Advanced Financial Management Exam Preparation
Guide
Course Introduction
Advanced Financial Management explores the strategic financial decisions faced by organizations, focusing on areas such as capital structure, investment analysis, risk management, working capital optimization, and valuation techniques. The course delves into complex financial instruments, mergers and acquisitions, international finance, and advanced topics in corporate restructuring. Emphasizing both theoretical frameworks and practical applications, students learn to analyze financial statements critically, assess financial performance, and develop strategies that align with organizational goals in dynamic market environments. Case studies and real-world scenarios are utilized to enhance problem-solving and decision-making skills relevant to contemporary financial management.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Q1) The major factors that determine the market value of a company's shares of stock include the ____.
A) risk of its cash flows
B) timing of its cash flows
C) book value of its assets
D) risk of its cash flows and the timing of its cash flows
Answer: D
Q2) Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be a divergence between shareholder wealth maximization and the actual goals of management. The primary reason for this is:
A) Management wants to ensure good public relations.
B) The Board of Directors is becoming increasingly uninvolved within the corporation.
C) Shareholders do not feel that wealth maximization is relevant.
D) There is a separation of ownership and control in corporations.
Answer: D
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return?
A) -25.14%
B) -16.67%
C) -12.57%
D) 16.00%
Answer: C
Q2) Eurodollars are U.S. dollars that have been deposited in A) foreign banks
B) foreign branches of U.S. banks
C) foreign subsidiaries
D) foreign banks and foreign branches of U.S. banks
Answer: D
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Chapter 3: Evaluation of Financial Performance
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Q1) The ratio group most likely to be used to indicate a firm's ability to meet short-term financial obligations would be
A) liquidity ratios
B) financial leverage ratios
C) activity ratios
D) profitability ratios
Answer: A
Q2) AK, Inc. is considering issuing additional long-term debt to finance an expansion. The company currently has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level.
A) $10 million
B) $ 6 million
C) $ 1 million
D) $5 million
Answer: A
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Chapter 4: Financial Planning and Forecasting
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Q1) Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
A) $339,600
B) $283,200
C) No financing needed, surplus of $224,400
D) No financing needed, surplus of $524,400
Q2) Pro forma financial statements are used to:
A) find the contribution margin
B) show the results of some assumed event
C) predict the sensitivity of different output variables
D) show the results of an actual event
Q3) The main advantage of deterministic models is that they
A) provide the user with more useful information than other models
B) allow the user to maximize some objective function
C) allow the user to perform sensitivity analyses quickly
D) allow the user to maximize or minimize some objective function
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Page 6
Chapter 5: The Time Value of Money
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Q1) How much will you have at the end of 5 years in a European vacation account if you deposit $200 a month in an account that is paying a nominal 12 percent per year, compounded monthly?
A) $16,334
B) $15,247
C) $16,497
D) $15,817
Q2) If a 16 year old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of 9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20 - 65) at 9%.
A) $442,014
B) $386,616
C) $1,767,995
D) $9,146
Q3) Annuity due calculations are especially important when dealing with
A) term loans
B) lease contracts
C) capital investments
D) capital recovery problems
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Q1) The call feature is an advantage to the issuing firm
A) if the bond has a floating rate
B) if interest rates decline
C) if the bond has a low par value
D) if interest rates increase
Q2) Potential sellers of an asset can be represented as a ____ schedule showing the ____ prices at which they are willing to sell given quantities of the asset.
A) supply, maximum
B) demand, maximum
C) supply, minimum
D) supply, average
Q3) An AT&T 5½05 bond with a current yield of 6.2% must be selling ____ its face value.
A) above
B) at
C) below
D) any of the above could be correct
Q4) What is the collateral used in collateral trust bonds and who is its primary user?
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) If the common stock of Comdisco pays an annual dividend of $0.28, has a PE ratio of 11 and closed at 25, what are the current earnings per share?
A) $3.08
B) $2.27
C) $7.00
D) $1.12
Q2) When Google went public the firm sold its stock in an unusual way. What was that method and how did it impact future sales of IPOs?
Q3) Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it should level to an 8% growth rate. The last dividend paid was $.65 per share. What price should the stock sell for if investors require 12% return.
A) $18.14
B) $22.75
C) $19.47
D) $20.16
Q4) Why do closely held firms need to have an outside appraiser to determine their value? What are the reasons for valuation?
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Chapter 8: Analysis of Risk and Return
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Q1) Dana has a portfolio of 8 securities, each with a market value of $5,000. The current beta of the portfolio is 1.28 and the beta of the riskiest security is 1.75. Dana wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security?
