Principles of Finance
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Course Introduction
Principles of Finance introduces students to the fundamental concepts and analytical tools essential for understanding financial management in organizations. The course covers the time value of money, risk and return, valuation of securities, capital budgeting, financial markets, and the role of financial institutions. Students will learn how financial decisions are made within firms, explore the basics of financial statements, and examine methods for raising and allocating capital. Emphasis is placed on applying quantitative reasoning to real-world financial problems, preparing students for advanced finance studies and professional careers.
Recommended Textbook
Fundamentals of Corporate Finance 11thEdition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
Q2) The controller of a corporation generally reports directly to the: A)board of directors.
B)chairman of the board.
C)chief executive officer.
D)president.
E)vice president of finance.
Answer: E
Q3) A business created as a distinct legal entity and treated as a legal "person" is called a:
A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)unlimited liability company.
Answer: A
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) The 2010 balance sheet of The Beach Shoppe showed long-term debt of $2.1 million,and the 2011 balance sheet showed long-term debt of $2.3 million.The 2011 income statement showed an interest expense of $250,000.What was the cash flow to creditors for 2011?
A)-$200,000
B)-$150,000
C)$50,000
D)$200,000
E)$450,000
Answer: C
Q2) As of 2012,which one of the following statements concerning corporate income taxes is correct?
A)The largest corporations have an average tax rate of 39 percent.
B)The lowest marginal rate is 25 percent.
C)A firm's tax is computed on an incremental basis.
D)A firm's marginal tax rate will generally be lower than its average tax rate once the firm's income exceeds $50,000.
E)When analyzing a new project, the average tax rate should be used.
Answer: C
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Page 4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Uptown Men's Wear has accounts payable of $2,214,inventory of $7,950,cash of $1,263,fixed assets of $8,400,accounts receivable of $3,907,and long-term debt of $4,200.What is the value of the net working capital to total assets ratio?
A)0.31
B)0.42
C)0.47
D)0.51
E)0.56
Answer: D
Q2) Which one of the following is a use of cash?
A)increase in notes payable
B)decrease in inventory
C)increase in long-term debt
D)decrease in accounts receivables
E)decrease in common stock
Answer: E
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Chapter 4: Long-Term Financial Planning and Growth
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Sample Questions
Q1) Financial planning accomplishes which of the following for a firm?
I.determination of asset requirements
II.development of plans to contend with unexpected events
III.establishment of priorities
IV.analysis of funding options
A)I and III only
B)II and IV only
C)I, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?
A)net working capital policy
B)capital structure policy
C)dividend policy
D)capital budgeting policy
E)capacity utilization policy
Q3) A)What are the assumptions that underlie the internal growth rate and B)what are the implications of this rate?
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Page 6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) Your older sister deposited $5,000 today at 8.5 percent interest for 5 years.You would like to have just as much money at the end of the next 5 years as your sister will have.However,you can only earn 7 percent interest.How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?
A)$321.19
B)$360.43
C)$387.78
D)$401.21
E)$413.39
Q2) At 8 percent interest,how long would it take to quadruple your money?
A)16.55 years
B)16.64 years
C)17.09 years
D)18.01 years
E)18.56 years
Q3) You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today.Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.
Page 7
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) You are planning to save for retirement over the next 15 years.To do this,you will invest $1,100 a month in a stock account and $500 a month in a bond account.The return on the stock account is expected to be 7 percent,and the bond account will pay 4 percent.When you retire,you will combine your money into an account with a 5 percent return.How much can you withdraw each month during retirement assuming a 20-year withdrawal period?
A)$2,636.19
B)$2,904.11
C)$3,008.21
D)$3,113.04
E)$3,406.97
Q2) Why might a borrower select an interest-only loan instead of an amortized loan,which would be cheaper?
Q3) What is the future value of $12,000 a year for 25 years at 12 percent interest?
A)$878,406
B)$1,600,006
C)$1,711,414
D)$1,989,476
E)$2,021,223
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent.The bonds mature in 6 years.What is the market price per bond if the face value is $1,000?
A)$989.70
B)$991.47
C)$996.48
D)$1,002.60
E)$1,013.48
Q2) Kaiser Industries has bonds on the market making annual payments,with 14 years to maturity,and selling for $1,382.01.At this price,the bonds yield 7.5 percent.What is the coupon rate?
A)8.00 percent
B)8.50 percent
C)9.00 percent
D)10.50 percent
E)12.00 percent
Q3) Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.
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9
Chapter 8: Stock Valuation
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Q1) How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend,the dividends increase by 2.5 percent annually,and you require a 10 percent rate of return?
