annual coupon of a bond divided by its face value is called the bond's:
A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.
Q3) The total interest paid on a zero-coupon bond is equal to: A)zero.
B)the face value minus the issue price.
C)the face value minus the market price on the maturity date.
D)$1,000 minus the face value.
E)$1,000 minus the par value.
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Chapter 9: Stock Valuation
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Q1) The Robert Phillips Co.currently pays no dividend.The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively.After that, the company anticipates increasing the dividend by 4% annually.The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year: A)3
Q2) Bill Bailey and Sons pays no dividend at the present time.The company plans to start paying an annual dividend in the amount of $.30 a share for two years commencing two years from today.After that time, the company plans on paying a constant $1 a share dividend indefinitely.Given a required return of 14%, what is the value of this stock?
A)$4.82
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) The market portfolio of common stocks earned 14.7% in one year.Treasury bills earned 5.7%.What was the real risk premium on equities?
A)5.0%
B)6.5%
C)9.0%
D)12.2%
E)18.7%
Q2) How much of total world stock market capitalization is from the United States in 2008?
A)approximately 10%
B)approximately 25%
C)approximately 45%
D)approximately 57%
E)approximately 72%
Q3) Over the period of 1926 to 2008, the average rate of inflation was _____%.
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Q1) The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in a recessionary economy.The probabilities of these economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession.What is the variance of the returns on the common stock of Flowers by Flo?
A).001044
B).001280
C).001863
D).002001
E).002471
Q2) The dominant portfolio with the lowest possible risk is:
A)the efficient frontier.
B)the minimum variance portfolio.
C)the upper tail of the efficient set.
D)the tangency portfolio.
E)None of the above.
Q3) A portfolio is made up of 75% of stock 1, and 25% of stock 2.Stock 1 has a variance of .08, and stock 2 has a variance of .035.The covariance between the stocks is -.001.Calculate both the variance and the standard deviation of the portfolio.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.
A)4%
B)5%
C)6%
D)7%
E)8%
Q2) The Fama-French three factor model includes the following factors:
A)beta, expected return on the market, risk free rate of interest, a size factor, and a value factor.
B)the market risk premium, a volume factor, and a size factor.
C)beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor.
D)the yield on corporate bonds, a size factor, and a market factor.
E)None of the above.
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Q4) Discuss the Fama-French three factor model; both what it means and the factors of the model.
Page 14
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Chapter 13: Risk, Cost of Capital, and Capital Budgeting
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Q1) If the risk of an investment project is different than the firm's risk then:
A)you must adjust the discount rate for the project based on the firm's risk.
B)you must adjust the discount rate for the project based on the project risk.
C)you must exercise risk aversion and use the market rate.
D)an average rate across prior projects is acceptable because estimates contain errors.
E)one must have the actual data to determine any differences in the calculations.
Q2) For a multi-product firm, if a project's beta is different from that of the overall firm, then the:
A)CAPM can no longer be used.
B)project should be discounted using the overall firm's beta.
C)project should be discounted at a rate commensurate with its own beta.
D)project should be discounted at the market rate.
E)project should be discounted at the T-bill rate.
Q3) The Neptune Company offers network communications systems to computer users.The company is planning a major investment expansion but is unsure of the correct measure of equity capital as it has no traded equity.Your job is to determine the basis of the equity cost.List and explain the steps you will need to take.
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) Ritter's study of Initial Public Offerings (IPOs) showed that the post offering stock performance was:
A)less than the control group by about 2% in the five years following the IPO.
B)incorrectly priced at issuance because over the next five years the abnormal returns were greater than zero on average.
C)immaterial to the pricing of the IPO because future market performance is unknown at issuance.
D)equal across IPOs, irrespective of risk or which year they were issued.
E)All of the above.
Q2) Suppose your cousin invests in the stock market and doubles her money in a single year while the market, on average, earned a return of only about 15%.Is your cousin's performance a violation of market efficiency?
Q3) If the weak form of efficient markets holds, then:
A)technical analysis is useless.
B)stock prices reflect all information contained in past prices.
C)stock prices follow a random walk.
D)All of the above.
E)None of the above.
Q4) Define the three forms of market efficiency.