A) 1.21
B) 0.91
C) 0.73
D) 1.62
Q2) The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning more than 21% on FTC common stock.
A) 1.00
B) 0.8413
C) 0.0013
D) 0.1587
(Note: Table V is required to work this problem.)
Q3) Explain marketability risk and marketability premium.
Q4) Why is risk an increasing function of time?
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Page 10
Chapter 9: Capital Budgeting and Cash Flow Analysis
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Q1) Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000.The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.
A) $32,000
B) $27,000
C) $24,000
D) $18,000
Q2) The determination of net cash flows (NCF) should never include
A) changes in depreciation
B) changes in operating costs
C) interest charges
D) indirect effects
Q3) List the reasons that the marginal cost of capital schedule increases as more funds are sought in the capital markets.
Q4) List the steps that a firm uses in the capital budgeting process:
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Q1) ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years. What is the NPV of this project if ZPS has a cost of capital of 12.45%?
A) $47,625
B) $18,503
C) $17,490
D) none of the above
Q2) The advantages of the payback approach include all of the following except:
A) it is easy to compute
B) it considers a project's liquidity
C) it considers cash flows, not net income
D) it provides an objective measure of profitability
Q3) The reasons that the amount and timing of the net cash flows to the foreign subsidiary and parent may differ include:
A) subsidized loans
B) differential tax rates
C) legal and political constraints on cash remittance
D) all of the above
Q4) In working with capital budgeting, what does a post-audit do?
Page 12
Q5) List the advantages and disadvantages of the payback method.
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Chapter 11: Capital Budgeting and Risk
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Q1) The most expensive method of adjusting for total project risk in the evaluation of capital budgeting projects is the
A) sensitivity analysis method
B) simulation approach
C) net present value/payback method
D) risk-adjusted discount rate approach
Q2) When analyzing a sensitivity curve, the ____ the slope, the more sensitive the net present value is to a change in the computed variable.
A) more negative
B) steeper
C) more general
D) smaller
Q3) A weakness of the net present value/payback method is:
A) It is a complicated calculation
B) It is subjective
C) It is directly related to the variability of returns from a project
D) Because it recognizes the riskiness of various projects, it can develop multiple outcomes.
Q4) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) A firm is determining its cost of common stock equity. It last paid a divided of $.52, the dividends are growing at 5%, flotation costs are $2 per share and the firm will net $72 per share upon the sale of the stock. What is the firm's cost of common equity?
A) 3.49%
B) 8.22%
C) 6.11%
D) 5.76%
Q2) Temple Company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that Temple's dividends are expected to grow at this rate for the foreseeable future. Temple's stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share.
Determine the costs of internal and external equity to Temple.
A) 18.1%; 18.9%
B) 15.9%; 16.6%
C) 16.2%; 16.9%
D) 15.9%; 18.9%
Q3) Sources of debt capital to small firms is limited. Generally, what are the sources of funds for the small firm?
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Chapter 13: Capital Structure Concepts
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Q1) The capital structure decision attempts to minimize ____ which maximizes the value of the firm.
A) leverage costs
B) the cost of capital
C) labor costs
D) compensation packages
Q2) Investors' required returns and the cost of equity capital ____ as the relative amount of debt used to finance the firm ____.
A) increase, increases
B) increase, decreases
C) remain constant, increases
D) remain constant, decreases
Q3) There are many factors that influence a firm's business risk. List them.
Q4) Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will
A) increase
B) decrease
C) remain unchanged; there is no relationship between the two
D) initially rise rapidly, then increase slowly beyond some point
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Chapter 14: Capital Structure Management in Practice
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Q1) Borkstran has sales of $7.8 million, a variable cost ratio of 0.6, EBIT of $1.1 million, and a degree of combined leverage of 3.4. What is Borkstran's degree of financial leverage?
A) 1.20
B) 0.73
C) 2.29
D) 0.84
Q2) Leigh Fibers expects its operating income over the coming year to equal $2.5 million with a standard deviation of $800,000. Leigh must pay interest charges of $1.2 million next year and preferred dividends of $300,000. Leigh's marginal tax rate is 35%. What is the probability that Leigh will have negative EPS next year if its operating income is expected to be normally distributed? (Problem requires normal distribution table)
A) 14.7%
B) 5.2%
C) 10.6%
D) 15.7%
Q3) Some firms prefer to use debt or preferred stock for financing to retain control. Explain the rationale behind this method.
