Advanced Financial Management
Mock Exam
Course Introduction
Advanced Financial Management is designed to equip students with a deep understanding of complex financial decision-making processes in contemporary organizations. The course covers advanced topics such as capital structure optimization, risk management, mergers and acquisitions, corporate valuation, international financial management, and innovative financial instruments. Students will apply theoretical concepts to real-world scenarios, analyzing case studies and utilizing quantitative tools for strategic planning and financial analysis. By the end of the course, participants will be able to critically evaluate financial strategies and make informed decisions to maximize shareholder value in a dynamic global environment.
Recommended Textbook
Contemporary Financial Management 13th 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 primary objective of the firm is:
A)Shareholder wealth maximization
B)Social responsibility
C)Long run survival
D)Profit maximization
Answer: A
Q2) Agency problems may give rise to costs that the market value of firms.
A)increase
B)decrease
C)do not affect
D)are not important to Answer: B
Q3) All of the following economic environment factors affect stock prices except:
A)investment strategies
B)competition
C)tax rates
D)currency exchange rates
Answer: A
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) Money markets deal in securities having maturities of ;capital market securities have maturities .
A)less than 18 months, greater than 18 months
B)one year or less, greater than one year
C)less than 9 months, greater than 9 months
D)less than 6 months, greater than 6 months
Answer: B
Q2) If the spot rate (in U.S.dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at an annualized
A)premium of 4.04%
B)premium of 3.98%
C)premium of 3.91%
D)discount of 3.89%
Answer: B
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4
Chapter 3: Evaluation of Financial Performance
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Q1) The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:
A)an accurate picture of the company's market position
B)based on the company's accounting information system (AIS)
C)constructed in conformity with generally accepted accounting principles
D)developed using management's choice of accounting enhancement techniques
Answer: C
Q2) Wall Mart Pictures and Decor Company has a net profit margin of 10% and its inventory turnover is 9, what is its annual cost of sales? You also know that Wall Mart's average inventory is $96,700 and its annual sales are $1,000,000.
A)$870,000
B)$850,000
C)$870,300
D)$790,000
Answer: C
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Chapter 4: Financial Planning and Forecasting
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Q1) Using a cash budget is more useful than the percentage of sales method because:
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) Which of the following is defined as the systematic allocation of the cost of an asset over more than one period?
A)Deferral
B)Expensing
C)Optimization
D)Depreciation
Q3) Scorch & Burn Fire Extinguishers, Inc.had an operating income (EBIT) of $260,000 last year.The firm had $18,000 in depreciation expenses, $15,000 in interest expenses and $60,000 in selling, general, and administrative expenses.If Scorch & Burn has a marginal tax rate of 40%, what was its after-tax cash flow for last year?
A)$165,000
B)$129,000
C)$174,000
D)$147,000
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Page 6
Chapter 5: The Time Value of Money
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Q1) Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the
A)future value of an annuity
B)present value of an annuity
C)future value of an annuity due
D)present value of an annuity due
Q2) What is the present value of $1,000 received 2 years from today if the nominal interest rate is 9% and compounded monthly?
A)$842
B)$914
C)$833
D)$836
Q3) Idlewild Bank has granted you a seven year loan for $50,000.If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?
A)14%
B)23%
C)12.6%
D)11%
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Chapter 5: A: The Time Value of Money
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Q1) You have just won a lottery that promises to pay you $1,000,000 in 5 years.What is the present value of this lottery win at the continuously discounted rate of 10%?
A)$621,000
B)$606,531
C)$648,720
D)$904,837
Q2) With continuous compounding, why is the effective rate higher than the nominal rate?
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 these are correct
Q4) Brad deposited $5,250 into an account that earns 7% interest compounded continuously.How much money will he have in 15 years?
A)$15,002.67
B)$12,175.90
C)$13,957.14
D)$14,964.25
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Q1) How much would you have to pay for a U.S.Government bond ($1,000 maturity value) scheduled to mature in February, 2020 and quoted at 118:07 "bid" and 118:15 "asked"?
A)$1,182.19
B)$1,181.50
C)$1,184.69
D)$1,180.70
Q2) Users of preferred stock include:
A)Utility companies
B)Acquiring firm in mergers and acquisitions
C)Large commercial banks
D)All listed answers are users
Q3) When an investor is trying to find the market value of an asset, he/she is trying to determine:
A)the exchange rate
B)the par value
C)the interest payment
D)the market price
Q4) Explain a sinking fund.
Q5) List the advantages and disadvantages of long-term debt financing:
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) The current price of Zebar is $32.00 and the current dividend is $.60.What is an investor's required rate of return on Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent?
