Advanced Financial Management Exam Preparation Guide
Course Introduction
Advanced Financial Management is an in-depth course designed to enhance students' understanding of the principles and practices that underpin complex financial decision-making in organizations. The course covers topics such as capital structure optimization, dividend policy, risk management, working capital management, international financial management, mergers and acquisitions, and advanced techniques for valuation and investment appraisal. Through case studies, financial modeling, and scenario analysis, students will develop skills for evaluating strategic financial alternatives and implementing sound financial strategies within a dynamic global business environment.
Recommended Textbook
Fundamentals of Financial Management 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management
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Q1) If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.
A)True
B)False
Answer: False
Q2) In most corporations,the CFO ranks under the CEO.
A)True
B)False
Answer: True
Q3) The Chairman of the Board must also be the CEO.
A)True
B)False
Answer: False
Q4) It is generally less expensive to form a corporation than a proprietorship because,with a proprietorship,extensive legal documents are required.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Markets and Institutions
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Q1) Financial institutions are more diversified today than they were in the past,when federal laws kept investment banks,commercial banks,insurance companies,and similar organizations quite separate.Today the larger financial services corporations offer a variety of services,ranging from checking accounts,to insurance,to underwriting securities,to stock brokerage.
A)True
B)False
Answer: True
Q2) Trades on the NYSE are generally completed by having a brokerage firm acting as a "dealer" buy securities and adding them to its inventory or selling from its inventory.The NASDAQ,on the other hand,operates as an auction market,where buyers offer to buy,and sellers to sell,and the price is negotiated on the floor of the exchange.
A)True
B)False
Answer: False
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Chapter 3: Financial Statements, cash Flow, and Taxes
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Sample Questions
Q1) During 2014,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?
A)$71,425
B)$74,996
C)$78,746
D)$82,683
E)$86,818
Answer: A
Q2) The value of any asset is the present value of the cash flows the asset is expected to provide.The cash flows a business is able to provide to its investors is its free cash flow.This is the reason that FCF is so important in finance.
A)True
B)False
Answer: True
Q3) EBITDA stands for earnings before interest,taxes,debt,and assets.
A)True
B)False
Answer: False
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Chapter 4: Analysis of Financial Statements
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Q1) A firm's new president wants to strengthen the company's financial position.Which of the following actions would make it financially stronger?
A)Increase accounts receivable while holding sales constant.
B)Increase EBIT while holding sales and assets constant.
C)Increase accounts payable while holding sales constant.
D)Increase notes payable while holding sales constant.
E)Increase inventories while holding sales constant.
Q2) Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?
A)The company's current ratio increased.
B)The company's times interest earned ratio decreased.
C)The company's basic earning power ratio increased.
D)The company's equity multiplier increased.
E)The company's total debt to total capital ratio increased.
Q3) The operating margin measures operating income per dollar of assets.
A)True
B)False
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Page 6
Chapter 5: Time Value of Money
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Q1) You plan to invest in securities that pay 8.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?
A)5.14
B)5.71
C)6.35
D)7.05
E)7.84
Q2) Your subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?
A)7.48
B)8.80
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Chapter 6: Interest Rates
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Q1) The real risk-free rate is 3.05%,inflation is expected to be 2.75% this year,and the maturity risk premium is zero.Ignoring any cross-product terms,what is the equilibrium rate of return on a 1-year Treasury bond?
A)5.51%
B)5.80%
C)6.09%
D)6.39%
E)6.71%
Q2) Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that
A)Inflation is expected to decline in the future.
B)The economy is not in a recession.
C)Long-term bonds are a better buy than short-term bonds.
D)Maturity risk premiums could help to explain the yield curve's upward slope.
E)Long-term interest rates are more volatile than short-term rates.
Q3) An upward-sloping yield curve is often call a "normal" yield curve,while a downward-sloping yield curve is called "abnormal."
A)True
B)False
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Page 8
Chapter 7: Bonds and Their Valuation
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Q1) Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.
