Advanced Financial Management
Exam Materials
Course Introduction
Advanced Financial Management explores complex concepts and techniques in financial decision-making within corporations and organizations. The course covers topics such as capital structure, risk management, mergers and acquisitions, international financial strategies, and advanced valuation methods. Emphasizing both theoretical frameworks and practical application, students analyze real-world financial scenarios, develop strategies for optimizing firm value, and examine the impact of financial markets and instruments. By the end of the course, students are equipped with the analytical tools and decision-making skills essential for addressing sophisticated financial challenges in a global business environment.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer
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27 Chapters
2109 Verified Questions
2109 Flashcards
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) List examples of agency costs which are incurred by shareholders in trying to minimize agency problems.
Answer: 1.Expenditures to structure the organization in such a way as to minimize the incentives for management to take actions contrary to shareholders interests.
2.Expenditures to monitor management's actions, such as paying for audits of managerial performance and internal audits of the firm's expenditures.
3.Bonding expenditures to protect the owners from managerial dishonesty.
4.The opportunity cost of lost profits arising from complex organizational structures that prevent management from making timely responses to opportunities.
Q2) Between 2008-2009 there were several ethical issues that caused the financial collapse. All of the following are a breach of financial ethics except:
A)collateralized mortgage obligation scandal
B)Treasury bond trading scandal
C)insider stock trading scandal
D)economic stimulus package scandal
Answer: D
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3
Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) There are three forms of market efficiency.All of the following statements are correct EXCEPT:
A)The weak form efficiency states that no investor can earn excess returns based on historical price information.
B)The strong form of efficiency states that no investor can consistently earn excess returns since all public and private information is reflected in stock prices.
C)The semi-strong form of efficiency states that no investor can earn excess returns based on an investment strategy using public information.
D)Market efficiency is a hard and fast rule that has been verified in real-world situations.
Answer: D
Q2) Financial intermediaries are compensated for their services by A)the interest rate spread.
B)salary.
C)stock options
D)preferred stock certificates
Answer: A
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Page 4
Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) An increase in the average collection period may suggest all of the following except
A)easing of credit terms
B)customers are not paying their bills on time
C)sales have decreased
D)firm could have a liquidity problem in the future
Answer: C
Q2) A firm's return on equity is a function of its net profit margin, and equity multiplier.
A)current ratio
B)cost of goods
C)total asset turnover
D)fixed asset turnover
Answer: C
Q3) If a firm's current ratio is 1.5,
A)its current liabilities exceed its current assets
B)it is possible for its quick ratio to be 2.0
C)it is possible for its quick ratio to be 1.0
D)its current assets equal its current liabilities
Answer: C
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5
Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) ICU, an eyeglass manufacturer, has current assets of $800,000 and net fixed assets of $1,400,000.The firm expects its sales to climb 25 percent next year from its current level of $3,500,000.ICU's only current liability is accounts payable of $1,200,000.If both current assets and current liabilities will increase proportionately with sales, what additional financing will be needed by ICU next year? Assume ICU has a net profit margin of 6 percent.An increase in net fixed assets of $500,000 will be required.The firm pays out 50 percent of its earnings as dividends.
A)$400,000
B)$358,750
C)$178,750
D)$268,750
Q2) Financial planning models have two classifications.What are they and how do they differ from each other?
Q3) The value of debt and equity securities is based upon:
A)The type of investment vehicle
B)The growth potential of the asset
C)The accounting method used for recording the asset
D)The present value of the cash flows that the securities are expected to provide.
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6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago.Determine the average annual rate of return on your investment, assuming the stock paid no dividends.
A)25%
B)8.33%
C)150%
D)7%
Q2) Sales for Triad Inc.have grown from $2 million to $8.092 million in 10 years.What is the implied growth rate of sales for Triad?
A)24.72%
B)4.05%
C)15.0%
D)12.2%
Q3) Why does an annuity due have a greater future value than a regular annuity - all things being equal?
Q4) Explain the sinking fund problem.
Q5) Explain a perpetuity and list some investment vehicles that can be perpetuities.
Q6) Explain the concept of interest and compare it to rate of interest.
Q7) What is/are the difference(s) between simple interest and compound interest?
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Chapter 5: A: The Time Value of Money
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Sample Questions
Q1) Vida has just won a jackpot that will pay her $10,000 now, $10,000 in one year, and $10,000 in 2 years.What is the present value of this jackpot at the continuously discounted rate of 9%?
A)$27,515
B)$28,345
C)$24,516
D)$27,492
Q2) What is the value of $10,000 invested for 5 years at 8% compounded continuously?
A)$14,693
B)$14,928
C)$14,918
D)$13,064
Q3) City Bank offers a 7 year CD with a nominal rate of interest of 7.0%.If compounding occurs continuously, what is the effective annual rate?