A)9.88%
B)11.38%
C)18.75%
D)10.03%
Q2) Common stock dividends normally are paid
A)monthly
B)quarterly
C)semi-annually
D)annually
Q3) All of the following are advantages of private security placements (over a public offering) except
A)reduced flotation costs
B)greater flexibility
C)lower interest rates
D)save time
Q4) What are some of the costs associated with new security offerings?
Q5) List the various rights of common stockholders.
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Chapter 8: Analysis of Risk and Return
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Q1) Don has $3,000 invested in AT&T with an expected return of 11.6 percent;$10,000 in IBM with an expected return of 12.8 percent;and $6,000 in GM with an expected return of 12.2 percent.What is Don's expected return on his portfolio?
A)12.42%
B)12.20%
C)11.81%
D)Cannot be determined
Q2) can be achieved by investing in a set of securities that have different risk-return characteristics.
A)Indexing
B)Capital Asset pricing
C)Diversification
D)Asset allocation
Q3) The term structure of interest rates is the pattern of interest rate yields for securities that differ only in
A)default risk
B)liquidity premiums
C)the yield to maturity
D)the length of time to maturity
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Q1) Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000.The line will be depreciated as a 7-year MACRS asset.With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000.If Ripstart expects to sell the new machine at the end of year 5 for $40,000, compute the net cash flow in the fifth year.The MACRS depreciation rate during the fifth year is 8.93% and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset.Assume the firm's marginal tax rate is 40 percent and that company does get to take the full benefit of year 5 depreciation.
A)$29,751
B)$53,736
C)$75,615
D)$69,751
Q2) Most existing products become obsolete. For a firm to continue to grow they must do all of the following EXCEPT:
A)move all production to the firm's existing facilities for economies of scale
B)generate research and development investment proposals
C)invest in marketing research
D)invest in new plants
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Page 12
Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Q1) 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
Q2) The payback method is at best a crude measure of the risk of a project because it fails to consider the of a project's returns.
A)liquidity
B)variability
C)timing
D)magnitude
Q3) What is the internal rate of return for a project that has a net investment of $150,000 and net cash flows of $40,000 for 5 years?
A)between 10% and 11%
B)between 9% and 10%
C)between 11% and 12%
D)between 12% and 13%
Q4) In working with capital budgeting, what does a post-audit do?
Q5) List the advantages and disadvantages of the payback method.
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real Option Considerations
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Q1) 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
Q2) 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
Q3) The importance of time discrepancies depends on several items when making capital budgeting decisions.State those items:
Q4) How does the equivalent annual annuity approach solve the time discrepancy problem?
Page 14
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Chapter 11: Capital Budgeting and Risk
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Q1) Determine the pure project beta of a project that has 30% debt and 70% equity.The beta for the company is 1.4 and a tax rate of 40%.
A)1.11
B)1.56
C)1.83
D)1.05
Q2) List the ways that a company's decision maker can adjust for total project risk in capital budgeting.
Q3) All of the following are methods of adjusting a project for total risk EXCEPT:
A)sensitivity analysis
B)carpe diem approach
C)certainty equivalent approach
D)simulation analysis
Q4) What are the weaknesses of the net present value/payback approach?
Q5) Which of the following techniques can be used to analyze total project risk?
A)net present value/payback approach
B)risk-adjusted discount rate approach
C)simulation analysis
D)all of these
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Q1) PDQ Inc.has a weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects: Project Cost Annual Cost Flow Project life \[\begin{array} { l l l l }
1 & \$ 10,000 & \$ 1,992.43 & 10 \text { years } \\
2 & \$ 21,000 & \$ 4,526.84 & 8 \text { years } \\
3 & \$ 18,500 & \$ 4,500.34 & 7 \text { years } \end{array}\]
In which projects should PDQ invest? Assume no capital rationing.
A)1 & 2
B)2 & 3
C)1 & 3
D)cannot be determined from the information provided
Q2) The optimal capital budget is indicated by the point at which the and the intersect.
A)depreciation schedule;investment opportunity schedule
B)investment opportunity curve;marginal cost of capital curve
C)investment opportunity curve;average cost of capital curve
D)efficient portfolio curve;marginal cost of capital curve
Q3) What is the investment opportunity curve and how is it accomplished?
Page 16
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Chapter 13: Capital Structure Concepts
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Q1) In determining the capital structure for an international firm, the managerial objective is to
A)minimize exchange rate risk
B)minimize the risk of expropriation
C)minimize the overall cost of capital
D)minimize available local low-cost financing
Q2) The management of Graphicopy is trying to determine how much debt they should have in their capital structure.If they sell $500,000 in perpetual bonds with a 9 percent coupon, what would be the present value of the tax shield? Assume the marginal tax rate is 35%.
