Principles of Finance Final Exam

Course Introduction

Principles of Finance introduces students to the fundamental concepts and analytical tools essential for understanding financial decision-making within organizations. Covering topics such as time value of money, risk and return, valuation of assets, capital budgeting, financial markets, and the role of financial institutions, this course lays the groundwork for more advanced study in finance. Through practical applications and real-world examples, students develop the ability to analyze financial information, assess investment opportunities, and make informed financial decisions that drive business success.

Recommended Textbook

Financial Management Principles and Applications 12th Edition by Sheridan Titman

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Page 2

Chapter 1: Getting Started-Principles of Finance

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Sample Questions

Q1) Which of the following best describes the goal of the firm?

A)The maximization of the total market value of the firm's common stock

B)Profit maximization

C)Risk minimization

D)None of the above

Answer: A

Q2) The major sources of financing for corporations are

A)partners contributions.

B)exchanges between shareholders.

C)interest and dividends.

D)debt and equity.

Answer: D

Q3) Limited partners may actively manage the business.

A)True

B)False

Answer: False

Q4) A sole proprietorship is the most desirable business form in all circumstances.

A)True

B)False

Answer: False

Page 3

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Chapter 2: Firms and the Financial Market

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Sample Questions

Q1) Investors in securities markets do not use a financial intermediary.

A)True

B)False

Answer: True

Q2) Venture capital funds play an important role in the initial financing of new businesses.

A)True

B)False

Answer: True

Q3) Which of the following financial instruments entails the most risk and potentially the highest returns for investors?

A)Debt with a maturity of less than one year

B)Bonds

C)Common stock

D)Preferred stock

Answer: C

Q4) Financial intermediaries help bring savers and borrowers together.

A)True

B)False

Answer: True

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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows

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Sample Questions

Q1) The change between a firm's beginning cash balance and ending cash balance would equal

A)cash flow from operations + cash flow from investing activities + cash flow from financing activities.

B)the change in current assets minus the change in current liabilities.

C)net income plus new borrowing minus asset purchases.

D)total assets minus total liabilities minus total stockholders' equity.

Answer: A

Q2) Patriot Corporation purchased manufacturing equipment with an expected useful life of five years.The purchase of the machinery would be shown as

A)an expense on the balance sheet.

B)an expense on the income statement.

C)an asset on the balance sheet.

D)both an expense and an asset.

Answer: C

Q3) The company's gross profit margin is EBIT divided by net sales.

A)True

B)False

Answer: False

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Chapter 4: Financial Analysis-Sizing up Firm Performance

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Sample Questions

Q1) Common size financial statements represent all figures on the financial statements

A)in inflation adjusted dollars from a base year.

B)as if all companies being compared had the same total revenue.

C)as if all companies being compared had the same total assets.

D)as a percentage of either sales or total assets.

Q2) One weakness of the times-interest-earned ratio is that it includes only the annual interest expense as a finance expense that must be paid.

A)True

B)False

Q3) In 1995,ABC's average collection period is

A)30 days.

B)32.5 days.

C)25 days.

D)35 days.

Q4) Since 2013,ABC's inventory management has

A)improved.

B)deteriorated.

C)remained the same.

D)changed but in an indeterminate manner.

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Chapter 5: Time Value of Money-The Basics

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Sample Questions

Q1) Money has a greater time value time value

A)when rates of return are higher.

B)when rates of return are lower.

C)when the future is uncertain.

D)when investors are willing to assume greater risks.

Q2) The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines.

A)True

B)False

Q3) What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).

A)$893

B)$3,106

C)$429

D)$833

Q4) Sketch a timeline that represents an immediate investment of $20,000 with $25,000 to be received at the end of 4 years.

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Chapter 6: The Time Value of Money-Annuities and Other Topics

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Sample Questions

Q1) The expected after-tax cash flow from an investment property that you are considering is

Year 1 $25,000

Year 2 $27,500

Year 3 $30,250

At the end of year 3 you expect to sell the property for $400,000.If the appropriate discount rate is 12%,what is the most you should pay for this property?

Q2) Charlie Stone wants to retire in 30 years,and he wants to have an annuity of $1,000 a year for 20 years after retirement.Charlie wants to receive the first annuity payment at the end of the 30th year.Using an interest rate of 10%,how much must Charlie invest today in order to have his retirement annuity (round to the nearest $10)?

A)$500

B)$490

C)$540

D)$570

Q3) An amortized loan is a loan paid in unequal installments.

A)True

B)False

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Chapter 7: An Introduction to Risk and Return-History of

Financial Market Returns

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Sample Questions

Q1) Michael Lynch invested $10,000 in the Rearguard Fund four years ago.All earnings were reinvested in the fund.If his compound annual rate of return was 7%,what is his investment worth today?

A)$1,310.80

B)$10,700

C)$12,800

D)$762.89

Q2) What is the geometric average return on her stock if she sells it five years from today?

A)-2.33%

B).59%

C)3.67%

D)4.88%

Q3) You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your rate of return?

