finance two

Multiple Choice Questions (MCQs)

Chapter 1: Corporate Finance Basics

1. What is the primary goal of corporate finance?
   a) Maximizing revenue
   b) Minimizing expenses
   c) Maximizing shareholder value
   d) Increasing debt levels

2. The right-hand side of the financial balance sheet represents:
   a) The company’s investments
   b) The company’s sources of financing
   c) The company’s total revenue
   d) The net cash flow of the company

3. Which of the following is an example of a tangible asset?
   a) Patent
   b) Brand reputation
   c) Machinery
   d) Trademarks

4. Agency costs refer to:
   a) The fees paid to financial institutions
   b) The costs arising from conflicts between shareholders and management
   c) The operating costs of a corporation
   d) The cost of issuing new stocks

5. Which of the following is NOT a difference between a financial and an accounting balance sheet?
   a) Financial balance sheets focus on market values, while accounting balance sheets use historical costs
   b) Accounting balance sheets are audited, while financial balance sheets are not always observable
   c) Accounting balance sheets focus on cash flows, while financial balance sheets focus on net income
   d) Financial balance sheets consider current market conditions, while accounting balance sheets focus on past transactions

Chapter 2: Financial & Product Markets

6. Which market is where companies issue new securities for the first time?
   a) Primary market
   b) Secondary market
   c) Money market
   d) Capital market

7. The Government’s role in financial markets includes:
   a) Setting interest rates
   b) Regulating markets and enforcing rules
   c) Determining stock prices
   d) Ensuring all companies are profitable

8. Short selling involves:
   a) Buying stocks and holding them for long-term gains
   b) Selling stocks at a loss to reduce risk
   c) Borrowing and selling a stock, hoping to buy it back at a lower price
   d) Investing in short-term government bonds

9. A perfectly competitive market is characterized by:
   a) A few large firms dominating the industry
   b) Many sellers with no pricing power
   c) High barriers to entry
   d) A single seller controlling the market

10. Which form of market efficiency suggests that all public and private information is already reflected in stock prices?
    a) Weak form
    b) Semi-strong form
    c) Strong form
    d) Fundamental form

Chapter 5: Financial Statements & Cash Flows

11. The income statement primarily reports:
    a) Assets and liabilities
    b) Revenue, expenses, and net profit
    c) Cash inflows and outflows
    d) Shareholder equity and debt

12. The simple cash cycle refers to:
    a) The time between paying suppliers and receiving customer payments
    b) The total length of a company’s debt repayment period
    c) The average lifespan of a company’s assets
    d) The duration of an investment before it matures

13. Which of the following is NOT a reason why accounting profits differ from cash flows?
    a) Revenue recognition principles
    b) Matching principle
    c) Depreciation expenses
    d) Stock price fluctuations

14. What is the quick formula to estimate cash flows from operations?
    a) Cash Flows = Net Income + Depreciation
    b) Cash Flows = Revenue - Expenses
    c) Cash Flows = Assets - Liabilities
    d) Cash Flows = Net Profit - Depreciation

Chapter 3: Time Value of Money (Extra Credit)

15. Opportunity cost refers to:
    a) The potential benefit lost by choosing one investment over another
    b) The profit earned from an investment
    c) The time required to break even on an investment
    d) The cost of borrowing funds

16. The formula for future value using compound interest is:
    a) FV = P(1 + rt)
    b) FV = P(1 + r)^n
    c) FV = P / (1 + r)^n
    d) FV = P(1 - r)^n

17. If interest is compounded semi-annually, how do you adjust the interest rate and periods?
    a) Divide the interest rate by 2 and multiply the number of periods by 2
    b) Multiply the interest rate by 2 and divide the number of periods by 2
    c) Multiply both the interest rate and the number of periods by 2
    d) Keep the interest rate and periods unchanged

True/False Questions

1. Corporate finance focuses only on how companies raise funds, not how they invest them. (False)

2. The financial balance sheet focuses on market values, while the accounting balance sheet relies on historical costs. (True)

3. Residual claims refer to the fixed claims of debt holders. (False)

4. The primary financial goal of a corporation is to maximize shareholder value. (True)

5. Shirking is when employees put in extra effort to maximize company profits. (False)

6. The secondary market is where investors buy and sell existing securities. (True)

7. The government has no influence on financial markets since stock prices are determined by supply and demand. (False)

8. Short selling involves buying undervalued stocks and holding them long-term. (False)

9. Perfect competition means that companies have complete control over pricing. (False)

10. In a strong-form efficient market, even insider information cannot lead to abnormally high profits. (True)

11. Depreciation expense reduces net income but does not involve an actual cash outflow. (True)

12. The cash cycle measures how quickly a company can convert investments into cash flow. (True)

Multiple-Choice Questions (MCQs)

CHAPTER 1: Corporate Finance Basics

1. What is the primary goal of corporate finance?
   A) Maximizing profits
   B) Maximizing shareholder value
   C) Increasing market share
   D) Reducing taxes