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Chapter 15: Dividend Policy
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Q1) Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT:
A) buy from shareholders through a tender offer
B) buy outstanding shares in the open market
C) buy treasury shares
D) negotiate a purchase privately from large holders, particularly institutions
Q2) Several regulations limit dividend payments. All of the following limit dividend payments except:
A) Capital impairment restriction
B) Restrictive covenants
C) Net earnings restriction
D) Liability restriction
Q3) The dividend clientele effect concept was originally developed by
A) Myron Gordon
B) Merton Miller and Franco Modigliani
C) Milton Friedman
D) Paul Samuelson
Q4) What is the signaling effect of dividend payments?
Q5) What are the procedures for repurchasing stock?
Q6) Explain the "clientele effect".
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Chapter 16: Working Capital Policy and Short-term Financing
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Q1) The ____ shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities.
A) inventory conversion period
B) cash conversion cycle
C) payables deferral period
D) receivables conversion period
Q2) A firm's operating cycle is equal to its ____.
A) inventory conversion period plus receivables conversion period
B) cash conversion cycle minus payables deferral period
C) a and b
D) none of the above
Q3) Historically, the yield curve has generally been ____, which indicates that long-term interest rates usually have been ____ short-term interest rates.
A) upward sloping, lower than
B) downward sloping, higher than C) upward sloping, higher than
D) level, about equal to
Q4) Why is working capital so important to a firm's continued profitability?
Q5) What is financial forecasting?
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Currently Nemonix is using a decentralized collection system whereby customers mail their checks to one of the firm's eight regional locations. Its annual sales are $95 million. Checks are deposited each business day in a local bank and the amount of the deposit is sent to the firm's concentration bank in Dallas. The average time between deposit in the local bank and the availability of those funds, in Dallas, to Nemonix is 6 days. Nemonix has determined that the use of wire transfers would reduce the float by four days, but the transfer will cost $7.50. If transfers will be made on the 250 days that banks are open each year, should Nemonix switch to the wire transfer system? Assume that Nemonix can earn 8% on the funds released through this more efficient transfer.
A) Yes-savings of $106,600
B) Yes-savings of $61,388
C) Yes-savings of $68,288
D) No-loss of $6,671
Q2) Which of the following types of marketable securities normally has the lowest yields?
A) Federal agency issues
B) Treasury bills
C) repurchase agreements
D) commercial paper
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Chapter 18: Management of Accounts Receivable and Inventories
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Q1) What are the "five Cs of credit"and how are they used?
Q2) The ____ measures the promptness with which customers repay their credit obligations.
A) bad-debt loss ratio
B) average collection period
C) credit term
D) cash discount
Q3) Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average investment in receivables.
A) $ 821,918
B) $ 3,409,091
C) $72,328,767
D) $ 82,192
Q4) How can a company use its credit period to affect sales and inventory?
Page 20
Q5) What are seasonal datings as it applies to credit terms?
Q6) What information could be used to judge the credit worthiness of a customer?
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Chapter 19: Lease and Intermediate-term Financing
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Q1) What are the disadvantages of leasing?
Q2) The IRS has general rules pertaining to the tax status of true leases which allow the annual lease payments to be tax deductible. What are those rules?
Q3) All of the following are attributes of operating leases except
A) lease period normally equals the economic life of the asset
B) lease payments under the initial lease contract are insufficient to recover the full cost of the asset for the lessor
C) cancelable
D) maintenance and insurance normally are responsibility of lessor
Q4) In a leveraged lease, what items secure the mortgage bonds of the lender?
Q5) All of the following are first determined by the lessee before a direct lease EXCEPT:
A) Equipment that will be leased
B) What taxes will be paid based on the lease
C) Options, warranties service agreements that will have to be made
D) What price will be paid for the asset
Q6) What are the advantages of leasing?
Q7) Explain a leveraged lease.
Q8) What is a term loan?
Page 22
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Chapter 20: Financing With Derivatives
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Q1) The market value of a convertible debt issue is usually above the A) conversion ratio
B) conversion value
C) straight-bond value
D) higher of either the conversion value or the straight-bond value
Q2) Firms issue warrants for which of the following reasons?
I. Allows the company to sell stock at a price above what other company stock is selling for.
II. Allows the company to choose which investors are allowed to buy the company's stock.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) The conversion ratio of a convertible security may change when
A) a cash dividend is paid
B) there is a change in the market value of the security
C) a stock dividend is paid
D) there is a rights offering
Q4) What is an interest rate swap? Describe how they are used.
Page 23
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Chapter 21: Risk Management
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Q1) Which of the following is a firm-specific asset?
A) Sewing machines designed for the manufacture of summer and winter clothes.
B) Fire-retardant paint in lime green.
C) Auto plant that can produce six styles of vehicles.
D) A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting.
Q2) Which of the following statements is/are true about futures contracts?