A)7.25%
B)6.77%
C)7.32%
D)7.00%
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Sample Questions
Q1) "Junk bond" is a term used to describe a bond that A)is in default
B)is rated Ba or lower
C)is currently paying interest
D)has been downgraded by Moody's
Q2) Foreign bonds have all of the following characteristics EXCEPT:
A)They are underwritten by an investment banking syndicate.
B)They are denominated in the currency of the country of sale.
C)They are denominated in euros.
D)The bond issuer is from a country other than the country in which the bonds are being issued.
Q3) There are consequences associated with not paying interest to bondholders.Which of the following apply?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q4) Explain a sinking fund.
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Q5) List the restrictions that an indenture places on the borrower of long-term debt.
Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the
A)negotiating spread
B)underwriting spread
C)bid spread
D)SEC cost
Q2) Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2.Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.
A)6.74%
B)17.26%
C)6.40%
D)3.80%
Q3) Stockholders' equity includes all of the following except:
A)Common stock at par
B)Treasury stock
C)Contributed capital in excess of par
D)Retained earnings
Q4) List the various rights of common stockholders.
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) The term structure of interest rates is related to the .
A)default risk premium
B)seniority risk premium
C)marketability risk premium
D)maturity risk premium
Q2) The risk remaining after extensive diversification is primarily:
A)unsystematic risk
B)systematic risk
C)coefficient of variation risk
D)standard deviation risk
Q3) An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company.The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent.The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent.The correlation between the returns for Gamma and Epsilon is +0.8.Determine the standard deviation of returns for this investor's portfolio.
A)73.8%
B)6.71%
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) The Johnson Drum Company is planning to build a new factory.The purchase of the land, building the plant, and installation of equipment will take place over a two year period.The following are planned cash outflows: \[\begin{array} { l l }
\frac { \text { Year } } { 0 } & \frac { \text { Cash Outflow } } { \$ 3,500,000 } \\
1 & \$ 4,750,000 \\
2 & \$ 6,100,000 \end{array}\]
Johnson Drum's cost of capital is 14%, and its marginal tax rate is 35%.What is the NINV measured in present value terms today?
A)$14,350,000
B)$12,356,650
C)$9,327,500
D)$8,035,788
Q2) What are some of the different outlays that may be classified as capital expenditures?
Q3) In classifying investment projects, there are several types of capital expenditures.List them.
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Why are there differences in the capital expenditure analysis practice between large and entrepreneurial firms?
Q2) Explain why the internal rate of return method is more popular than the net present value method.What are some potential problems with relying on the IRR method?
Q3) Using the profitability index, which of the following projects should be accepted?
\[\begin{array} { l l l }
\text { Praject } M : & \text { NPV } = \$ 60,000 & \text { NINV } = \$ 200,000 \\
\text { Praject } N : & N P V = \$ 10,000 & \text { NINV } = \$ 30,000 \\
\text { Praject } 0 : & N P V = \$ 2,000 & \text { NINV } = \$ 5,000
\end{array}\]
A) Project M NPV = $2,000 NINV = $5,000
B) Project N
C) Project O
D) All projects should be accepted
Q4) Why is the net present value method of evaluating projects better than the internal rate of return method?
Q5) In working with capital budgeting, what does a post-audit do?
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) Under most conditions the equivalent annual annuity method will give the same decision as:
A)the net present value method
B)linear programming
C)the replacement chain method
D)the internal rate of return
Q2) Marvec needs to replace an extruder and two replacements look good.Extruder A costs $102,000 and has a 10 year life.Extruder B costs only $56,000 but its expected life is 6 years.Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years.If Marvec's cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities.
A)B, $564
B)B, $2,388
C)A, $1,646
D)A, $280
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
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Page 14
Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) All of the following techniques are used to measure total project risk EXCEPT:
A)simulation analysis
B)profitability index
C)certainty equivalent approach
D)risk adjusted discount rate
Q2) Which of the following is/are a risk associated with projects that must be considered when determining the net present value?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q3) Which of the following statements is correct about adjusting for beta risk in capital budgeting?
A)It measures unsystematic risk.
B)It is a guaranteed measure of the success of the project.
C)The beta concept can be used to determine RADR.
D)It evaluates the efficiency of the management team.
Q4) What are the weaknesses of the net present value/payback approach?
Q5) What is the reason companies utilize the certainty equivalent approach in evaluating projects?
Page 15
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Sample Questions
Q1) The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when
A)the firm is growing at a rate of 7-10 percent a year
B)the firm is expanding an existing product line
C)the firm is expanding into a new product line
D)all of these answers are correct
Q2) For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current weights of the individual components.