2. Which of the following is a tangible asset?
   A) Trademark
   B) Brand reputation
   C) Machinery
   D) Patent

3. What is the key difference between a financial balance sheet and an accounting balance sheet?
   A) Financial balance sheets use historical costs
   B) Accounting balance sheets focus on future cash flows
   C) Financial balance sheets focus on market values and cash flows
   D) Accounting balance sheets are not audited

4. Which of the following does NOT represent a fixed claim?
   A) Bonds
   B) Bank loans
   C) Equity shares
   D) Mortgages

5. Which of the following describes an agency cost?
   A) A manager making decisions that benefit the company and shareholders
   B) A manager avoiding responsibilities (shirking)
   C) A company reducing its debt levels
   D) A business following financial regulations

CHAPTER 2: Financial & Product Markets

6. What is the role of financial markets?
   A) To regulate the government’s financial policies
   B) To provide a place where securities are bought and sold
   C) To control inflation and interest rates
   D) To manufacture goods and services

7. Which of the following is an example of a primary market transaction?
   A) An investor selling shares on the New York Stock Exchange (NYSE)
   B) A company issuing new bonds to raise funds
   C) A company repurchasing its own shares
   D) An investor short-selling stock

8. What type of competition exists when many firms compete, but each sells a slightly different product?
   A) Perfect competition
   B) Monopoly
   C) Oligopoly
   D) Monopolistic competition

9. What is short selling?
   A) Buying stocks and holding them for long-term gains
   B) Selling stocks borrowed from another investor with the hope of repurchasing them at a lower price
   C) Selling stocks immediately after purchase to earn a quick profit
   D) Trading only in the primary market

10. If all public and private information is reflected in stock prices, the market is said to be:
    A) Weak-form efficient
    B) Semi-strong form efficient
    C) Strong-form efficient
    D) Not efficient

CHAPTER 5: Cash Flows & Financial Statements

11. Which of the following is NOT included in the cash cycle?
    A) Accounts payable
    B) Inventory turnover
    C) Depreciation expense
    D) Accounts receivable

12. According to GAAP principles, when is revenue recognized?
    A) When cash is received
    B) When a sale is made, even if payment hasn’t been collected
    C) When the company’s stock price increases
    D) When net income is positive

13. The matching principle ensures that:
    A) Revenues are recognized only when cash is received
    B) Expenses are recorded in the same period as the revenues they help generate
    C) Companies record all transactions at historical cost
    D) Only profitable companies can recognize revenue

14. Which formula correctly estimates cash flows using the quick method?
    A) Cash Flows = Net Income + Depreciation
    B) Cash Flows = Revenue - Expenses
    C) Cash Flows = Total Assets - Total Liabilities
    D) Cash Flows = Operating Profit - Taxes

15. Which of the following is NOT a financial statement?
    A) Balance Sheet
    B) Income Statement
    C) Cash Flow Statement
    D) Budget Forecast

CHAPTER 3: Time Value of Money

16. The time value of money concept is based on the idea that:
    A) Money today is worth more than money in the future
    B) Money does not lose value over time
    C) Future money is always worth more than present money
    D) Inflation has no impact on money’s value

17. What is the formula for Future Value (FV) with compound interest?
    A) FV = P(1 + rt)
    B) FV = P(1 + r)^n
    C) FV = P × r × n
    D) FV = (P × r) ÷ n

18. If the annual interest rate is 8% and compounded quarterly, what is the periodic interest rate?
    A) 8%
    B) 4%
    C) 2%
    D) 1%

19. What happens to the Present Value (PV) of a future cash flow if the discount rate increases?
    A) PV increases
    B) PV decreases
    C) PV remains the same
    D) PV becomes negative

20. Which of the following represents opportunity cost?
    A) The cost of hiring new employees
    B) The benefits lost when choosing one investment over another
    C) The cost of maintaining financial records
    D) The risk of a stock’s price dropping

True or False Questions

1. Corporate finance focuses primarily on maximizing a company’s profit. (False)

2. Fixed claims include bonds and loans, while residual claims include equity shares. (True)

3. A company’s investments should always be risk-free to maximize value. (False)

4. Information asymmetry occurs when all investors have equal knowledge about a company. (False)

5. Agency costs arise when management’s goals do not align with shareholders’ interests. (True)

6. The primary market is where securities are traded among investors after they are initially issued. (False)

7. Short selling allows investors to profit from falling stock prices. (True)

8. Perfect competition exists when a single firm dominates an industry. (False)

9. Liquidity refers to how easily an asset can be converted into cash. (True)

10. In strong-form efficient markets, even insider information is already reflected in stock prices. (True)

11. The balance sheet shows a company’s financial position at a specific point in time. (True)

12. Depreciation expense affects cash flow but not accounting profits. (False)

13. The income statement reports a company’s financial performance over a period of time. (True)

14. Cash flow can be estimated by adding net income and depreciation. (True)

15. GAAP requires companies to recognize revenue only when cash is received. (False)

16. Money received today is more valuable than money received in the future due to the time value of money. (True)

17. Simple interest and compound interest yield the same results over long periods. (False)

18. If interest is compounded more frequently, future value increases. (True)

19. Present value decreases when interest rates increase. (True)

20. Opportunity cost refers to the profit a company makes on investments. (False)