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) If a long-term debt instrument is perpetual, it is called a(n):
A)secured debt issue.
B)subordinated debt issue.
C)consol.
D)capital debt issue.
E)indenture.
Q2) If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is:
A)the amortization amount.
B)the call price.
C)the sinking fund amount.
D)the spread premium.
E)None of the above.
Q3) Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the U.S.?
A)Long-term debt first, new common equity, internal financing last.
B)Long-term debt first, internal financing, new common equity last.
C)Internal financing first, new common equity, long-term borrowing last.
D)Internal financing first, long-term borrowing, new common equity last.
E)None of the above.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm is known as:
A)MM Proposition III that the cost of stock is less than the cost of debt.
B)MM Proposition I that leverage is invariant to market value.
C)MM Proposition II that the cost of equity is always constant.
D)MM Proposition I that the market value of the firm is invariant to the capital structure.
E)MM Proposition III that there is no risk associated with leverage in a no tax world.
Q2) A firm should select the capital structure which:
A)produces the highest cost of capital.
B)maximizes the value of the firm.
C)minimizes taxes.
D)is fully unlevered.
E)has no debt.
Q3) Given a level of operating income of $2,500, show the specific strategy that Mike has in mind.
Q4) Explain homemade leverage and why it matters.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 10%
Personal tax rate on income from stocks: 50%
A)$-0.050
B)$-0.188
C)$0.367
D)$0.633
E)None of the above
Q2) Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 30%
A)$-0.050
B)$0.006
C)$0.246
D)$0.340
E)$0.423
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The Tip-Top Paving Co.wants to be levered at a debt to value ratio of .6.The cost of debt is 11%, the tax rate is 34%, and the cost of equity for an all equity firm is 14%.What will be Tip-Top's cost of equity?
A)0.08%
B)3.06%
C)14.0%
D)16.97%
E)None of the above.
Q2) Using APV, the analysis can be tricky in examples of:
A)tax subsidy to debt.
B)interest subsidy.
C)flotation costs.
D)All of the above.
E)Both A and C.
Q3) A loan of $10,000 is issued at 15% interest.Interest on the loan is to be repaid annually for 5 years, and the non-amortized principal is due at the end of the fifth year.Calculate the NPV of the loan if the company's tax rate is 34%.
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Chapter 19: Dividends and Other Payouts
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Q1) The difference between the highest and lowest prices at which a stock has traded is called its:
A)average price.
B)bid-ask spread.
C)trading range.
D)opening price.
E)closing price.
Q2) The Retail Outlet has 6,000 shares of stock outstanding with a par value of $1.00 per share.The current market value of the firm is $420,000.The balance sheet shows a capital in excess of par account value of $136,000 and retained earnings of $234,000.The company just announced a 2-for-1 stock split.What will the market price per share be after the split?
A)$35
B)$40
C)$55
D)$70
E)$140
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Chapter 20: Issuing Securities to the Public
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Q1) Lamar Inc.is attempting to raise $5,000,000 in new equity with a rights offering.The subscription price for the 125,000 new shares will be $40 per share.The stock currently sells for $50 per share and there are 250,000 shares outstanding.What will the price per share be if all rights are exercised?
Q2) An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?
A)Insiders can sell their shares or cash out
B)Generate cash to pay down bank indebtedness
C)To establish a market value for the equity and provide funds for operations
D)All of the above.
E)None of the above.
Q3) A group of investment bankers who pool their efforts to underwrite a security are known as a(n):
A)amalgamate.
B)conglomerate.
C)green shoe group.
D)klatch.
E)syndicate.
Q4) Discuss what a Dutch auction is and how it works.
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Chapter 21: Leasing
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Q1) For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?
A)The lessee can purchase the asset below fair market value at the end of the lease.
B)The lease transfers ownership of the asset to the lessee by the end of the lease.
C)The lease term is more than 75% of the asset's economic life.
D)The present value of the lease payments is more than 90% of the asset's market value at lease inception.
E)All of the above would lead to the lease being considered a capital lease.
Q2) In valuing the lease versus purchase option, the relevant cash flows are the:
A)tax shield from depreciation.
B)investment outlay for the equipment.
