D775- Introduction to business finance
Exam and Correct Answers 2025-2026
Updated.
Accounts Receivable (A/R) Turnover - Answer A type of liquidity ratio that describes the
number of times a firm's accounts receivable account is paid off. Accounts Receivable Turnover
= Credit Sales ÷ Accounts Receivable.
Activity Ratios - Answer A type of financial ratio that evaluates how efficiently a firm utilizes
its assets to generate sales or revenue; also known as efficiency ratios.
After-tax Cost of Debt - Answer An adjustment of the before-tax cost of debt that considers
the tax deductions on interest expenses. It reflects the actual cost to a firm for debt financing
after benefiting from tax breaks.
Agency Costs - Answer Costs that are incurred by the firm when management and
employees of a company do not act in the best interests of shareholders.
Agency Problem - Answer A conflict of interest inherent in relationships where one party is
expected to act in another's best interests, such as between shareholders and company
management.
Annual Interest Rate - Answer The annualized cost of borrowing or the yearly interest rate
charged on a loan or credit balance. Also known as annual percentage rate (APR).
Annuity - Answer A financial arrangement in which a series of equal payments is made or
received at regular intervals over a specified period of time.
Assets - Answer Resources owned by the company that have economic value.
Auction Markets - Answer Financial markets in which buyers and sellers submit competitive
bids and offers, with transactions occurring at prices that match the highest bid with the lowest
offer.
Average Collection Period - Answer A type of liquidity ratio that calculates the average
number of days it takes for a company to collect its receivables. Average Collection Period =
Accounts Receivable ÷ Daily Credit Sales.
, Before-tax Cost of Debt - Answer The interest rate on loans or bonds. If a bank provides an
interest rate on a small business loan of 9.5%, then 9.5% is the before-tax cost of debt.
Balance Sheet - Answer A financial statement that presents a company's financial position at
a specific point in time.
Bonds - Answer Debt securities issued by corporations or governments to raise capital,
where the issuer agrees to pay back the principal along with interest on specified dates.
Book Value - Answer Literal value or face value.
Business Finance - Answer The area of the business in which 1) financial measures are used
to help management make decisions (ratio analysis), 2) financial analysts use mathematical
models to select what projects to invest in (capital budgeting), and 3) financial analysts use the
cost of capital to determine whether these projects should be financed with either debt or
equity, and which type of each.
Capital Appreciation - Answer When a stock is bought at a lower price than what it is sold.
Subtracting the lower purchase price from the higher sales price is the appreciation.
Capital Budgeting - Answer The process by which businesses evaluate potential investments
to determine if they are worth pursuing. It assesses projected cash flows, costs, and returns of
projects like new machinery or acquisitions to ensure efficient resource allocation and
profitability.
Capital Structure - Answer The mixture of debt and equity that a firm uses to finance the
company.
Cash Ratio - Answer A type of liquidity ratio that provides insight into a company's ability to
pay off short-term liabilities with its cash on hand. Cash Ratio = Cash ÷ Current Liabilities.
Common Stock - Answer A type of security that represents ownership in a corporation,
granting shareholders voting rights and a claim on a portion of the company's profits through
dividends.
Compound Interest - Answer The process of calculating how a sum of money grows over
time as interest is added to both the initial principal and accumulated interest. In the context of
the time value of money, compounding is used to determine the future value of a lump sum or
a series of payments.
Exam and Correct Answers 2025-2026
Updated.
Accounts Receivable (A/R) Turnover - Answer A type of liquidity ratio that describes the
number of times a firm's accounts receivable account is paid off. Accounts Receivable Turnover
= Credit Sales ÷ Accounts Receivable.
Activity Ratios - Answer A type of financial ratio that evaluates how efficiently a firm utilizes
its assets to generate sales or revenue; also known as efficiency ratios.
After-tax Cost of Debt - Answer An adjustment of the before-tax cost of debt that considers
the tax deductions on interest expenses. It reflects the actual cost to a firm for debt financing
after benefiting from tax breaks.
Agency Costs - Answer Costs that are incurred by the firm when management and
employees of a company do not act in the best interests of shareholders.
Agency Problem - Answer A conflict of interest inherent in relationships where one party is
expected to act in another's best interests, such as between shareholders and company
management.
Annual Interest Rate - Answer The annualized cost of borrowing or the yearly interest rate
charged on a loan or credit balance. Also known as annual percentage rate (APR).
Annuity - Answer A financial arrangement in which a series of equal payments is made or
received at regular intervals over a specified period of time.
Assets - Answer Resources owned by the company that have economic value.
Auction Markets - Answer Financial markets in which buyers and sellers submit competitive
bids and offers, with transactions occurring at prices that match the highest bid with the lowest
offer.
Average Collection Period - Answer A type of liquidity ratio that calculates the average
number of days it takes for a company to collect its receivables. Average Collection Period =
Accounts Receivable ÷ Daily Credit Sales.
, Before-tax Cost of Debt - Answer The interest rate on loans or bonds. If a bank provides an
interest rate on a small business loan of 9.5%, then 9.5% is the before-tax cost of debt.
Balance Sheet - Answer A financial statement that presents a company's financial position at
a specific point in time.
Bonds - Answer Debt securities issued by corporations or governments to raise capital,
where the issuer agrees to pay back the principal along with interest on specified dates.
Book Value - Answer Literal value or face value.
Business Finance - Answer The area of the business in which 1) financial measures are used
to help management make decisions (ratio analysis), 2) financial analysts use mathematical
models to select what projects to invest in (capital budgeting), and 3) financial analysts use the
cost of capital to determine whether these projects should be financed with either debt or
equity, and which type of each.
Capital Appreciation - Answer When a stock is bought at a lower price than what it is sold.
Subtracting the lower purchase price from the higher sales price is the appreciation.
Capital Budgeting - Answer The process by which businesses evaluate potential investments
to determine if they are worth pursuing. It assesses projected cash flows, costs, and returns of
projects like new machinery or acquisitions to ensure efficient resource allocation and
profitability.
Capital Structure - Answer The mixture of debt and equity that a firm uses to finance the
company.
Cash Ratio - Answer A type of liquidity ratio that provides insight into a company's ability to
pay off short-term liabilities with its cash on hand. Cash Ratio = Cash ÷ Current Liabilities.
Common Stock - Answer A type of security that represents ownership in a corporation,
granting shareholders voting rights and a claim on a portion of the company's profits through
dividends.
Compound Interest - Answer The process of calculating how a sum of money grows over
time as interest is added to both the initial principal and accumulated interest. In the context of
the time value of money, compounding is used to determine the future value of a lump sum or
a series of payments.
