Principles of Finance: Exam Information Credit Recommendations

PRINCIPLES OF FINANCE
EXAM INFORMATION CREDIT RECOMMENDATIONS

This exam was developed to enable schools to award The American Council on Education’s College
credit to students for knowledge equivalent to that Credit Recommendation Service (ACE CREDIT)
learned by students taking the course. This exam has evaluated the DSST test development
covers topics such as financial statements and process and content of this exam. It has made the
planning, time value of money, working capital following recommendations:
management, cost of capital, capital budgeting, etc.
Area or Course Equivalent: Principles of Finance
The exam contains 100 questions to be answered in 2 Level: Lower-level baccalaureate
hours. Amount of Credit: 3 Semester Hours
Minimum Score: 400
Form Codes: SQ524, SR524, SY524, SZ524 Source: www.acenet.edu
EXAM CONTENT OUTLINE
The following is an outline of the content areas covered in the examination. The approximate percentage of the
examination devoted to each content area is also noted.
I. Financial Statements and Planning – 20%

a. Fundamentals of financial statements (e.g., balance sheet, income statement, statement of cash
flows, statement of owner equity)
b. Ratio analysis (e.g., liquidity, solvency, market prospect, profitability, dupont)
c. Taxes (e.g., average versus marginal tax rates, corporate tax rates)
II. Time Value of Money – 20%
a. Present value (lump sum and annuity)
b. Future value (lump sum and annuity)
c. Annuity due versus ordinary annuity
d. Interest rate calculations (e.g. Equivalent Annual Rate [EAR], Annualized Percentage Rate
[APR])
III. Working Capital Management – 10%
a. Short-term sources of funds
b. Management of short-term assets and liabilities (e.g., inventory, account receivables, accounts
payable, short-term investments)
c. Cash budget
IV. Valuation and Characteristics of Stocks and Bonds – 9%
a. Bonds (e.g., debenture, sinking funds, coupon)
b. Common stock and preferred stock (i.e., dividend)
V. Capital Budgeting – 12%
a. Capital asset (e.g., building and equipment)
b. Project cash flow forecasting and analysis (e.g., incremental, total, pro forma)
c. Financial analysis tools (e.g., Net Present Value, payback, Accounting Rate of Return [ARR],
Internal Rate of Return [IRR])
d. Break even and sensitivity analysis
Rev 3/2017
VI. Cost of Capital – 11%
a. Cost of debt
b. Cost of equity (e.g., common and preferred stock)
c. Weighted average cost of capital
VII. Risk and Return – 11%
a. Expected return on an asset and a portfolio
b. Measures of risk (e.g., standard deviation, beta)
c. Determinants of interest rates (e.g., real and nominal)
d. Capital Asset Pricing Model (CAPM) and Security Market Line (SML) (e.g., beta and risk
premium)
e. Diversification (e.g., market risk, company specific risk, portfolio risk)
VIII. International Financial Management – 7%
a. Impact of exchange rates on international financial markets
b. Currency risk and political risk
c. Tools (e.g., Spot vs Forward, hedging)
REFERENCES
Below is a list of reference publications that were either used as a reference to create the exam, or were used
as textbooks in college courses of the same or similar title at the time the test was developed. You may
reference either the current edition of these titles or textbooks currently used at a local college or university for
the same class title. It is recommended that you reference more than one textbook on the topics outlined in this
fact sheet.
You should begin by checking textbook content against the content outline provided before selecting textbooks
that cover the test content from which to study.
Sources for study material are suggested but not limited to the following:
1. Ross, Stephen (2016). Essentials of Corporate Finance, 9th Edition, McGraw-Hill Higher Education
2. Brigham, Eugene F (2016). Fundamentals of Financial Management, 14th Edition, Cengage Learning
SAMPLE QUESTIONS
All test questions are in a multiple-choice format, with one correct answer and three incorrect options. The
following are samples of the types of questions that may appear on the exam.
1. Which of the following statements is true about a stock split?
a. It increases equity
b. It decreases assets
c. It increases retained earnings
d. It decreases the par value of the stock
2. When a firm pays a cash dividend, the firm's balance sheet is affected in which of the following ways?
a. Assets and equity remain the same
b. Assets decrease and equity increases
c. Assets and liabilities decrease
d. Assets and equity decrease
3. The degree of financial leverage measures the responsiveness of
a. Earnings to changes in operating expenses
b. Earnings to changes in output
c. Earnings before taxes to changes in operating income
d. Operating income to changes in net income
Rev 3/2017
4. In linear break-even analysis, a decrease in fixed costs, if other factors remain constant, will cause the
break-even point and the degree of operating leverage to do which of the following?
a. Increase decrease
b. Decrease decrease
c. Decrease increase
d. Increase increase
5. Which of the following terms of trade credit is most favorable for the buyer?
a. 2/15 net 30
b. 2/15 net 45
c. 3/10 net 30
d. 3/15 net 45
6. The internal rate of return for a project will be higher if the
a. cost of capital is lower
b. cost of capital is higher
c. initial investment is lower
d. initial investment is higher
7. If the internal rate of return of two mutually exclusive investments is less than the firm's cost of capital,
the firm should make which of the following investments, if any?
a. The shorter term investment
b. The investment with the lower internal rate of return
c. The investment with the higher internal rate of return
d. None of the above
8. 8. Which of the following is associated with a stock dividend as opposed to a cash dividend?
a. An increase in assets
b. An increase in equity
c. A decrease in assets
d. No change in liabilities
9. 9. The primary responsibility of a financial manager is to maximize the firm's
a. stockholder wealth
b. sales
c. earnings
d. profits
10. 10. Which two of the following would be preferable to bond owners?
I. Debt ratio of 50% rather than 20%
II. Debt ratio of 20% rather than 50%
III. Times-interest-earned of 2.0 rather than 5.0
IV. Times-interest-earned 5.0 rather than 2.0
a. I and III
b. I and IV
c. II and III
d. II and IV
11. 11. Which of the following will cause a currency outflow from the United States?
a. The purchase of United States plants and equipment by Japanese investors
b. The maintenance of United States military bases in Europe
c. The trading of Japanese yen for United States dollars by Japanese investors
d. The return of income from United States investments in Europe
Answers to sample questions:
1-D; 2-D; 3-C; 4-B; 5-D; 6- C; 7-D; 8-D; 9-A; 10-D; 11-B
Rev 3/2017

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PRINCIPLES OF FINANCE

EXAM INFORMATION CREDIT RECOMMENDATIONS

EXAM CONTENT OUTLINE

I. Financial Statements and Planning – 20%

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