C)a decrease in the firm's operating costs that are not affected by leasing.
D)All of the above are relevant.
E)None of the above are relevant.
Q3) What are some of the advantages and disadvantages of leasing?
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Chapter 22: Options and Corporate Finance
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Q1) Given an exercise price, time to maturity, and European put-call parity, the present value of the strike price plus the call option is equal to:
A)the current market value of the stock.
B)the present value of the stock minus a put option.
C)a put option minus the market value of the share of stock.
D)the value of a U.S.Treasury bill.
E)the share of stock plus the put option.
Q2) Tru-U stock is selling for $36 a share.A 3-month call on Tru-U stock with a strike price of $40 is priced at $1.Risk-free assets are currently returning 0.25% per month.What is the price of a 3-month put on Tru-U stock with a strike price of $40?
A)$2.98
B)$3.00
C)$4.03
D)$4.70
E)$4.90
Q3) Suppose XYZ is priced at $125 a share, has a call with an exercise price of $150, has two months to expiration, and costs $0.125 per contract.Why do you suppose investors would be willing to purchase a call that is so far out of the money?
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:
A)there is a constant variability.
B)any new information impacting prices is similar period to period.
C)interest or discount rates are constant.
D)Both A and C.
E)Both A and B.
Q2) Why is straight NPV analysis flawed as compared to models that include option pricing in the NPV analysis?
Q3) Options are granted to top corporate executives because:
A)executives will make better business decisions in line with benefiting the shareholders.
B)executive pay is at risk and linked to firm performance.
C)options are tax-efficient and taxed only when they are exercised.
D)All of the above.
E)None of the above.
Q4) In what instances is the binomial option pricing model superior to the Black Scholes option pricing model?
Q5) What is the value of Mr.Maxim's options?
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) Two major differences between a warrant and a call option are:
A)warrants are contracts outside of the firm while options are within the firm.
B)warrants have long maturities while options are usually short maturities.
C)warrant exercise dilutes the value of equity while option exercise does not.
D)Both A and C.
E)Both B and C.
Q2) Warrants are similar to options, in that the value of the warrant is limited by:
A)expiring worthless if the stock price is below the total warrant exercise price.
B)the trading capabilities of the exchange used.
C)the price of the underlying stock divided by the number of warrants needed to purchase a share.
D)Both A and C.
E)Both B and C.
Q3) Refer to the above scenario.What is the conversion premium?
A)10.00%
B)27.58%
C)33.32%
D)103.23%
E)None of the above.
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Chapter 25: Derivatives and Hedging Risk
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Q1) In the practical use of credit default swaps there:
A)is not an organized exchange or template for the agreement.
B)is an organized exchange or template for the agreement.
C)are laws making them illegal in the United States.
D)are limits to the amount of borrowing of both parties.
E)None of the above.
Q2) In percentage terms, higher coupon bonds experience a _______ price change compared with lower coupon bonds of the same maturity given a change in yield to maturity.
A)greater
B)smaller
C)similar
D)smaller or greater
E)None of the above.
Q3) Derivatives can be used to either hedge or speculate.These actions:
A)increase risk in both cases.
B)decrease risk in both cases.
C)spread or minimize risk in both cases.
D)offset risk by hedging and increase risk by speculating.
E)offset risks by speculating and increase risk by hedging.
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Chapter 26: Short-Term Finance and Planning
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Q1) As of the beginning of the quarter, you have a cash balance of $250.During the quarter you pay your suppliers $310.Your accounts receivable collections are $420.You also pay an interest payment of $30 and a tax bill of $180.In addition, you borrow $75.What is your cash balance at the end of the quarter?
A)$225
B)$245
C)$255
D)$275
E)$285
Q2) Birds Unlimited has a 45 day accounts payable period.The firm has expected sales of $1,800, $2,100, $2,400 and $2,800, respectively, by quarter for the next calendar year.The cost of goods sold for a quarter is equal to 65% of the next quarter sales.What is the amount of the projected cash disbursements for accounts payable for Quarter 2 of the next year? Assume that a year has 360 days.
