REVIEW – BUSINESS FIANCE

PART A: Multiple choice questions

13, 24, 36, 39, 41, 43, 47, 51, 52, 57, 58
1. Which of the following is a series of constant cash flows that occur at the end of each period
for some fixed number of periods?
A. Ordinary annuity
B. Annuity due
C. Perpetuity
D. None of the given options

2. The conflict of interest between stockholders and management is known as:

A. Agency problem
B. Interest conflict
C. Management conflict
D. Agency cost

3. Which of the following form of business organization is least regulated?

A. Sole-proprietorship
B. General Partnership
C. Limited Partnership
D. Corporation

4. Which of the following ratios are intended to address the firm’s financial leverage?
A. Liquidity Ratios
B. Long-term Solvency Ratios
C. Asset Management Ratios
D. Profitability Ratios

5. Balance Sheet is based upon which of the following formula?

A. Assets = Liabilities – Stockholder’s equity
B. Assets + Liabilities = Stockholder’s equity
C. Assets + Stockholder’s equity = Liabilities
D. Assets = Liabilities + Stockholder’s equity

6. Quick Ratio is also known as:

A. Current Ratio
B. Acid-test Ratio
C. Cash Ratio
D. None of the given options

7. Which of the following is a special case of annuity, where the stream of cash flows continues
forever?
A. Ordinary Annuity
B. Special Annuity
C. Annuity Due
D. Perpetuity

8. Which of the following ratios are particularly interesting to shortterm creditors?

A. Liquidity Ratios
B. Long-term Solvency Ratios
C. Profitability Ratios
D. Market Value Ratios

1
9. AST Company has a current ratio of 4:3. Current Liabilities reported by the company are
$30,000. What would be the Net Working Capital for the company?
A. $ 40,000
B. (–$ 40,000)
C. $ 10,000
D. (–$ 10,000)

10. In which form of Business, owners have limited liability.

A. sole proprietorship
B. partnership
C. joint stock company
D. none of the above

11. Which of the following item provides the important function of shielding part of income from
taxes?
A. Inventory
B. Supplies
C. Machinery
D. Depreciation

12. The process of determining the present value of a payment or a stream of payments that is to
be received in the future is known as:
A. Discounting
B. Compounding
C. Factorization
D. None of the given options

13. You need $10,000 to buy a new television. If you have $ 6,000 to invest at 5 percent
compounded annually, how long will you have to wait to buy the television?
A. 8.42 years
B. 10.51 years
C. 15.75 years
D. 18.78 years

14. Which of the following equation is known as Cash Flow (CF) identity?
A. CF from Assets = CF to Creditors – CF to Stockholder
B. CF from Assets = CF to Stockholders – CF to Creditors
C. CF to Stockholders = CF to Creditors + CF from Assets
D. CF from Assets = CF to Creditors + CF to Stockholder

15. In which of the following type of annuity, cash flows occur at the beginning of each period?
A. Ordinary annuity
B. Annuity due
C. Perpetuity
D. None of the given options

16. Between the two identical bonds having different maturity periods, the price of the ______
bond will change less than that of ______ bond.
A. long-term; short-term
B. short-term; long-term
C. lower-coupon; higher-coupon
D. None of the given options

17. Which of the given area is NOT addressed by Business Finance?

2
 A. Financing
B. Investing
C. Managing day today expenses
D. None of the given options

18. Which of the following form of business organization is least regulated?

A. Sole-proprietorship
B. General Partnership
C. Limited Partnership
D. Corporation

19. Which of the following is measured by profit margin?

A. Operating efficiency
B. Asset use efficiency
C. Financial policy
D. Dividend policy

20. A company having a current ratio of 1 will have ________ net working capital.
A. Positive
B. Negative
C. zero
D. None of the given options

21. Business Finance addresses which of the following?

A. Capital budgeting
B. Capital structure
C. Working capital management
D. All of the given options

22. In which type of business, all owners share in gains and losses and all have unlimited liability
for all business debts?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnership
D. Corporation

23. Which of the following is measured by retention ratio?

A. Operating efficiency
B. Asset use efficiency
C. Financial policy
D. Dividend policy

24. How many years will it take to pay off a $ 11,000 loan with a $1,241.08 annual payment and a
5% interest rate?
A. 6 years
B. 12 years
C. 24 years
D. 48 years