A)35.00%

B)12.50%

C)17.50%

D)25.00%

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Chapter 8: Risk and Return-Capital Market Theory

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Sample Questions

Q1) The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

A)True

B)False

Q2) When assets are positively correlated,they tend to rise or fall together.

A)True

B)False

Q3) A stock with a beta greater than 1.0 has returns that are ________ volatile than the market,and a stock with a beta of less than 1.0 exhibits returns which are ________ volatile than those of the market portfolio.

A)more,more

B)more,less

C)less,more

D)less,less

Q4) Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.

Q5) Provide an intuitive discussion of beta and its importance for measuring risk.

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Chapter 9: Debt Valuation and Interest Rates

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Sample Questions

Q1) On any given day,a bond can be issued at A)a discount.

B)a premium.

C)par.

D)all of the above.

Q2) What is the value of a bond that matures in three years,has an annual coupon payment of $110,and a par value of $1,000? Assume a required rate of return of 11%,and round your answer to the nearest $10.

A)$970

B)$1,330

C)$330

D)$1,000

Q3) Long-term government bonds are not without maturity risk.

A)True

B)False

Q4) Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall. A)True

B)False

Q5) Compare and contrast current yield and yield to maturity.

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Chapter 10: Stock Valuation

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Sample Questions

Q1) Common stock represents a claim on residual income.

A)True

B)False

Q2) The P/E ratio is calculated by dividing

A)the current stock price by stockholders' equity.

B)total assets by net income.

C)the current stock price by earnings per share.

D)the current stock price by operating cash flow per share.

Q3) Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.

Q4) CEOs naming friends to the board of directors and paying them more than the norm is an example of the A)agency problem.

B)preemptive right.

C)majority voting feature.

D)proxy fights.

Q5) The higher a firm's P/E ratio,the more optimistic investors feel about the firm's growth prospects.

A)True

B)False

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Chapter 11: Investment Decision Criteria

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Sample Questions

Q1) Which of the following best explains the continuing popularity of the payback method?

A)Mathematical simplicity and some insight into the riskiness of cash flows.

B)Uses all cash flows and takes into account the time value of money.

C)Reliably selects the projects that add most value to the firm.

D)It provides objective selection criteria and is taught as the primary method in most business schools.

Q2) Discounted payback periods for projects Y and Z are

A)1.64 and 1.71 years.

B)3.14 years and never.

C)2 years and 2 years.

D)5 years and never.

Q3) We compute the profitability index of a capital-budgeting proposal by

A)multiplying the IRR by the cost of capital.

B)dividing the present value of the annual after-tax cash flows by the cost of capital.

C)dividing the present value of the annual after-tax cash flows by the cost of the project.

D)multiplying the cash inflow by the IRR.

Q4) Why is it so difficult for firms to find good investment ideas?

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Chapter 12: Analyzing Project Cash Flows

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Sample Questions

Q1) By examining cash flows,we are correctly able to analyze the timing of the benefits.

A)True

B)False

Q2) Taxes may have a significant effect on the cost of replacing an old asset with a new asset.

A)True

B)False

Q3) If the new machine is purchased,depreciation expense will increase or decrease by

A)increase $8,000.

B)increase $6,900.

C)increase $6,300.

D)decrease $5,000.

Q4) The salvage value of equipment should not be considered when replacing it with new equipment.

A)True

B)False

Q5) What is the advantage,if any,to using MACRS rather than straight line depreciation?

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Page 14

Chapter 13: Risk Analysis and Project Evaluation

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Sample Questions

Q1) The form of risk analysis intended to identify the most important forces for the success or failure of a project is known as

A)scenario analysis.

B)sensitivity analysis.

C)value driver analysis.

D)expected value analysis.

Q2) Real options can have the effect of

A)increasing a project's NPV.

B)reducing a project's risk.

C)gaining information about future opportunities.

D)all of the above.

Q3) Briefly explain what is meant by a real option in capital budgeting.Give 2 concrete examples.

Q4) Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by A)15%.

B)17.5%.

C)1.43%.

D)3.5%.

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Chapter 14: The Cost of Capital

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Sample Questions

Q1) National Gridlock's capital structure consisted of $125 million of debt and $250 million of equity before it issued bonds to borrow an additional $125 million.The new funds will be used to finance infrastructure improvements and expansion.The company believes that the project will generate enough cash to retire 1/5 of the bonds each year.How do the borrowing and the repayment plan affect the discount rate(s)that should be used to evaluate this project?

Q2) Plimoth Plantation's overall WACC is 11%.It has an opportunity to accept a project that involves nearly riskless cash flows,but will earn only 7%.This project will require a significant portion of the firm's capital.If Plimoth accepts this project

A)the value of the company will fall because it's WACC will fall.

B)the value of the company will fall because it's average rate of return on investments will fall.

C)the value of the company will rise because its WACC will fall.

D)both it's average rate of return and its WACC should fall.

Q3) Why are market values preferred to book (balance sheet)values when computing a firm's weighted average cost of capital.