A)True
B)False
Q2) If the required rate of return on a bond (r<sub>d</sub>)is greater than its coupon interest rate and will remain above that rate,then the market value of the bond will always be below its par value until the bond matures,at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question.)
A)True
B)False
Q3) A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Q1) Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35.What would the portfolio's new beta be?
A)1.17
B)1.23
C)1.29
D)1.36
E)1.43
Q2) The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.
A)True
B)False
Q3) If an investor buys enough stocks,he or she can,through diversification,eliminate all of the market risk inherent in owning stocks,but as a general rule it will not be possible to eliminate all diversifiable risk.
A)True
B)False
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Chapter 9: Stocks and Their Valuation
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Q1) Which of the following statements is CORRECT?
A)If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.
B)The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
C)The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.
D)The stock valuation model, P<sub>0</sub> = D<sub>1</sub>/(r<sub>s</sub> g), cannot be used for firms that have negative growth rates.
E)The stock valuation model, P<sub>0</sub> = D<sub>1</sub>/(r<sub>s</sub> g), can be used only for firms whose growth rates exceed their required return.
Q2) When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.
A)True B)False
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Chapter 10: The Cost of Capital
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Q1) Bolster Foods' (BF)balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%.The yield to maturity on this debt is 8.00%,and the debt has a total current market value of $27 million.The balance sheet also shows that the company has 10 million shares of stock,and the stock has a book value per share of $5.00.The current stock price is $20.00 per share,and stockholders' required rate of return,r<sub>s</sub>,is 12.25%.The company recently decided that its target capital structure should have 35% debt,with the balance being common equity.The tax rate is 40%.Calculate WACCs based on book,market,and target capital structures,and then find the sum of these three WACCs.
A)28.36%
B)29.54%
C)30.77%
D)32.00%
E)33.28%
Q2) Refer to Exhibit 10.1.Based on the CAPM,what is the firm's cost of equity?
A)11.15%
B)11.73%
C)12.35%
D)13.00%
E)13.65%
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Chapter 11: The Basics of Capital Budgeting
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Q1) The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A)The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
B)One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.
C)If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
D)The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
E)One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.
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Chapter 12: Cash Flow Estimation and Risk Analysis
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Q1) Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project.Also,the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information,which of the following statements is CORRECT?
A)The proposed new project would have more stand-alone risk than the firm's typical project.
B)The proposed new project would increase the firm's corporate risk.
C)The proposed new project would increase the firm's market risk.
D)The proposed new project would not affect the firm's risk at all.
E)The proposed new project would have less stand-alone risk than the firm's typical project.
Q2) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate,projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
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Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Q1) It is not possible for abandonment options to decrease a project's risk as measured by the project's coefficient of variation.
A)True
B)False
Q2) Lindley Corp.is considering a new product that would require an investment of $10 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $5 million at the end of each of the next 3 years (t = 1,2,3),but if the market did not like the product,then the cash flows would be only $2 million per year.There is a 50% probability that the market will be good.The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.The project's WACC is 10.0%.What is the value (in thousands)of the project after considering the investment timing option?
A)$ 726
B)$ 807
C)$ 896
D)$ 996
E)$1,106
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Chapter 14: Capital Structure and Leverage
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Q1) Modigliani and Miller (MM)won Nobel Prizes for their work on capital structure theory.
A)True
B)False
Q2) According to Modigliani and Miller (MM),in a world with corporate income taxes the optimal capital structure calls for approximately 100% debt financing.
A)True
B)False
Q3) Provided a firm does not use an extreme amount of debt,operating leverage typically affects only EPS,while financial leverage affects both EPS and EBIT.
A)True
B)False
Q4) It is possible for Firms A and B to have identical financial and operating leverage,yet for Firm A to have more risk as measured by the variability of EPS.This would occur if Firm A has more business risk than Firm B.
A)True
B)False
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Q1) If a firm uses the residual dividend model to set dividend policy,then dividends are determined as a residual after providing for the equity required to fund the capital budget.Under this model,the higher the firm's debt ratio,the lower its payout ratio will be,other things held constant.