A)$1,125.00
B)$1,462.50
C)$1,690.00
D)$2,125.50
E)$2,250.00
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Chapter 27: Cash Management
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Q1) Determining the appropriate target cash balance involves assessing the trade-off between:
A)income and diversification.
B)the benefit and cost of liquidity.
C)balance sheet strength and transaction needs.
D)All of the above.
E)None of the above.
Q2) During the month you receive 4 checks, one for $100, two for $200, and one for $500.They are delayed for 2 days, 4 days, and 8 days respectively.What is your average daily collection float (a month has 30 days)?
Q3) A firm with low cash balances will need to borrow to cover an unexpected cash outflow:
A)if it has high cash flow variability.
B)if COGS decrease.
C)if the firm maintains a zero lower control limit.
D)Both A and B.
E)Both A and C.
Q4) Refer to the above scenario.What is the savings float and what can you earn if the firm takes Mesa's lockbox service?
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Chapter 28: Credit and Inventory Management
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Sample Questions
Q1) To collect on the accounts receivable due to the firm, a firm can:
A)send a delinquency letter of past due status to the customer.
B)make personal contact by telephone.
C)employ a collection agency.
D)take legal action against the customer as necessary.
E)All of the above.
Q2) Delta Distributors has an investment in accounts receivable of $2,750,000.Daily credit sales are $118,280.If 30% of Delta's credit customers receive a discount by paying within 10 days, what is the net period that Delta maintains?
A)10 days
B)23 days
C)38 days
D)45 days
E)There is not enough information to tell.
Q3) The three components of credit policy are:
A)collection policy, credit analysis, and interest rate determination.
B)collection policy, credit analysis, and terms of the sale.
C)collection policy, interest rate determination, and repayment analysis.
D)credit analysis, repayment analysis, and terms of the sale.
E)interest rate determination, repayment analysis and terms of sale.
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Chapter 29: Mergers and Acquisitions
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Q1) Firm V was worth $500 and Firm A had a market value of $400.Firm V acquired Firm A for $450 because they thought the combination of the new Firm VA was worth $1,000.What is the synergy from the merger of Firm V and Firm A?
A)$50
B)$100
C)$450
D)$1,000
E)None of the above.
Q2) The empirical evidence strongly indicates that the stockholders of the target firm realize large wealth gains as a result of a takeover bid but the stockholders in the acquiring firm gain little, if anything.Although there exists no definitive answer as to why this is the case, several possible explanations have been proposed.List and explain three of these possible explanations for the minimal returns to the acquiring firm's stockholders.
Q3) Sometimes the management of a target firm fights a takeover attempt even when that attempt appears to be in the best interest of the shareholders.Why would management take this stance?
Q4) Discuss why Bank of America purchased Merrill Lynch in 2009.
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Chapter 30: Financial Distress
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Q1) Successful private workouts are better for firms than formal bankruptcy because:
A)direct costs are considerably lower in private workouts.
B)private workout firms can issue new debt senior to all prior debt.
C)stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.
D)Both A and B.
E)Both A and C.
Q2) How much and what percentage of their claim will the secured creditors receive, in total?
A)$900,000; 75%
B)$981,818; 81.82%
C)$1,009,091; 84.1%
D)$1,200,000; 100%
E)Not enough information to answer.
Q3) In a prepackaged bankruptcy the firm:
A)and creditors agree to a private reorganization outside formal bankruptcy.
B)must reach agreement privately with most of the creditors.
C)will have difficulty when there are thousands of reluctant trade creditors.
D)All of the above.
E)None of the above.
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Chapter 31: International Corporate Finance
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Q1) The home currency approach:
A)discounts all of a project's foreign cash flows using the current spot rate.
B)employs uncovered interest parity to project future exchange rates.
C)computes the net present value (NPV) of a project in the foreign currency and then converts that NPV into U.S.dollars.
D)utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency.
E)utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars.
Q2) What kind of trade involves agreeing today on an exchange rate for settlement in 90 days?
A)Spot trade
B)Futures trade
C)Forward trade
D)Triangle trade
E)None of the above
Q3) What is triangle arbitrage? Using the U.S.dollar, the Canadian dollar, and the euro, construct an example in which triangle arbitrage exists, and then show how to exploit it.
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