I. The buyer of the contract must take delivery of the underlying commodity.
II. To reverse a position, the buyer of a contract must sell an identical contract which is recognized as offsetting the other one.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) All of the following are reasons to reduce financial distress EXCEPT:
A) enhanced debt capacity.
B) reduced WACC.
C) better currency exchange ratio.
D) ensure adequate cash flows.
Q4) List five hedging strategies for risk management
Page 24
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Chapter 22: International Financial Management
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Questions
Q1) Under current accounting procedures, all of the following balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet except:
A) stockholder's equity
B) fixed assets
C) current liabilities payable in a foreign currency
D) long-term liabilities payable in a foreign currency
Q2) Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?
A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
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) Name the factors that affect exchange rates.
Page 25
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Chapter 23: Corporate Restructuring
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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) A new takeover defense is boardmail. How does it work?
Q4) An example of a passive institutional investor is a:
A) pension fund
B) private equity investor
C) parent company
D) third party administrator
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Chapter 24: Continuous Compounding and Discounting
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Q1) Moneybag Bank & Trust is offering loans at 5% compounded continuously. Before you decide to borrow using that interest rate, what payment would be required on a $200,000 loan for a 30 year loan?
A) $1,089.59
B) $1,578.34
C) $1,183.92
D) $1,226.90
Q2) What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?
A) $21,240
B) $11,080
C) $16,421
D) none of the above
Q3) With continuous compounding
A) the effective rate is higher than the nominal rate
B) the effective rate is higher than the logarithmic rate
C) the base "e" is the effective rate
D) all the above are correct
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Q1) Using a replacement chain, which project should be chosen? Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows.
A) Project B. NPV of A is negative
B) Project A. NPV of B is negative
C) Project B. NPV is $492 higher
D) Project A. NPV is $6,468 higher
Q2) Quorex is evaluating two mutually exclusive projects. Project A has a net investment of $48,000 and net cash flows over a six year period of $12,500 per year. Project B also has a net investment of $48,000 but its net cash flows of $8,640 per year will occur over a 12 year period. If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen and what is its NPV?
A) A, $862
B) A, $1,800
C) B, $2,475
D) B, $902
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
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Chapter 26: Breakeven Analysis
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Q1) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
Q2) Kettle of Fish Hatcheries provides a stocked pond for fishing enthusiasts. They have fixed costs of $525,000, they charge $50 per person for pond access and the variable costs of stocking the pond average about $15 per person. How many people need to fish the pond annually to break even?
A) 45,000
B) 15,000
C) 32,000
D) 10,000
Q3) The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes. The finished product sells for $60 with a variable cost per unit of $27. The company has fixed operating costs of $1,250,000. What is its breakeven point?
A) 22,187
B) 37,879
C) 56,124
D) 48,961
Q4) List the limitations of breakeven analysis:
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Chapter 27: Bond Refunding Analysis
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Q1) Waste Deep Disposal Services are considering refunding a $525,000,000 bond issue. The old bonds have a 7.25% coupon rate. The new bonds will have a 6% coupon rate. Both issues will be outstanding for about four weeks. What is the overlapping interest if the company is in the 38% tax bracket (rounded)?
A) $1,517,465
B) $1,815,288
C) $1,357,642
D) $1,225,427
Q2) Clinch River Power is considering refunding a $150 million 12% coupon bond with a 10% coupon bond, 20 year bond. The current bond also matures in 20 years and is now callable at 110% of par. The unamortized flotation cost on the old issue is $540,000 and the flotation cost of the new issue is 0.925%. Clinch River estimates that there would be a 4 week period where both bonds would be outstanding. The company has a weighted cost of capital of 11% and a 40% marginal tax rate. Should Clinch River sell the refunding issue?
A) Yes, NPV is approximately $9.838 million
B) Yes, NPV is approximately $9.930 million
C) Yes, NPV is approximately $9.655 million
D) Yes, NPV is approximately $10.808 million
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Chapter 28: Taxes
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Q1) Intercompany dividends, or dividends paid by one corporation to another, are normally entitled to a ____ percent exclusion from Federal income taxes.
A) 15
B) 30
C) 50
D) 70
Q2) How are dividends received by a corporation treated for tax purposes?
Q3) BET had a taxable income of $135,000 in 2010. What is its tax liability?
A) $22,500
B) $52,650
C) $35,900
D) $15,900
Q4) ____ received by corporations are normally entitled to a 70 percent exclusion from federal income taxes.
A) Capital gains income
B) Dividend income
C) Loss carrybacks and carryforwards
D) none of the above
Q5) Explain the difference between average tax rate and marginal tax rate.
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