A)$15,750
B)$29,250
C)$175,000
D)$45,000
Q3) With an optimal capital structure
A)overall capital costs are minimized
B)the net present value of new projects is minimized
C)financial leverage is minimized
D)the weighted cost of capital is maximized
Q4) 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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Q1) A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a increase in EBIT.
A)81%
B)3%
C)9%
D)6%
Q2) Dippity Doodle Noodle Makers has a capital structure that consists of2.0 million shares outstanding and $2.0 million of debt at 8% interest.The company is planning a major plant expansion must decide between the following two financing plans.Option 1 is to increase debt by $1.0 million at 9% interest and sell 10,000 new shares of stock at $50 per share.Option 2 is to sell 30,000 new shares of stock at $50 per share.What would be the indifference point and considering that EBIT is expected to be $10,000,000 which option would be best
A)Indifference of $10,750,000.Use stock option.
B)Indifference of $1,600,000.Use stock option.
C)Indifference of $16,270,000.Use the debt option.
D)Indifference of $9,250,000.Use the debt option.
Q3) What are the effects of leverage on shareholder wealth and the cost of capital?
Q4) In what way does management's willingness to assume risk impact the firm?
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Chapter 14: A: Capital Structure Management in Practice
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Q1) The difference between the selling price per unit and the variable cost per unit is the:
A)contribution to the bottom line
B)contribution to revenue
C)contribution margin
D)contribution to EBIT
Q2) Breakeven analysis can be used:
A)when planning renovations
B)when planning expansions
C)when planning financial resources
D)when planning new product development
Q3) Another name for breakeven analysis is:
A)cost-volume-profit analysis
B)graphic analysis
C)EBIT-EPS analysis
D)degree of operating leverage
Q4) How can a firm have more than one breakeven output point?
Q5) List the limitations of breakeven analysis:
Q6) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
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Chapter 15: Dividend Policy
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Q1) Determine the balance in the common stock account after the stock dividend.
A)$1,250,000
B)$1,375,000
C)$125,000
D)$2,500,000
Q2) A passive residual dividend policy suggests that the firm will:
A)pay the same dollar amount of dividends every year
B)pay the same percentage of earnings in dividends every year
C)pay a dividend only after all viable investment projects have been exhausted D)omit a dividend in the next period
Q3) According to Miller and Modigliani, it is that really determines a firm's value.
A)investment policy
B)dividend policy
C)payout ratio
D)transaction costs
Q4) The dividend clientele effect concept was originally developed by
A)Myron Gordon
B)Merton Miller and Franco Modigliani
C)Milton Friedman
D)Paul Samuelson
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Chapter 16: Working Capital Management
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Q1) 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
Q2) Net working capital is defined as:
A)total current assets
B)current assets minus current liabilities
C)total assets minus total liabilities
D)current assets plus current liabilities
Q3) If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the approach to asset financing.
A)aggressive
B)moderate
C)matching
D)conservative
Q4) Explain how a firm uses commercial paper as a short-term financing source and explain the disadvantage of using this form of financing.
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Amazon's CFO is considering the fees charged by two banks in trying to determine which is best for her firm.First American charges a flat $0.11 per payment and First Western requires a minimum compensating balance of $500,000 plus $0.05 per payment.If Amazon's cost of funds is 8.50%, and the expected number of payments per year is 900,000, which bank should be chosen?
A)FW, savings = $54,000
B)FA, savings = $23,000
C)FW, savings = $11,500
D)FW, savings = $18,500
Q2) Why do firms hold liquid asset balances?
Q3) Cash management involves much more than simply paying bills and receiving payments for goods and services.The cash management function is concerned with all of the following except:
A)Determining the optimal size of a firm's liquid asset balance.
B)The appropriate types of long-term debt the firm should have.
C)The most efficient methods of controlling the collection and disbursement of cash.
D)The appropriate types and amounts of short-term investments a firm should make.
Q4) Name the three primary components (or sources) of float:
Page 22
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) The likelihood that a customer will fail to repay credit extended to it is referred to as:
A)default risk
B)maturity risk
C)bad-debt loss ratio
D)opportunity cost
Q2) Safety stock is needed to absorb
A)changes in accounts receivables
B)cyclical changes
C)random fluctuations in sales
D)annual model changes
Q3) When an order is placed for an item that is manufactured internally within a company, ordering costs consist primarily of .