A)True
B)False
Q2) Which of the following does NOT normally influence a firm's dividend policy decision?
A)The firm's ability to accelerate or delay investment projects without adverse consequences.
B)A strong preference by most of its shareholders for current cash income versus potential future capital gains.
C)Constraints imposed by the firm's bond indenture.
D)The fact that much of the firm's equipment is leased rather than bought and owned.
E)The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
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17
Chapter 16: Working Capital Management
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Q1) A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.
A)True
B)False
Q2) Atlanta Cement,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?
A)10.86%
B)12.07%
C)13.41%
D)14.90%
E)16.55%
Q3) Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.
A)True
B)False
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Page 18
Chapter 17: Financial Planning and Forecasting
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Q1) A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?
A)The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
B)The company increases its dividend payout ratio.
C)The company begins to pay employees monthly rather than weekly.
D)The company's profit margin increases.
E)The company decides to stop taking discounts on purchased materials.
Q2) A firm's profit margin is 5%,its debt ratio is 56%,and its dividend payout ratio is 40%.If the firm is operating at less than full capacity,then sales could increase to some extent without the need for external funds,but if it is operating at full capacity with respect to all assets,including fixed assets,then any positive growth in sales will require some external financing.
A)True
B)False
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Chapter 18: Derivatives and Risk Management
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Q1) A riskless hedge can best be defined as
A)A situation in which aggregate risk can be reduced by derivatives transactions between two parties.
B)A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.
C)Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken.
D)Two parties agree to exchange obligations to make specified payment streams.
E)Simultaneously buying and selling a call option with the same exercise price.
Q2) The value of a stock option depends on all of the following EXCEPT:
A)Exercise price.
B)Variability of the stock price.
C)Length of time until option expiration.
D)Risk-free rate of interest.
E)Bond price.
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20
Chapter 19: Multinational Financial Management
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Q1) Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74,with a maturity value of $10,000.The exchange rate at that time was 1.420 Swiss francs per dollar.Today,at maturity,the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor?
A) 7.93%
B) 7.13%
C) 6.42%
D) 5.78%
E) 5.20%
Q2) Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.
A)True
B)False
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles
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Q1) Ballentine Inc.,which has a zero tax rate due to tax loss carry-forwards,is considering a 6-year,$5,000,000 bank loan in order to buy a new piece of equipment.The loan will be amortized over 6 years with end-of-year payments and has an interest rate of 9%.Alternatively,Ballentine can also lease the equipment for an end-of-year payment of $1,250,000.By how much does the lease payment exceed the loan payment?
A)$110,285
B)$116,090
C)$122,199
D)$128,631
E)$135,401
Q2) Assume that a piece of leased equipment has a relatively high expected residual value.From the lessee's viewpoint,it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.
A)True
B)False
Q3) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True
B)False
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Chapter 21: Mergers and Acquisitions
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Q1) The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
A)True
B)False
Q2) The text gives a number of valid,acceptable reasons for companies to merge.Which of the following is NOT acceptable?
A)Synergistic benefits arising from mergers.
B)Reduction in competition resulting from mergers.
C)Acquisition of assets at below replacement value.
D)Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately.
E)Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.
Q3) Since the primary rationale for any operating merger is synergy,in planning such mergers the development of accurate pro forma cash flows is the single most important task.
A)True
B)False
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Page 23
Chapter 22: Continuous Compounding and Discounting
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Q1) You need a down payment of $19,000 in order to purchase your first home 4 years from today.You currently have $14,014 to invest.In order to achieve your goal,what nominal interest rate,compounded continuously,must you earn on this investment?
A)7.61%
B)7.99%
C)8.39%
D)8.81%
E)9.25%
Q2) In six years' time,you are scheduled to receive money from a trust established by your grandparents.When the trust matures there will be $100,000 in the account.If the account earns 9% compounded continuously,how much is in the account today?