A)$9.29
B)$9.33
C)$9.57
D)$9.53
E)$9.59
Q2) Callander Enterprises stock is listed on NASDAQ.The firm is planning to issue some new equity shares for sale to the general public.This sale will occur in which one of the following markets?
A)private
B)auction
C)exchange floor
D)secondary
E)primary
Q3) Kelley wants to purchase shares in Classic Kars,Inc.,but is torn between buying shares of common stock or shares of preferred stock.What should he consider before determining the type of share he should purchase?
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?
A)The net present value indicates accept while the internal rate of return indicates reject.
B)Payback indicates acceptance.
C)The payback decision rule could override the accept decision indicated by the net present value.
D)The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.
E)The net present value decision rule is the only rule that matters when making the final decision.
Q2) The internal rate of return:
A)may produce multiple rates of return when cash flows are conventional.
B)is best used when comparing mutually exclusive projects.
C)is rarely used in the business world today.
D)is principally used to evaluate small dollar projects.
E)is easy to understand.
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Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Consider a project to supply 60,800,000 postage stamps to the U.S.Postal Service for the next 5 years.You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today,it would net you $912,000,aftertax.The land can be sold for $1,500,000 after taxes in 5 years.You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life.The equipment can be sold for $456,000 at the end of the project.You will also need $469,000 in initial net working capital for the project,and an additional investment of $38,000 in every year thereafter.All net working capital will be recovered when the project ends.Your production costs are 0.38 cents per stamp,and you have fixed costs of $608,000 per year.Your tax rate is 31 percent and your required return on this project is 11 percent.What bid price per stamp should you submit?
A)$0.018
B)$0.020
C)$0.023
D)$0.026
E)$0.029
Q2) How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?
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Page 12
Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source.Explain how project analysis conducted by that firm would work in this situation.
Q2) Which of the following characteristics relate to the cash break-even point for a given project?
I.The project never pays back.
II.The IRR equals the required rate of return.
III.The NPV is negative and equal to the initial cash outlay.
IV.The operating cash flow is equal to the depreciation expense.
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
Q3) What is forecasting risk and why is it important to the analysis of capital expenditure projects?
What methods can be used to reduce this risk?
Q4) What is operating leverage and why is it important in the analysis of capital expenditure projects?
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Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Today,you sold 200 shares of Indian River Produce stock.Your total return on these shares is 6.2 percent.You purchased the shares one year ago at a price of $31.10 a share.You have received a total of $100 in dividends over the course of the year.What is your capital gains yield on this investment?
A)3.68 percent
B)4.59 percent
C)5.67 percent
D)7.26 percent
E)7.41 percent
Q2) A stock has returns of 18 percent,15 percent,-21 percent,and 6 percent for the past four years.Based on this information,what is the 95 percent probability range of returns for any one given year?
A)-13.56 to 20.56 percent
B)-24.60 to 31.80 percent
C)-31.00 to 40.00 percent
D)-47.68 to 54.68 percent
E)-71.73 to 71.73 percent
Q3) Define and explain the three forms of market efficiency.
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14
Chapter 13: Return, Risk, and the Security Market Line
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Sample Questions
Q1) Which of the following statements concerning risk are correct?
I.Nondiversifiable risk is measured by beta.
II.The risk premium increases as diversifiable risk increases.
III.Systematic risk is another name for nondiversifiable risk.
IV.Diversifiable risks are market risks you cannot avoid.
A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I, II, and III only
Q2) The market rate of return is 11 percent and the risk-free rate of return is 3 percent.Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent.This stock:
A)is underpriced.
B)is correctly priced.
C)will plot below the security market line.
D)will plot on the security market line.
E)will plot to the right of the overall market on a security market line graph.
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Chapter 14: Cost of Capital
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Sample Questions
Q1) Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each.The company also has 2,500 shares of preferred stock at a market price of $28 a share.The common stock is priced at $37 a share and there are 28,000 shares outstanding.What is the weight of the common stock as it relates to the firm's weighted average cost of capital?
A)43.08 percent
B)45.16 percent
C)47.11 percent
D)54.00 percent
E)55.45 percent
Q2) A firm's overall cost of equity is:
A)is generally less that the firm's WACC given a leveraged firm.
B)unaffected by changes in the market risk premium.
C)highly dependent upon the growth rate and risk level of the firm.
D)generally less than the firm's aftertax cost of debt.
E)inversely related to changes in the firm's tax rate.
Q3) What role does the weighted average cost of capital play when determining a project's cost of capital?
