Question 1

Which of the following best describes the primary goal of the firm in financial management?

Accepted Answer

To maximize shareholder wealth

Question 2

According to Principle 1 of finance, 'Money has a time value.' Which equation best represents the calculation of future value (FV) of a single sum invested today?

Accepted Answer

$$FV = PV 	imes (1 + r)^n$$

Question 3

A corporation is considering two mutually exclusive projects. Project A has a higher IRR, but Project B has a higher NPV. According to capital budgeting principles, which project should the firm select?

Accepted Answer

Project B, because NPV is the superior ranking criterion for mutually exclusive projects

Question 4

Which of the following is NOT a characteristic of an efficient market?

Accepted Answer

Prices are slow to adjust to new information

Question 5

A company issues new shares to the public for the first time. This transaction is an example of:

Accepted Answer

A primary market transaction

Question 6

Which formula is used to calculate the expected return of a portfolio consisting of two assets?

Accepted Answer

$$E(R_p) = w_1$ E(R_1$) + w_2$ E(R_2$)$$

Question 7

Which of the following best describes the agency problem in corporate finance?

Accepted Answer

A conflict between managers and shareholders due to differing goals

Question 8

A bond has a coupon rate of 6%, a face value of $1,000, and matures in 10 years. If the required rate of return is 8%, which formula should be used to calculate its value?

Accepted Answer

$$P = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^n}$$

Question 9

Which of the following is a definition of working capital?

Accepted Answer

Current assets minus current liabilities

Question 10

A company has the following data: Net income = $50,000; Number of shares outstanding = 10,000. What is the earnings per share (EPS)?

Accepted Answer

$$EPS = \frac{50,000}{10,000} = 5$$

Question 11

Which of the following best describes the term structure of interest rates when the yield curve is upward sloping?

Accepted Answer

Long-term rates are higher than short-term rates

Question 12

Which formula is used to calculate the price of preferred stock?

Accepted Answer

$$P = \frac{D}{r}$$

Question 13

A company is considering a project with an initial outlay of $$100,000, annual free cash flows of 30$$,000 for 5 years, and a terminal cash flow of $10,000. Which formula should be used to calculate the Net Present Value (NPV) if the discount rate is 8%?

Accepted Answer

$$NPV = -100,000 + \sum_{t=1}^{5} \frac{30,000}{(1 + 0.08)^t} + \frac{10,000}{(1 + 0.08)^5$}$$

Question 14

Which of the following is a definition of beta in finance?

Accepted Answer

A measure of a stock's volatility relative to the market

Question 15

Which formula is used to calculate the cost of not taking the discount on trade credit?

Accepted Answer

$$Cost = \frac{Discount\%}{100\% - Discount\%} 	imes \frac{360}{Final Due Date - Discount Period}$$

Question 16

Which of the following is an example of a money market security?

Accepted Answer

Treasury bill

Question 17

A company has a dividend payout ratio of 40%. If net income is $100,000, what is the total amount of dividends paid?

Accepted Answer

$$Dividends = 100,000 	imes 0.40 = 40,000$$

Question 18

Which formula is used to calculate the price of common stock using the Dividend Growth Model?

Accepted Answer

$$P = \frac{D_1$}{r - g}$$

Question 19

Which of the following best describes the hedging principle in working capital management?

Accepted Answer

Matching the maturity of assets and liabilities

Question 20

A firm has a capital structure consisting of 60% equity (cost of equity 10%) and 40% debt (cost of debt 6%, tax rate 30%). What is the Weighted Average Cost of Capital (WACC)?

Accepted Answer

$$WACC = 0.6 	imes 0.10 + 0.4 	imes 0.06 	imes (1 - 0.3) = 0.06 + 0.0168 = 0.0768 = 7.68\%$$

Comprehensive Study Notes for Financial Accounting and Business Finance

Study Guide - Practice Questions

Study Guide - Flashcards