A)$55,361.08
B)$58,274.83
C)$61,188.57
D)$64,247.99
E)$67,460.39
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Chapter 23: Zero Coupon Bonds
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Q1) Schiffauer Electronics plans to issue 10-year,zero coupon bonds with a par value of $1,000 and a yield to maturity of 9.5%.The company has a tax rate of 30%.How much extra in taxes would the company pay (or save)the second year (at t = 2)if it goes ahead and issues the bonds?
A)$12.59
B)$12.91
C)$13.23
D)$13.56
E)$13.90
Q2) U.S.Delay Corporation,a subsidiary of the Postal Service,must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities.The $1,000 par value quarterly payment bonds would sell at $795.54,have a 10% coupon rate,and mature in 10 years.At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate as the quarterly payment bonds?
A)$220.77
B)$232.39
C)$244.62
D)$257.50
E)$270.37
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Page 25
Chapter 24: Bankruptcy and Reorganization
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Q1) Chapter 7 of the Bankruptcy Act is designed to do all of the following EXCEPT:
A)Provides safeguards against the withdrawal of assets by the owners of the bankrupt firm.
B)Allows insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
C)Provides for an equitable distribution of the assets among the creditors.
D)Details the procedures to be followed when a firm is liquidated.
E)Establishes the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
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Chapter 25: Calculating Beta Coefficients
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Q1) Refer to Exhibit 8A.1.Set up the SML equation and use it to calculate both stocks' required rates of return,and compare those required returns with the expected returns given above.You should invest in the stock whose expected return exceeds its required return by the widest margin.What is the widest positive margin,or greatest excess return (expected return required return)?
A)1.97%
B)2.19%
C)2.43%
D)2.70%
E)3.00%
Q2) Refer to Exhibit 8A.1.Calculate both stocks' betas.What is the difference between the betas? That is,what is the value of beta<sub>R</sub> beta<sub>S</sub>? (Hint: The graphical method of calculating the rise over run,or (Y<sub>2</sub> Y<sub>1</sub>)divided by (X<sub>2</sub> X<sub>1</sub>)may aid you.)
A)1.3538
B)1.4250
C)1.5000
D)1.5750
E)1.6538
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Chapter
Cost of Capital
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Q1) Using the Security Market Line concept in capital budgeting,which of the following statements is CORRECT?
A)If the expected rate of return on a given capital project lies above the SML, the project should be accepted even if its beta is greater than the beta of the firm's average project.
B)If a project's return lies below the SML, it should be rejected if it has a beta greater than the firm's existing beta but accepted if its beta is below the firm's beta.
C)If two mutually exclusive projects' expected returns are both above the SML, the project with the lower risk should be accepted.
D)If a project's expected rate of return is greater than the expected rate of return on an average project, it should be accepted.
E)None of the statements is correct.
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Chapter 27: Techniques for Measuring Beta Risk
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Q1) Northern Conglomerate has two divisions,Division A and Division B.Northern looks at competing pure-play firms to estimate the betas of each of the two divisions.After this analysis,Northern concludes that Division A has a beta of 0.8 and Division B has a beta of 1.5.The two divisions are the same size.The risk-free rate is 5% and the market risk premium is 6%.Assume that Northern is 100% equity financed.What is the overall composite WACC for Northern Conglomerate?
A)10.74%
B)11.31%
C)11.90%
D)12.50%
E)13.12%
Q2) Which of the following methods involves calculating an average beta for comparable firms and using that beta to determine a project's beta?
A)Risk premium method
B)Pure play method
C)Accounting beta method
D)CAPM method
E)Discounted cash flow model
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Chapter 28: Degree of Leverage
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Sample Questions
Q1) If a firm uses debt financing (Debt ratio = 0.40)and sales change from the current level,which of the following statements is CORRECT?
A)The percentage change in operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income.
B)The percentage change in EBIT will equal the percentage change in net income.
C)The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt.
D)The percentage change in operating income will be less than the percentage change in net income.
E)Since debt is used, the degree of operating leverage must be greater than 1.
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