Q4) Explain how the use of internal equity rather than external equity affects the analysis of a project.
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Chapter 15: Raising Capital
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Sample Questions
Q1) Explain both a rights offering and the basic characteristics of a right.
Q2) Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering.The firm will issue one right for each share of stock outstanding.The offering consists of a total of 860,000 new shares.The current market price of the stock is $38.Currently,there are 5.16 million shares outstanding.What is the value of one right?
A)$0.97
B)$0.86
C)$0.48
D)$0.52
E)$0.60
Q3) What is an issue of securities that is offered for sale to the general public on a direct cash basis called?
A)best efforts underwriting
B)firm commitment underwriting
C)general cash offer
D)rights offer
E)herring offer
Q4) Explain why there is a tendency for IPOs to be underpriced.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) The SLG Corp.uses no debt.The weighted average cost of capital is 11 percent.The current market value of the equity is $31 million and the corporate tax rate is 34 percent.What is EBIT?
A)$4,180,000
B)$4,821,194
C)$5,166,667
D)$6,230,018
E)$6,568,500
Q2) Kelso Electric is debating between a leveraged and an unleveraged capital structure.The all equity capital structure would consist of 40,000 shares of stock.The debt and equity option would consist of 25,000 shares of stock plus $280,000 of debt with an interest rate of 7 percent.What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.
A)$42,208
B)$44,141
C)$46,333
D)$49,667
E)$52,267
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Page 18
Chapter 17: Dividends and Payout Policy
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Q1) Billingsley United declared a $0.20 a share dividend on Thursday,October 16.The dividend will be paid on Monday,November 10 to shareholders of record on Friday,October 31.Which one of the following is the ex-dividend date?
A)Tuesday, October 28
B)Wednesday, October 29
C)Thursday, October 30
D)Wednesday, November 5
E)Thursday, November 6
Q2) Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per share and a market value of $19 per share.The balance sheet shows $3,500 in the common stock account,$24,000 in the capital in excess of par account,and $31,400 in the retained earnings account.The firm just announced a 100 percent stock dividend.What is the value of the capital in excess of par account after the dividend?
A)$0
B)$20,500
C)$24,000
D)$55,500
E)$87,000
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) A firm with a flexible short-term financial policy will:
A)maintain a low balance in accounts receivables.
B)only have minimal amounts, if any, invested in marketable securities.
C)invest heavily in inventory.
D)have low cash balances.
E)have tight restrictions on granting credit to customers.
Q2) Which of the following actions will tend to decrease the inventory period?
I.discontinuing all slow-selling merchandise
II.selling obsolete inventory below cost just to get rid of it
III.buying raw materials only as needed for the manufacturing process
IV.producing goods on demand versus for inventory
A)I and III only
B)II and IV only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Q3) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms?
What other types of alternative financing are available?
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Chapter 19: Cash and Liquidity Management
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Q1) Which one of the following statements is correct concerning a cash management system that employs both lockboxes and a concentration bank account?
A)All customer payments must be submitted to a lockbox.
B)The party which collects the checks from the lockbox is responsible for recording the payment on the customer's account.
C)Payments received in a lockbox are transferred immediately to the concentration account.
D)The firm's cash manager determines how the funds in the concentration account are disbursed.
E)The concentration account must be zeroed out on a daily basis.
Q2) Disbursements float:
A)occurs when a deposit is recorded but the funds are unavailable.
B)causes the book balance to exceed the bank balance.
C)has tended to increase since the enactment of the Check Clearing Act for the 21<sup>st</sup> Century.
D)is a recommended source of funds for short-term investments.
E)is eliminated when payments are made electronically.
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Chapter 20: Credit and Inventory Management
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Q1) The incremental investment in receivables under the accounts receivable approach is equal to:
A)P - vQ .
B)PQ .
C)PQ + v(Q - Q).
D)P(Q - Q).
E)PQ(Q - Q).
Q2) Which one of the following credit instruments is commonly used in international commerce?
A)open account
B)sight draft
C)time draft
D)banker's acceptance
E)promissory note
Q3) Which one of the following inventory items is probably the most liquid?
A)a custom made set of kitchen cabinets
B)metal cabinets for dishwashers
C)wheat stored in a grain silo
D)a customized drilling press
E)a partially built modular home
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Chapter 21: International Corporate Finance
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Q1) Trader A has agreed to give 100,000 U.S.dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62.The traders agree to settle this trade within two business day.What is this exchange called?
A)swap
B)option trade
C)futures trade
D)forward trade
E)spot trade
Q2) Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S.dollar and the British pound?
