FNAN 522 EXAM 2 2025/2026 QUESTIONS WITH ANSWERS
GRADED A+
✔✔What is a nominal interest rate? - ✔✔the stated interest rate charged on financing
✔✔What is the real rate of interest? - ✔✔An interest rate that has been adjusted to
remove the effects of inflation to reflect the real cost of funds to the borrower, and the
real yield to the lender; Real Interest Rate = Nominal Interest Rate - Inflation (Expected
or Actual)
✔✔What is the Inflation Premium? - ✔✔The part of the prevailing interest rates that
results form lenders compensating for expected inflation by pushing nominal interest
rates to higher levels; It is the difference in actual inflation and target inflation
✔✔What is a risk premium? - ✔✔A risk premium is the minimum amount of money by
which the expected return on a risky asset must exceed the known return on a risk-free
asset in order to induce an individual to hold the risky asset rather than a risk-free asset;
the amount that a risk-averse person would pay to avoid taking a risk
✔✔What is a Normal Shaped Yield Curves? - ✔✔A yield curve in which short-term debt
instrument have a lower yield than long-term debt instruments of the same credit
quality.
✔✔What is retained earnings? - ✔✔the cumulative total of all earnings, net of dividends,
that have been retained and reinvested in the firm
✔✔What is Cash Flow from Operations? - ✔✔The Money a company brings in from
ongoing, regular business activities, such as manufacturing and selling goods or
providing a service; does not include long-term capital or investment costs
✔✔Who analyzes financial statements? - ✔✔1) Internal Users like management (for
planning purposes) and 2) External Users like Stakeholders, which includes investors,
creditors, regulatory agencies, stock market analysts, and auditors.
✔✔What is Comparative Analysis? - ✔✔Also known as Cross Sectional; you compare
your financial position with the industry average or a benchmark; can only use the same
industry as the company for the results to make sense
✔✔What is Trend Analysis? - ✔✔Also known as Time Series analysis; when you
examine the same ratio for several time periods
✔✔Financial Planning includes... - ✔✔1) Cash Planning (Cash Budget), 2) Profit or
Performance Planning (Pro Forma Income Statement) and 3) Investment and Financial
Mix Planning (Pro Forma Balance Sheet)
, ✔✔What does the Pro Forma Income Statement plan? - ✔✔Profit Planning or
Performance Planning; looks at the future performance of the company; can use
percentage of sales method or managerial approach
✔✔What does the Pro Forma Balance Sheet plan? - ✔✔The needed Investments or
Financial Mix; financial planning
✔✔Who are the Net Demanders of Funds in the Financial Markets and institutions? -
✔✔Businesses
✔✔Who are the Net Suppliers of Funds in the Financial Markets and institutions? -
✔✔Consumers; we put money in the system for businesses to use
✔✔What is a Financial Institution? - ✔✔They take in deposits and premiums, ect. and
loan or invest the money. Examples include commercial banks (most important),
savings and loans, credit unions, insurance companies, and mutual funds
✔✔What is working capital? - ✔✔Working Capital includes your current assets and your
current liabilities
✔✔What is a Cash Budget? - ✔✔A statement of the firm's planned inflows and outflows
of cash that is used to estimate its short-term cash requirements; matched expected
cash inflows to expected cash outflows and the budget shows the expected cash
position or cash balance at different times periods
✔✔What are the reasons to prepare a cash budget? - ✔✔1) use as a budget and
compare the expected to the actual values and investigate variances, 2) Predicts Cash
Shortages and Surpluses and allows for planning, 3) Loan Documentation (shows how
much is needed, when the loan is needed, reason for borrowing, and when repayment
can be expected)
✔✔What is the Basic Cash Budget Format? - ✔✔1) Cash Inflows, 2) Cash Outflows, 3)
Net Cash Flow, 4) Begin Bash Balance, 5) End Cash Balance, 6) Required Cash
Balance, and 7) Excess (or Shortage)
✔✔If you have a line of credit needed, how do you know what to borrow? - ✔✔Borrow
the largest negative balance.
✔✔What are the Investments of the Firm? - ✔✔The left-hand side of the balance sheet.
