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Finance Sample Exam Questions

Understanding Financial Statements

Question 1: Analyze the following simplified balance sheet and income statement for Company ABC. Calculate the current ratio, debt-to-equity ratio, and profit margin. Explain what each ratio signifies and what conclusions you can draw about Company ABC’s financial health based on these calculations.

Balance Sheet (in thousands)

Assets: Cash: $50, Accounts Receivable: $100, Inventory: $150, Fixed Assets: $500, Total Assets: $800

Liabilities & Equity: Accounts Payable: $75, Short-Term Debt: $25, Long-Term Debt: $200, Equity: $500, Total Liabilities & Equity: $800

Income Statement (in thousands)

Revenue: $1000, Cost of Goods Sold: $600, Gross Profit: $400, Operating Expenses: $200, Net Income: $200

Question 2: Explain the differences between the three main financial statements: the balance sheet, the income statement, and the cash flow statement. How are they interconnected, and why is it important to analyze them collectively?

Time Value of Money

Question 3: You are considering investing $10,000 today. You have two investment options:

1. Option A offers a simple interest rate of 8% per year for 5 years.
2. Option B offers a compound interest rate of 7% per year for 5 years, compounded annually.

Which option provides a higher return at the end of the 5-year period? Show your calculations and explain why compounding interest is beneficial.

Question 4: What is the present value of receiving $5,000 per year for the next 3 years, assuming a discount rate of 10%? Explain the concept of present value and why it is important in financial decision-making.

Investment Analysis

Question 5: Discuss the Capital Asset Pricing Model (CAPM). Explain its formula, the meaning of beta, and how it is used to determine the expected return of an investment. What are some limitations of the CAPM?

Question 6: You are evaluating two mutually exclusive projects. Project X has an initial investment of $50,000 and is expected to generate cash flows of $20,000 per year for the next 4 years. Project Y has an initial investment of $75,000 and is expected to generate cash flows of $25,000 per year for the next 5 years. Assuming a discount rate of 12%, calculate the Net Present Value (NPV) of each project. Which project should you choose based on the NPV rule?

Corporate Finance

Question 7: Explain the Weighted Average Cost of Capital (WACC). How is it calculated, and why is it important for corporate investment decisions?

Question 8: Describe the different sources of financing available to a corporation. Discuss the advantages and disadvantages of debt financing versus equity financing.

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