Q4) Briefly identify and describe some important uses of a firm's weighted average cost of capital.

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Page 16

Chapter 15: Capital Structure Policy

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Sample Questions

Q1) The total interest obligation will be

A)$105,000 under alternative I and $9,000 under alternative II.

B)$9,000 under alternative I and $105,000 under alternative II.

C)zero under alternative I and $96,000 under alternative II.

D)$105,000 under both alternative I and alternative II.

Q2) The original form of the Modigliani and Miller Capital Structure Theorem

A)ignores the effect of taxes.

B)ignores the relationship between firm value and cost of capital.

C)ignores transaction costs.

D)both A and C are true.

Q3) The Tradeoff Theory of capital structure theory indicates that

A)the tax shield on debt positively affects firm value,indicating that there is some benefit to financial leverage as opposed to an all-equity capitalization.

B)the higher the firm's financial leverage,the higher the probability the firm will be unable to meet the financial obligations included in its debt contracts,which could ultimately lead to firm failure.

C)there is a range of capital structures,rather than a single capital structure,that is optimal.

D)all of the above.

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Page 17

Chapter 16: Dividend Policy

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Sample Questions

Q1) The clientele effect suggests that a firm's dividend policy will be affected by the needs of the shareholders.

A)True

B)False

Q2) For accounting purposes,a stock split has been defined as a stock dividend exceeding

A)25%.

B)35%.

C)45%.

D)55%.

Q3) Which of the following motivates corporations to enter into stock repurchase programs?

A)Favorable impact on EPS

B)Expected favorable impact on stock price

C)To modify the firm's capital structure

D)All of the above

Q4) A firm with high profitability will always have the cash flow necessary to pay high dividends.

A)True

B)False

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Chapter 17: Financial Forecasting and Planning

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Sample Questions

Q1) Miller Metalworks had sales in November of $60,000,in December of $40,000,and in January of $80,000.Miller collects 40% of sales in the month of the sale and 60% one month after the sale.Calculate Miller's cash receipts for January.

A)$44,000

B)$56,000

C)$64,000

D)$72,000

Q2) The most commonly used method for making financial forecasts is the percent-of-sales method.

A)True

B)False

Q3) Based on the information in Table 3,what is Thompson's projected cumulative borrowing as of March 1,2014?

A)$85,000

B)$45,000

C)$70,000

D)- 0 -

Q4) What is meant by discretionary financing?

Q5) Why is financial planning important in a highly uncertain financial environment.

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Chapter 18: Working Capital Management

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Sample Questions

Q1) Working capital refers to investment in current assets,while net working capital is the difference between current assets and current liabilities.

A)True

B)False

Q2) The U.R.Bloom Corporation established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $125,000 at a rate of 5%.A compensating balance averaging 10% of the loan is required.If the firm needs $100,000 for six months,what is the dollar cost of the loan and the annual percentage rate (APR)?

Q3) Becker.com has an inventory turnover ratio of 52,an accounts receivable balance of $365,000,average daily credit sales of $36,500,accounts payable of $182,500 and cost of goods sold of $7,993,500.What is Becker's cash conversion cycle to the nearest day?

A)17 days

B)9 days

C)27 days

D)-27 days

Q4) Discuss the advantages of using commercial paper.

Q5) Describe the differences between secured and unsecured short-term credit.

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Chapter 19: International Business Finance

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Sample Questions

Q1) The spot exchange rate for Canadian dollars is .1.007 to the U.S.dollar.The 6 months forward rate is 1.0068 to the U.S.dollar.The interest rate in Canada (annual)is 1.02%.What is the U.S.interest rate?

A)1.00%

B)1.04%

C)1.08%

D).9800%

Q2) The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%.The nominal rate of interest in Canada is 2.5% and the inflation rate is zero.We would expect

A)the ruble to strengthen against the dollar.

B)the exchange rate between the Canadian dollar and the ruble to stay the same because of interest rate parity.

C)the exchange rate between the Canadian dollar and the ruble to stay the same because of purchasing price parity.

D)the Canadian dollar to strengthen against the ruble.

Q3) The price of a Big Mac is more or less the same everywhere in the world.

A)True

B)False

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Page 21

Chapter 20: Corporate Risk Management

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Sample Questions

Q1) What are the differences between forward contracts and futures contracts? What are some advantages and disadvantages of each.

Q2) Assume that the current price of FGX stock is $33,that a 6 month call option on the stock has a strike or exercise price of $35.00,the risk free rate is 4%,and that you have calculated N(d<sub>1</sub>)as .65 and N(d2)as .55.Use the Black-Scholes model to calculate the price of the option.

Q3) Futures contracts

A)can be used by financial managers to reduce risk.

B)provide their holder with an opportunity to buy or sell an asset at some future time if the asset's value has changed in a manner favorable to the futures contract holder.

C)sustain a small change in value when there is a small change in the price of the underlying commodity.

D)have all of the characteristics stated above.

Q4) A purchaser of commodities who is completely hedged with forward contracts will profit if prices fall before the purchase is concluded.

A)True

B)False

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