A)storage and handling costs
B)deterioration costs
C)production set-up costs
D)carrying costs
Q4) How does an optimal credit extension policy impact a company's accounts receivables?
Q5) How can a company use its credit period to affect sales and inventory?
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) Index Laboratories is considering leasing a thermoplastic molder.The lease would require 7 beginning of the year payments of $122,000 each.If Index capitalizes this lease for financial reporting purposes at a 12% rate, what asset amount will be reported initially on its balance sheet?
A)$623,625
B)$969,046
C)$556,808
D)$854,000
Q2) In a lease arrangement, the owner of the property is called the A)lessee
B)lessor
C)equity trustee
D)lender
Q3) Normally, when a firm operates under the protection of a bankruptcy court, lease payments .
A)may be suspended
B)must continue to be paid by lessors
C)must be paid to lessors if assets are secured
D)may be suspended if they are "true" leases
Q4) What are the advantages of leasing?
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Chapter 20: Financing with Derivatives
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Q1) Which of the following securities (if any) is not an example of an option?
A)warrant
B)convertible security
C)right
D)futures contract
Q2) The most basic type of interest rate swap is the:
A)fixed for floating rate swap
B)exchange-rated swap
C)LIBOR for prime rate swap
D)Interest rate rights offering
Q3) Jana owns preferred stock from High Brow Cow Dairy Farms, makers of the finest dairy products.The stock has a par value of $1,250 and a conversion ratio of 25.The stock is currently convertible.The firm's common stock is selling for $57 per share.If Jana converts the preferred stock, what would be the conversion value?
A)$1,250
B)$31,250
C)$2,850
D)$1,425
Q4) What variables affect the call option valuation?
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Chapter 20: A: Financing with Derivatives
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Q1) When considering bond refunding, all of the following are important input items EXCEPT:
A)interest payments of old issue
B)weighted cost of capital
C)interest payments of new issue
D)after-tax cost of debt
Q2) Why is the after-tax cost of debt used in bond refunding analysis?
Q3) 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
Q4) Bond refunding occurs when a company redeems a callable issue and A)sells an equity issue, thereby reducing outstanding debt
B)sells a new issue with a lower coupon rate
C)sells a preferred issue with a low dividend rate
D)none of these is correct
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Chapter 21: Risk Management
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Q1) Marking to market is a procedure for contracts.
A)futures
B)forwards
C)margin
D)implied
Q2) Forward contracts are most common in markets.
A)stock
B)agricultural
C)currency
D)bond
Q3) A futures contract is a(n) contract.
A)implied
B)negotiated
C)standardized
D)variable
Q4) List some nonhedging risk management strategies.
Q5) List several reasons why a firm may choose to employ risk management techniques.
Q6) What options does the buyer of a futures contract have at the time the futures contract matures?
Q7) What is marking-to-market and how is this process guaranteed?
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Chapter 22: International Financial Management
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Q1) Primary sources of supply of British pounds in the foreign exchange market include:
A)British importers who need to convert their pounds into foreign currency to pay for purchases
B)foreign investors who desire to make investments in physical or financial assets in Great Britain
C)speculators who expect British pounds to increase in value relative to other currencies
D)U.S.importers who need to convert dollars to pounds to pay for purchases
Q2) When interest rate parity exists, the forward rate will differ from the spot rate by just enough to .
A)offset the difference in the real rate of return
B)permit the buyer of a covered option to make a profit
C)offset the interest rate differential between the two currencies
D)result in a perfect interest rate arbitrage
Q3) There are two methods used to forecast future exchange rates.What are they and how do companies use them to protect against risk?
Q4) How do market forces support the relative purchasing power parity?
Q5) How does a firm manage economic exposure due to changes in exchange rates?
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Chapter 23: Corporate Restructuring
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Q1) Bankruptcy occurs when the firm
A)is unable to pay its debts
B)files a bankruptcy petition in accordance with the Federal bankruptcy laws
C)is more than 6 months overdue to its creditors
D)is unable to pay its debts and files a bankruptcy petition in accordance with the Federal bankruptcy laws
Q2) What are the total assets and stockholders' equity (in $ millions) if the pooling of interests method had been used as the accounting method for this merger?
A)$130, $63
B)$130, $67
C)$132, $65
D)$132, $67
Q3) A reorganization plan is reviewed by the for fairness and feasibility.
A)bankruptcy court
B)Securities and Exchange Commission
C)Federal Trade Commission
D)bankruptcy court and the SEC
Q4) Explain the difference between a stock purchase and an asset purchase in a merger transaction.Which is preferred and why?
To view all questions and flashcards with answers, click on the resource link above. Page 29