25. Which one of the following terms refers to the risk arises for bond owners from fluctuating
interest rates?
A. Fluctuations Risk
B. Interest Rate Risk 
C. Real-Time Risk

3
 D. Inflation Risk

26. Which of the following set of ratios relates the market price of the firm's common stock to
selected financial statement items?
A. Liquidity Ratios
B. Leverage Ratios
C. Profitability Ratios
D. Market Value Ratios

27. If a firm uses cash to purchase inventory, its quick ratio will:
A. Increase
B. Decrease
C. Remain unaffected
D. Become zero

28. Standard Corporation sold fully depreciated equipment for Rs.5,000. This transaction will be
reported on the cash flow
statement as a(n):
A. Operating activity
B. Investing activity
C. Financing activity
D. None of the given options

29. Which of the following ratios are particularly interesting to short term creditors?
A. Liquidity Ratios
B. Long-term Solvency Ratios
C. Profitability Ratios
D. Market Value Ratios 

30. Financial policy is evaluated by which of the following?

A. Profit Margin
B. Total Assets Turnover
C. Debt-equity ratio
D. None of the given options

31. Mr. Y and Mr. Z are planning to share their capital to run a business. They are going to employ
which of the following type of business?
A. Sole-proprietorship
B. Partnership
C. Corporation
D. None of the given options

32. When the market's required rate of return for a particular bond is much less than its coupon
rate, the bond is selling at:
A. Premium
B. Discount
C. Par
D. Cannot be determined without more information

33. Which of the following statement is considered as the accountant’s snapshot of firm’s
accounting value as of a particular date?
A. Income Statement
B. Balance Sheet
C. Cash Flow Statement

4
 D. Retained Earnings Statement

34. Finance is vital for which of the following business activity (activities)?
A. Marketing Research
B. Product Pricing
C. Design of marketing and distribution channels
D. All of the given options

35. The most important item that can be extracted from financial statements is the actual ________
of the firm.
A. Net Working Capital
B. Cash Flow
C. Net Present Value
D. None of the given options

36. A firm has paid out $150,000 as dividends from its net income of $250,000. What is the
retention ratio for the firm?
A. 12%
B. 25%
C. 40%
D. 60%

37. If a firm’s debt ratio is 45%, this means _____ of the firm’s assets are financed by equity
financing.
A. 50%
B. 55%
C. 45%
D. Cannot be determined without more information

38.Which of the following ratios is NOT from the set of Asset Management Ratios?
A. Inventory Turnover Ratio
B. Receivable Turnover
C. Capital Intensity Ratio
D. Return on Assets

39. If you plan to save $5,000 with a bank at an interest rate of 8%, what will be the worth
of your amount after 4 years if
interest is compounded annually?
A. $ 5,400
B. $ 5,900
C. $ 6,600
D. $ 6,802

40. Which of the following statement is TRUE regarding debt?

A. Debt is an ownership interest in the firm.
B. Unpaid debt can result in bankruptcy or financial failure.
C. Debt provides the voting rights to the bondholders.
D. Corporation’s payment of interest on debt is fully taxable.

41. A firm reports total liabilities of $ 300,000 and owner’s equity of $ 500,000. What
would be the total worth of the firm’s
assets?
A. $300,000

5
 B. $500,000
C. $ 800,000
D. $ 1100,000

42. Which of the following measure reveals how much profit a company generates with the
money shareholders have invested?
A. Profit Margin
B. Return on Assets
C. Return on Equity
D. Debt-Equity Ratio

43. If you have $ 850 and you plan to save it for 4 years with an interest rate of 10%, what
will be the future value of your
savings?
A. $1,000
B. $1,244
C. $1,331
D. $1,464

44. Who of the following make a broader use of accounting information?

A. Accountants
B. Financial Analysts
C. Auditors
D. Marketers

45. Rule of 72 for finding the number of periods is fairly applicable

to which of the following range of discount rates?
A. 2% to 8%
B. 4% to 25%
C. 5% to 20%
D. 10% to 50%

46. A portion of profits, which a company distributes among its shareholders, is known as:
A. Dividends
B. Retained Earnings
C. Capital Gain
D. None of the given options

47.You want to receive $5,000 per month for the next 5 years. How much would you need
to deposit today if you can earn 0.75% per month?
a. $240,867
b. $204,787
c. $24,086
d. $20,478

