Principles of Finance
Mock Exam
Course Introduction
Principles of Finance introduces students to the fundamental concepts and practices of financial management within organizations. The course covers topics such as the time value of money, risk and return analysis, valuation of securities, capital budgeting, cost of capital, and the basics of financial markets and institutions. Students will learn how financial decisions are made, the role of ethics in finance, and how to analyze financial statements to assess organizational performance. The course provides a solid foundation for further study in finance and prepares students to make informed financial decisions in both professional and personal contexts.
Recommended Textbook
NEW Corporate Finance Online 1st Edition by Stanley Eakins
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16 Chapters
1371 Verified Questions
1371 Flashcards
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Page 2
Chapter 1: Overview of Finance
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47 Flashcards
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Sample Questions
Q1) ________ are long-term debt instruments business and government use to raise large sums of money.
A) T-bills
B) Bonds
C) Common stocks
D) Preferred stocks
E) Commercial papers
Answer: B
Q2) In a broad sense,every business asset is ultimately owned by
A) individuals.
B) the federal government.
C) foreign governments.
D) trust funds.
E) none of the above
Answer: A
Q3) Preferred stock pays a variable dividend.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Statements and Ratio Analysis
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Sample Questions
Q1) If net income was $10,000,interest expense was $4,000,and taxes were $1,000,what is the operating profit margin if sales were $50,000?
A) 28%
B) 30%
C) 22%
D) 10%
E) 20%
Answer: B
Q2) The quick ratio improves upon the current ratio by
A) using more up-to-date information.
B) simplifying the calculation.
C) subtracting intangible assets like goodwill.
D) recognizing that inventory is the current asset that is easiest to value.
E) recognizing that inventory is the least liquid current asset.
Answer: E
Q3) All else held constant,an increase in leverage should increase the ROE.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Time Value of Money - Introduction
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) Leon's has a "Don't Pay For One Year" event on right now at the store,so you purchase an Italian,hand-stitched leather sofa.You will pay $1,267.99 for the sofa in one year.You have a savings account that pays 3% annual interest.How much must you deposit in your account today in order to have enough money to pay for the sofa in one year?
A) $1,231.06
B) $1,267.99
C) $1,195.20
D) $1,230.56
E) $1,337.21
Answer: A
Q2) At an effective annual interest rate of 20%,how many years will it take a given amount to triple in value? (Round to the closest year.)
A) 5
B) 8
C) 6
D) 10
E) 9
Answer: C
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5
Chapter 4: Time Value of Money - Streams and Valuations
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Sample Questions
Q1) Your company is planning to borrow $1,000,000 on a 5-year,15%,annual payment,fully amortized term loan.What fraction of the payment made at the end of the second year will represent repayment of principal?
A) 29.83%
B) 57.18%
C) 35.02%
D) 64.45%
E) 72.36%
Q2) In three years you will begin receiving an annual payment of $600 that will be made for two years.If the annual interest rate is 12%,what will be the balance in your account at the end of the fourth year?
A) $2,025
B) $1,344
C) $1,272
D) $1,200
E) $1,260
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6
Chapter 5: Risk and Return - Introduction
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Sample Questions
Q1) You bought a stock for $80.00 and sold it after three years for $95.00.While you held the stock it paid $3.00 in dividends.What is the annualized return?
A) 18.75%
B) 11.25%
C) 7.50%
D) 22.50%
E) 9.38%
Q2) Consider the following bet: heads I pay you a dollar,tails you pay me a dollar.What is the standard deviations of the payoffs (returns)of this bet? (Assume a fair coin.)
A) -$1.00
B) $0
C) $0.50
D) $1.00
E) $10.00
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Chapter 6: Portfolio Theory
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Sample Questions
Q1) The slope of the characteristic line is beta.
A)True
B)False
Q2) The expected return on the market is 8% and the risk free rate is 3%.A stock has an expected return of 6.75% and a beta of 0.75.Where does the stock plot relative to the SML?
A) Below the SML
B) On the SML
C) Above the SML
Q3) The graph of the Capital Asset Pricing Model (CAPM)that relates the beta of a stock to its required return is called the
A) characteristic line.
B) risk/return profile.
C) line of least resistance.
D) capital market line.
E) security market line.
Q4) Beta is the slope of the security market line.
A)True
B)False
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Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) A US Government bond has 10 years remaining to maturity,pays annual coupons (yesterday)of $40,and has a face value of $1,000.The current price of the bond is $1,085.30 to yield 3%.If you buy the bond today,hold it for one year and sell it after the next coupon,then what return will you earn for the year? (Assume that yields are expected to remain constant at the current level over the bond's life.)
A) 3%
B) 3.25%
C) 3.5%
D) 3.69%
E) 4%
Q2) The bonds of Vandalay Inc.pay annual coupons at the rate of 7%.They mature in 15 years with a face value of $1,000.What is their price if their yield is 6%?
A) $731.70
B) $908.92
C) $1,000
D) $1,097.12
E) $1,279.83
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Page 9
Chapter 8: Stock Valuation and Market Efficiency
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Sample Questions
Q1) A common stock currently has a beta of 1.3,the risk-free rate is an annual rate of 6 percent,and the market return is an annual rate of 12 percent.The stock is expected to generate per-share benefits of $5.20 during the coming period.A toxic spill results in a lawsuit and potential fines,and the beta of the stock jumps to 1.6.Assuming zero growth the new equilibrium,price of the stock ________.
A) will be $37.68
B) will be $43.33
C) will be $33.33
D) cannot be determined from the information given
Q2) ________ have a higher payment priority than do ________.