✔✔What is Financing Mix? - ✔✔It is the mix of debt and equity financing for an
organization; HOW a company financing
GRADED A+
✔✔What is a nominal interest rate? - ✔✔the stated interest rate charged on financing
✔✔What is the real rate of interest? - ✔✔An interest rate that has been adjusted to
remove the effects of inflation to reflect the real cost of funds to the borrower, and the
real yield to the lender; Real Interest Rate = Nominal Interest Rate - Inflation (Expected
or Actual)
✔✔What is the Inflation Premium? - ✔✔The part of the prevailing interest rates that
results form lenders compensating for expected inflation by pushing nominal interest
rates to higher levels; It is the difference in actual inflation and target inflation
✔✔What is a risk premium? - ✔✔A risk premium is the minimum amount of money by
which the expected return on a risky asset must exceed the known return on a risk-free
asset in order to induce an individual to hold the risky asset rather than a risk-free asset;
the amount that a risk-averse person would pay to avoid taking a risk
✔✔What is a Normal Shaped Yield Curves? - ✔✔A yield curve in which short-term debt
instrument have a lower yield than long-term debt instruments of the same credit
quality.
✔✔What is retained earnings? - ✔✔the cumulative total of all earnings, net of dividends,
that have been retained and reinvested in the firm
✔✔What is Cash Flow from Operations? - ✔✔The Money a company brings in from
ongoing, regular business activities, such as manufacturing and selling goods or
providing a service; does not include long-term capital or investment costs
✔✔Who analyzes financial statements? - ✔✔1) Internal Users like management (for
planning purposes) and 2) External Users like Stakeholders, which includes investors,
creditors, regulatory agencies, stock market analysts, and auditors.
✔✔What is Comparative Analysis? - ✔✔Also known as Cross Sectional; you compare
your financial position with the industry average or a benchmark; can only use the same
industry as the company for the results to make sense
✔✔What is Trend Analysis? - ✔✔Also known as Time Series analysis; when you
examine the same ratio for several time periods
✔✔Financial Planning includes... - ✔✔1) Cash Planning (Cash Budget), 2) Profit or
Performance Planning (Pro Forma Income Statement) and 3) Investment and Financial
Mix Planning (Pro Forma Balance Sheet)
, ✔✔What does the Pro Forma Income Statement plan? - ✔✔Profit Planning or
Performance Planning; looks at the future performance of the company; can use
percentage of sales method or managerial approach
✔✔What does the Pro Forma Balance Sheet plan? - ✔✔The needed Investments or
Financial Mix; financial planning
✔✔Who are the Net Demanders of Funds in the Financial Markets and institutions? -
✔✔Businesses
✔✔Who are the Net Suppliers of Funds in the Financial Markets and institutions? -
✔✔Consumers; we put money in the system for businesses to use
✔✔What is a Financial Institution? - ✔✔They take in deposits and premiums, ect. and
loan or invest the money. Examples include commercial banks (most important),
savings and loans, credit unions, insurance companies, and mutual funds
✔✔What is working capital? - ✔✔Working Capital includes your current assets and your
current liabilities
✔✔What is a Cash Budget? - ✔✔A statement of the firm's planned inflows and outflows
of cash that is used to estimate its short-term cash requirements; matched expected
cash inflows to expected cash outflows and the budget shows the expected cash
position or cash balance at different times periods
✔✔What are the reasons to prepare a cash budget? - ✔✔1) use as a budget and
compare the expected to the actual values and investigate variances, 2) Predicts Cash
Shortages and Surpluses and allows for planning, 3) Loan Documentation (shows how
much is needed, when the loan is needed, reason for borrowing, and when repayment
can be expected)
✔✔What is the Basic Cash Budget Format? - ✔✔1) Cash Inflows, 2) Cash Outflows, 3)
Net Cash Flow, 4) Begin Bash Balance, 5) End Cash Balance, 6) Required Cash
Balance, and 7) Excess (or Shortage)
✔✔If you have a line of credit needed, how do you know what to borrow? - ✔✔Borrow
the largest negative balance.
✔✔What are the Investments of the Firm? - ✔✔The left-hand side of the balance sheet.
✔✔What is Financing Mix? - ✔✔It is the mix of debt and equity financing for an
organization; HOW a company financing