A)book value
B)market value
C)replacement value
D)accounting value
Q3) In determining the cost of debt, several factors must be considered.All of the following are those factors EXCEPT:
A)the firm's before-tax cost of debt
B)the firm's tax rate
C)flotation costs
D)the firm's growth rate of dividends
Page 16
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) In considering a firm's capital structure, the firm should increase its which will maximize its value.
A)stock outstanding
B)earnings
C)cash flow from investing
D)debt
Q2) The objective of capital structure management is to find the capital mix that leads to
A)maximization of earnings per share
B)shareholder wealth maximization
C)maximization of net income
D)maximization of the current period's dividends
Q3) Arbitrage transactions are:
A)risky
B)illegal
C)speculative
D)risk-free
Q4) What is the pecking order theory with regard to managerial preferences for financing alternatives?
Q5) There are many factors that influence a firm's business risk.List them.
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Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) Chemex has a cash and marketable securities balance of $200 million.Management expects free cash flows of $320 million during the coming year.If management is considering a restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year?
A)-$30 million
B)$170 million
C)$230 million
D)$470 million
Q2) Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30.The firm has $10 million in bonds outstanding with a coupon interest rate of 9%.KH has 200,000 shares of common stock outstanding.The firm has revenues of $32.2 million and its marginal tax rate is 40%.Compute KH's degree of combined leverage.
A)26.8
B)5.5
C)29.1
D)4.7
Q3) Explain the difference between short-run costs and long-run costs.
Q4) What are the effects of leverage on shareholder wealth and the cost of capital?
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Chapter 14: A: Capital Structure Management in Practice
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Q1) The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.The company has operating costs of $1,050,000.What is the firm's breakeven point in dollars?
A)$1,750,000
B)$4,670,000
C)$2,625,000
D)$3,875,566
Q2) How can a firm have more than one breakeven output point?
Q3) What are the possible uses for breakeven analysis?
Q4) The breakeven point occurs where total revenues intersect with:
A)market returns
B)the risk-free rate
C)total costs
D)total interest and taxes
Q5) List the limitations of breakeven analysis:
Q6) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
Page 19
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Chapter 15: Dividend Policy
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Q1) A firm that employs a constant payout ratio dividend policy pays .
A)a constant (fixed) dollar dividend
B)out a certain percentage of each year's earnings
C)a constant quarterly dividend
D)low payout ratios if the company has low growth rates
Q2) Dividend policy can affect the value of the firm for which of the following reasons?
A)personal taxes
B)flotation costs
C)shareholder transaction costs
D)all of these answers are correct
Q3) Explain the "clientele effect."
Q4) Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40.If Cafe de Oro has a capital budget of $200,000 and 70,000 shares outstanding, what are the annual dividends per share?
A)$1.70
B)$1.39
C)$2.55
D)$4.00
Q5) What are the factors that determine the dividend policy of a firm?
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Chapter 16: Working Capital Management
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Q1) The rate of return on fixed assets is normally assumed to be the rate of return on current assets (especially cash and marketable securities).
A)less than
B)greater than
C)equal to
D)none of these answers is correct.
Q2) The size of a firm's investment in current assets is a function of all of the following factors except
A)sales level
B)inventory policies
C)credit policies
D)stockholders equity
Q3) All other things being equal, a policy of holding a relatively proportion of the firm's total assets in the form of current assets will tend to result in a expected profitability or rate of return on the total assets of the firm.
A)large, higher
B)small, higher
C)constant, higher
D)constant, lower
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Page 21
Chapter 17: The Management of Cash and Marketable Securities
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Q1) Which of the following statements concerning auction rate money market preferred stocks is (are) true?
A)The price of the stock stays near par.
B)Fifty percent of the dividends are exempt from corporate income taxes.
C)The dividend yield on these securities is adjusted every 20 days through an auction process, where investors can exchange their stock for cash.
D)The price of the stock stays well above par.
Q2) All of the following portfolio criteria used in determining which securities to include in a portfolio are concerned with risk except:
A)rate of return
B)default risk
C)marketability
D)maturity date
Q3) Banks use depository transfer checks to move surplus funds from bank accounts to its concentration bank account or accounts.Explain how this is done.
Q4) Explain how companies can slow disbursements in order to keep funds in the bank for longer periods of time.
Q5) Why do firms hold liquid asset balances?
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) Wallace Company sells $73 million of its products to retailers on credit terms of "net 30." Its average collection period is 55 days.To speed up the collection of receivables, the company is considering changing its credit terms to "2/10, net 30." The company expects 40% of its customers to take the cash discount and its average collection period to decline to 35 days.Wallace's required pretax rate of return on receivables investments is 15%.Determine the net effect on Wallace's pretax profits of the change in credit terms.(Assume 365 days per year in any calculations.)