48. Conflict of interest between principal and agent, called.

a. Agency relationship
b. Agency problem
c. Agency cost
d. All of above

49. Preferred stocks also carry voting rights like as equity stocks.
a. True

6
 b. False

50. The IRR method will indicate that a project is viable if the IRR exceeds the minimum
acceptable rate of return.
a. True
b. False

51.A company is considering two mutually exclusive projects with the following projected
cash flows

The company has a required rate of return of 8%. If the company’s objective is to maximize
shareholder wealth, which one of the following is the most valid reason for selecting one of the
projects?
a) The net present value of Project A is greater than the net present value of Project B,
therefore select Project A.
b) The net present value of Project A is less than the net present value of Project B,
therefore select Project B.
c) The internal rate of return of Project A is greater than the internal rate of return of
Project B, therefore select Project A.
d) The internal rate of return of Project A is less than the internal rate of return of Project
B, therefore select Project B

52.Bennet, Inc., uses the net present value method to evaluate capital projects. Bennet’s
required rate of return is 10%. Bennet is considering two mutually exclusive projects
for its manufacturing business. Both projects require an initial outlay of $120,000 and
are expected to have a useful life of four years. The projected after-tax cash flows
associated with these projects are as follows:

Assuming adequate funds are available, apply NPV and find that which of the following project
options would you recommend that Bennet’s management undertake?
a) Project X only
b) Project Y only
c) Both projects
d) None of above

53. Capital market is the market where people only buy long term debts instruments.
a. True
b. False

7
54. Which one of following NOT part to Money Market?
a. Preference stocks
b. Treasury bills
c. Commercial paper
d. Repurchase agreement

55. Company can sell IPO in Secondary Market through Exchanges.

a. True
b. False

56. Insider Trading is legal is activity in Capital Market.

a. True
b. False

57. Pam Valenti wishes to find the present value of $1,700 that will be received 8 years from now.
Pam’s opportunity cost is 8%.
a. $918
b. $819
c. $198
d. $1700

58.Find the value at the end of 2 years (n = 2) of Fred Moreno’s $100 deposit (PV = $100) in
an account paying 8% annual interest (r = 0.08) compounded continuously
a. $114.98
b. $112.98
c. $117.35
d. $876

59. Which one of the following statement is correct regarding tax benefits?
a. Payment to preference shareholders reduce tax
b. Payment to bond holders reduce tax
c. Payment to common shareholders reduce tax
d. None of above reduce tax

60. A Sole trading is a business owned by two or more people and operated for profit
a. True
b. False

61. A preemptive right allows common stockholders to maintain their proportionate ownership
in the corporation when new shares are issued, thus protecting them from dilution of their
ownership
a. True
b. False

62. Which one of the following statement is correct in relation of Debts?

a. Debt includes all borrowing incurred by a firm, including bonds, and is repaid
according to a fixed schedule of payments
b. Debt consists of funds provided by the firm’s owners (investors or stockholders) that
are repaid subject to the firm’s performance.
c. All of above
d. None of above

63. Which one of the following is the feature of callable preference stocks?
a. Dividend accumulate

8
 b. Buy back
c. Change into equity
d. Dividend doesn’t accumulate, paid periodically

64. Financial institutions are intermediaries which transfer funds from…… to………..
a. Spender to borrower
b. Saver to lender
c. Saver to spender
d. Government to public

PART B: ATTEMPT ANY TWO OUT OF THREE

Question 1:

Hoa Phat Company uses a 12% interest rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year:

Project 1 Project 2 Project 3 Project 4

Initial capital outlay $200,000 $298,000 $248,000 $272,000
Annual net cash inflows
Year 1 65,000 100,000 80,000 95,000
Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000

a) You are required to select one of the above projects using Accounting Rate of Return; Payback
Period; Net Present Value; and Internal Rate of Return.
b) Which project(s) company should undertake using NPV if it has 600,000 fund available?

Question 2:

Suppose you are looking at the following possible cash flows: Year 1 CF = $100; Years 2 and 3 CFs =
$200; Years 4 and 5 CFs = $300. The required discount rate is 7%. What is the value of the cash flows
at year 5, today, year 3?

Question 3:

a) An investment will provide you with $100 at the end of each year for the next 10 years. What
is the present value of that annuity if the discount rate is 8% annually? What is the present
value of the above if the payments are received at the beginning of each year?
b) What will the future value be if you open the account with $1,000 today, and then make the
$100 deposits at the end of each year? The deposit those payments into an account earning
8%, for 10 years.

9
THE END