A) Preferred dividends; bond interest payments
B) Common dividends; bond interest payments
C) Common dividends; preferred dividends
D) Preferred dividends; common dividends
E) Preferred dividends; zero-coupon payments
Q3) Preferred stock is valued as if it were
A) a fixed-income obligation.
B) a bond.
C) a perpetuity.
D) a common stock.
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) In 1967,Lockheed planned to build a wide-bodied passenger aircraft called the L-1011 Tri Star airbus.The pre-production phase of the Tri Star project was planned to end in 1971 and total $1B.Lockheed planned to sell 35 aircraft per year for six years between 1972 and 1977 with an operating profit of $2M per aircraft.This sales forecast was aggressive as it represented a market share of 45% of the world market for wide-bodied aircraft (which was forecast to be about 80 aircraft per year).
By 1971 the company was in financial distress and had to seek a government bailout. At the end of 1967,Lockheed had 11.3 million shares outstanding which traded at $70 per share.If the market had known the NPV of the L-1011 project at that time,then what would the stock price have been?
A) Larger than $70; hard to tell without more information
B) Much less than $70, as the project clearly had a large, negative NPV
C) About $70; the NPV of the project was close to zero
D) $70; the NPV of a project does not affect the stock price
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11
Chapter 10: Capital Budgeting - Cash Flows
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Sample Questions
Q1) The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7<sup>th</sup> year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What is the cash flow from the replacement project for Year 1?
A) $27,684
B) $34,316
C) $39,860
D) $50,000
E) $31,544
Q2) When the sale of an asset is equal to its book value,a firm will have to pay taxes on recaptured depreciation.
A)True
B)False
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Page 12
Chapter 11: Cost of Capital
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Sample
Questions
Q1) Swiss Cheeses,Inc.has paid annual dividends of $1.00,$1.04,$1.09,and $1.15 per share over the last four years,respectively.The stock is currently selling for $42 a share.What is this firm's cost of equity?
A) 7.45 percent
B) 7.64 percent
C) 7.83 percent
D) 7.87 percent
E) 8.02 percent
Q2) The common stock of Big Birds Unlimited has a required return of 8 percent and a growth rate of 4 percent.The last annual dividend was $.60 a share.What is the current price of this stock?
A) $7.50
B) $7.80
C) $10.00
D) $15.00
E) $15.60
Q3) Doing a single corporate WACC is always the best way to evaluate a project.
A)True
B)False
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) A company posts a 25% increase in sales,a degree of financing leverage of 2.4,and a degree of total leverage of 3.2.Find the % change in the earnings per share.
A) 50%
B) 33.33%
C) 80%
D) 24%
E) 30%
Q2) What type of firm should have the least amount of operating leverage?
A) Airlines
B) Ship building
C) Accounting and consulting
D) Auto manufacturing
E) Electric utilities
Q3) Under the Static Tradeoff Theory,the optimal debt-to-equity ratio is higher than under Modigliani and Miller (with taxes).
A)True
B)False
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14
Chapter 13: Dividends, repurchases, and Splits
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Sample Questions
Q1) Ewing Oil has $5B of excess cash and has announced an open market stock repurchase.Prior to the announcement,the stock was trading for $25 per share and there are 2.5B shares outstanding.Assume that the stock repurchase is executed at the pre-repurchase price.Sue Ellen has 100 shares of Ewing Oil.She bought the shares for $25 per share.Sue Ellen pays a tax rate of 20% on capital gains and 34% on dividends.What is Sue Ellen's after-tax wealth if she sells the same proportion of shares as Ewing repurchases,and that she receives the same price that Ewing pays? Assume that Sue Ellen sells her remaining shares after the repurchase at the price that prevails after the repurchase.
A) $1,800
B) $1,965
C) $2,250
D) $2,500
E) $2,625
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Chapter 14: Financial Planning
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Sample Questions
Q1) Referring to Gerald's Produce,what is Gerald's ending cash balance expected to be in March?
A) $15,400
B) $16,700
C) $17,000
D) $17,700
E) $18,200
Q2) Referring to Schwety,what is the cash balance at the end of March?
A) $10.90
B) $11.50
C) $12.70
D) $13.00
E) $13.70
Q3) Referring to Cool Looks,what are total cash disbursements in October?
A) $13,950
B) $17,050
C) $20,950
D) $27,950
E) $28,950
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Page 16
Chapter 15: The Management of Working Capital
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Sample Questions
Q1) If a company has not had prior experience with a client,where might they obtain the credit information?
A) Rating Companies
B) 5 C's
C) Complex Programs
D) Friends and family
Q2) What would help track the use of discounts offered as well as delinquency occurrence?
A) Debt Table
B) Aging Schedule
C) Invoice Tracker
D) Average Collection Period
Q3) The inventory method that relies on deliveries coming right before they are needed is:
A) Just-in-Time
B) Basket
C) LIFO
D) FIFO
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Chapter 16: International Finance
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80 Flashcards
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Sample Questions
Q1) What can companies use to lock in exchange rates to set up a risk-free arbitrage for interest rates?
A) Expropriation
B) Forward markets
C) Counter rates
D) Futures contracts
Q2) The increased risk of doing business in a foreign country can be offset by:
A) Lack of growth.
B) Arbitrage.
C) Diversification.
D) Expropriation.
Q3) Insisting the contracts be denominated in the U.S.dollar can help avoid ________.
A) Exchange rate risk
B) Arbitrage
C) Political risk
D) PPP
Q4) It is more difficult to deal with political risk than exchange rate risk.
A)True
B)False
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