A)-$860,000
B)$600,000
C)$16,000
D)$584,000
Q2) Cycles de Oro produces 120,000 high-tek bikes a year and orders the brake assembly from IKON for $15.40 each.The order cost is $84 and Cycles estimates their inventory carrying costs are 15%.What is their total ordering cost per year?
A)$7,968
B)$3,412
C)$4,118
D)$6,437
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) In a direct lease, the user-lessee first determines all of the following EXCEPT:
A)which manufacturer will supply the equipment
B)what equipment will be leased
C)the terms of the lease
D)what price will be paid for the asset
Q2) In a(n) , the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment.
A)operating lease
B)capital lease
C)leveraged lease
D)term lease
Q3) In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at the firm's
A)weighted (marginal) cost of capital
B)cost of internal equity capital
C)pretax marginal cost of borrowing
D)after-tax marginal cost of borrowing
Q4) What is a term loan?
Q5) What are the advantages of leasing?
Q6) In a leveraged lease, what items secure the mortgage bonds of the lender?
Page 24
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Chapter 20: Financing with Derivatives
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Q1) Which of the following (if any) are factors affecting the value of a call option?
A)time remaining until expiration date
B)interest rates
C)expected stock price volatility
D)all of these factors affect the value of a call option
Q2) The similarities between convertible securities and warrants include all of the following except:
A)both tend to reduce agency costs
B)the purpose of both is the deferred issuance of common stock
C)both give the company full control over when the common stock is issued
D)all of these answers are correct
Q3) A is a fixed income security with a call option on common stock.
A)convertible security
B)warrant
C)futures contract
D)derivative security
Q4) List some securities that have option features.
Q5) What is an interest rate swap? Describe how they are used.
Q6) Why would a company issue convertible securities instead of straight bonds?
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Chapter 20: A: Financing with Derivatives
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Q1) In considering the bond refunding analysis, which of the following statements is/are correct?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q2) When a bond is called, the old issue is retired and the bondholder receives:
A)new, lower interest rate bonds
B)new corporate stock
C)a cash payoff
D)treasury stock
Q3) Why is the after-tax cost of debt used in bond refunding analysis?
Q4) In a bond refunding analysis, the net investment calculation includes
A)aftertax call premium
B)flotation cost of new debt
C)overlapping interest
D)all of these
Q5) Why would a corporation consider bond refunding?
Q6) What is the principal inflow and what is the principal outflow from a bond refunding situation?
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Chapter 21: Risk Management
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Q1) Which of the following describes basis risk?
A)a natural disaster that affects the underlying commodity
B)the risk that the commodity is not marketable
C)the variance in the price of the commodity and the value of the American dollar
D)a change in the relationship between the futures price and the local spot price
Q2) Which of the following is a related benefit of hedging external risks for a company?
A)Management can determine international markets for their product.
B)Management can forecast political events that may impact their sales.
C)Management can focus on performance and compensation factors that are under their control.
D)Management can determine the economic forces that will impact their earnings.
Q3) A "clearinghouse" operated by the futures exchange handles:
A)the offices of the future contract buyers.
B)the location of the future contract sellers.
C)the payments between buyers and sellers.
D)the actual products bought and sold.
Q4) What is a hedge?
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Chapter 22: International Financial Management
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Q1) In general, when a foreign subsidiary's assets are than its liabilities, will occur when the exchange rate on the currency of the country in which the foreign subsidiary operates loses value.
A)greater, currency exchange gains
B)greater, currency exchange losses
C)less, nothing
D)greater, nothing
Q2) How does a firm manage economic exposure due to changes in exchange rates?
Q3) Basic hedging techniques include all of the following except
A)money market hedge
B)forward market hedge
C)primary market hedge
D)none, because all are basic hedging techniques
Q4) To protect itself against transaction exchange rate risk, a U.S.company that purchases automobiles from a Japanese manufacturer may use all of the following techniques except:
A)borrow U.S.funds and invest them in interest-bearing Japanese securities
B)execute a contract in the forward exchange market
C)sell yen in the spot market at the time of each transaction
D)execute a contract in the foreign exchange futures market
Page 28
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Chapter 23: Corporate Restructuring
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75 Flashcards
Source URL: https://quizplus.com/quiz/22897
Sample
Questions
Q1) In a , the acquiring company effectively announces that it will pay a certain price above the current existing price for a merger candidate's shares.
A)leveraged buyout
B)tender offer
C)equity carve-out
D)divestiture
Q2) What is a form of business combination in which a company purchases all or a controlling block of another company's common shares and the two companies become affiliated?
A)horizontal merger
B)vertical merger
C)conglomerate
D)holding company
Q3) In a form of business combination, a parent-subsidiary relationship exists between the acquiring and acquired companies.
A)leveraged buyout
B)holding company
C)consolidation
D)leveraged buyout or consolidation
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