A)S<sub>0</sub> = P<sub>UK</sub> × P<sub>US</sub>
B)P<sub>US</sub> = F<sub>t</sub> × P<sub>UK</sub>
C)P<sub>UK</sub> = S<sub>0</sub> × P<sub>US</sub>
D)F<sub>t</sub> = P<sub>US</sub> × P<sub>UK</sub>
E)S<sub>0</sub> × F<sub>t</sub> = P<sub>UK</sub> × P<sub>US</sub>
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
Q2) You are the manager of a retail store.You believe the economy is in a recession and that sales for the month will be unusually slow.Since you have complete discretion over the pricing at your location,you decide to have a store-wide sale and offer 10 percent off all merchandise for a 3-day period.You don't expect your superiors to criticize this decision as you believe they,along with the majority of the other store managers,feel the same way about the economy as you do.Which one of the following applies to you?
A)recency bias
B)law of small numbers
C)gambler's fallacy
D)false consensus
E)money illusion
Q3) Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.
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Chapter 23: Enterprise Risk Management
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Q1) You decided to speculate in the market and sold 8 gold futures contracts when the futures price was $867.50 per ounce.The price on the contract maturity date was $730.40.What was your total profit or loss if the contract size was 100 ounces?
A)-$109,680
B)-$13,710
C)$13,710
D)$54,840
E)$109,680
Q2) Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?
A)American call
B)American put
C)European call
D)European put
E)European swap
Q3) What is cross-hedging?
Why do you suppose firms use this method of risk management? What are some of the drawbacks?
Q4) Explain why a swap is effectively a series of forward contracts.
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Chapter 24: Options and Corporate Finance
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Q1) Which one of the following statements regarding employee stock options (ESOs)is correct?
A)ESOs grant an employee the right to buy a fixed number of shares of company stock at the market price.
B)Employees must exercise their ESOs prior to those ESOs becoming vested.
C)Employees may forfeit their ESOs if they terminate their employment with the issuing firm.
D)If a firm issues ESOs it must make them available to all employees.
E)Employees can sell their ESOs if they do not want to personally exercise them.
Q2) Steve owns an option which grants him the right to purchase shares of Lokier Tool stock at a price of $45 a share.Currently,the stock is selling for $52.40 a share.Steve would like to realize his profits but is not permitted to exercise the option for another two weeks.Which one of the following does Steve own?
A)straight bond
B)American call
C)American put
D)European call
E)European put
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Chapter 25: Option Valuation
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Q1) Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?
A)theta
B)vega
C)rho
D)delta
E)gamma
Q2) In the Black-Scholes model,the symbol " " is used to represent the standard deviation of the:
A)option premium on a call with a specified exercise price.
B)rate of return on the underlying asset.
C)volatility of the risk-free rate of return.
D)rate of return on a risk-free asset.
E)option premium on a put with a specified exercise price.
Q3) Explain why financial mergers tend to benefit bondholders more than shareholders.
Q4) Give an example of a protective put and explain how this strategy reduces investor risk.
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Chapter 26: Mergers and Acquisitions
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Q1) Alpha is planning on merging with Beta.Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha.Alpha currently has 4,200 shares of stock outstanding at a market price of $40 a share.Beta has 2,500 shares outstanding at a price of $18 a share.The after-merger earnings will be $8,800.What will the earnings per share be after the merger?
A)$1.61
B)$1.65
C)$1.75
D)$1.81
E)$1.86
Q2) Pearl,Inc.has offered $920 million cash for all of the common stock in Jam Corporation.Based on recent market information,Jam is worth $710 million as an independent operation.For the merger to make economic sense for Pearl,what would the minimum estimated value of the synergistic benefits from the merger have to be?
A)$0
B)$75 million
C)$210 million
D)$710 million
E)$920 million
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Page 28
Chapter 27: Leasing
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/57390
Sample Questions
Q1) Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".
Q2) Williams' Paints is weighing a lease versus a purchase of some new machinery.The purchase price is $312,000.The equipment will be depreciated to zero over the 4-year life of the project after which time it is expected to have a resale value of $76,000.The firm uses straight-line depreciation and can borrow money at 8 percent.The equipment can be leased for $66,000 a year for 4 years.Williams' Paints does not expect to owe any taxes for the next 4 years because of its net operating losses.What is the net advantage to leasing?
A)$9,846
B)$11,900
C)$24,924
D)$28,207
E)$37,537
Q3) The party who owns a leased asset is called the:
A)lessee.
B)lessor.
C)guarantor.
D)trustee.
E)manager.
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