Advanced Financial Management Test
Questions
Course Introduction
Advanced Financial Management delves into complex financial decision-making processes within organizations, covering topics such as capital structure optimization, risk management, mergers and acquisitions, corporate valuation, and international financial strategies. The course integrates theoretical models with real-world case studies to develop students abilities in critical analysis and strategic financial planning. Emphasis is placed on applying quantitative techniques and financial tools to maximize firm value, manage financial risks, and support long-term organizational growth. Through a combination of lectures, discussion, and project work, students gain the advanced skills essential for financial leadership roles.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals,Firm A is a financial intermediary.
A)True
B)False
Answer: True
Q2) Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?
A) Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers' shareholders (the ex-partners) will now be exposed to less liability.
D) Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.
Answer: C
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Chapter 2: Financial Statements, cash Flow, and Taxes
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Sample Questions
Q1) NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets.All of these assets were required in operations.The firm's current liabilities consisted of $475,000 of accounts payable,$375,000 of 6% short-term notes payable to the bank,and $150,000 of accrued wages and taxes.Its remaining capital consisted of long-term debt and common equity.What was NNR's total investor-provided operating capital?
A) $4,694,128
B) $4,941,188
C) $5,201,250
D) $5,475,000
E) $5,748,750
Answer: D
Q2) The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.
A)True
B)False
Answer: False
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Companies Heidee and Leaudy have the same total assets,sales,operating costs,and tax rates,and they pay the same interest rate on their debt.However,company Heidee has a higher debt ratio.Which of the following statements is CORRECT?
A) If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE.
B) Given this information, Leaudy must have the higher ROE.
C) Company Leaudy has a higher basic earning power ratio (BEP).
D) Company Heidee has a higher basic earning power ratio (BEP).
E) If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.
Answer: A
Q2) Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?
A) $10,155.68
B) $10,690.19
C) $11,252.83
D) $11,845.09
E) $12,468.51
Q2) Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions)will they be 5 years later?
A) $271.74
B) $286.05
C) $301.10
D) $316.16
E) $331.96
Q3) A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.
A)True
B)False
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Page 6
Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) Which of the following statements is CORRECT?
A) All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
B) All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
C) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
D) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
E) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.
Q2) Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.
A)True
B)False
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Chapter 6: Risk and Return
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Questions
Q1) Assume that two investors each hold a portfolio,and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0,while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same,then the two investors face the same amount of risk.However,the holders of either portfolio could lower their risks,and by exactly the same amount,by adding some "normal" stocks with beta = 1.0.
A)True
B)False
Q2) It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.
A)True
B)False
Q3) The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.
A)True
B)False
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Chapter 7: Valuation of Stocks and Corporations
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Q1) Which of the following statements is CORRECT?
A) Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
B) The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
C) One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.
D) One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.
E) A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?
A) The price of the call option will increase by more than $2.
B) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
C) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
D) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
E) The price of the call option will increase by $2.
Q2) If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.
A)True B)False
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
B) Suppose some of a publicly-traded firm's stockholders are not diversified; they hold only the one firm's stock. In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's intrinsic value.
C) The cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity.
D) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.
E) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.
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11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) If a project has "normal" cash flows, then its MIRR must be positive.
B) If a project has "normal" cash flows, then it will have exactly two real IRRs.
C) The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.
D) If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.
E) If a project has "normal" cash flows, then its IRR must be positive.
Q3) The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.
A)True
B)False
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?
A) A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm's current products.
B) A firm must obtain new equipment for the project, and $1 million is required for shipping and installing the new machinery.
C) A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected.
D) A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm's other products.
E) A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes.
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13
Chapter 12: Corporate Valuation and Financial Planning
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Q1) Which of the following is NOT one of the steps taken in the financial planning process?
A) Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
B) Determine the amount of capital that will be needed to support the plan.
C) Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
D) Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
E) Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.
Q2) The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.
A)True
B)False
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Chapter 13: Agency Conflicts and Corporate Governance
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Q1) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q3) A poison pill is also known as a corporate restructuring. A)True B)False
Q4) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock.
A)True
B)False
Q2) Which of the following statements is correct?
A) An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers.
B) Stock repurchases tend to reduce financial leverage.
C) If a company declares a 2-for-1 stock split, its stock price should roughly double.
D) One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.
E) If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.
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Chapter 15: Capital Structure Decisions
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Q1) If a firm utilizes debt financing,an X% decline in earnings before interest and taxes (EBIT)will result in a decline in earnings per share that is larger than X.
A)True
B)False
Q2) If Miller and Modigliani had incorporated the costs of bankruptcy into their model,it is unlikely that they would have concluded that 100% debt financing is optimal.
A)True
B)False
Q3) The firm's target capital structure should be consistent with which of the following statements?
A) Minimize the cost of debt (r<sub>d</sub>).
B) Obtain the highest possible bond rating.
C) Minimize the cost of equity (r<sub>s</sub>).
D) Minimize the weighted average cost of capital (WACC).
E) Maximize the earnings per share (EPS).
Q4) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Sample Questions
Q1) Net working capital is defined as current assets divided by current liabilities. A)True
B)False
Q2) A lockbox plan is most beneficial to firms that
A) have widely dispersed manufacturing facilities.
B) have a large marketable securities portfolio and cash to protect.
C) receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
D) have customers who operate in many different parts of the country.
E) have suppliers who operate in many different parts of the country.
Q3) The longer its customers normally hold inventory,the longer the credit period supplier firms normally offer.Still,suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered,this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.
A)True
B)False
Q4) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
Page 18
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Chapter 17: Multinational Financial Management
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Q1) Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.
A)True
B)False
Q2) When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
Q3) Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals 0.71 U.S.dollars.If purchasing power parity (PPP)holds,what is the price of hockey pucks in the United States?
A) $14.79
B) $63.00
C) $74.55
D) $85.88
E) $147.88
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Q1) If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision,and if the NPV of refunding is positive,then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.
A)True
B)False
Q2) The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt,in part because there is relatively little risk of not realizing the interest savings.
A)True
B)False
Q3) Suppose a company issued 30-year bonds 4 years ago,when the yield curve was inverted.Since then long-term rates (10 years or longer)have remained constant,but the yield curve has resumed its normal upward slope.Under such conditions,a bond refunding would almost certainly be profitable.
A)True
B)False
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) To finance the construction of a new plant,Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.If the firm wants its ex-rights price to be $50,what subscription price must it set on the new shares?
A)$29.55
B)$33.78
C)$39.28
D)$41.80
E)$50.00
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21
Chapter 19: Lease Financing
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Q1) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
Q2) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
Q3) Leasing is typically a financing decision and not a capital budgeting decision.Thus,the availability of lease financing cannot affect the size of the capital budget.
A)True
B)False
Q4) A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.
A)True
B)False
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Page 22
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Q1) Which of the following statements is most CORRECT?
A) One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.
B) The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.
C) The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.
D) Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.
E) Warrants have an option feature but convertibles do not.
Q2) A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued.Most traded warrants are originally attached to bonds or preferred stocks.
A)True
B)False
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Page 23
Chapter 21: Dynamic Capital Structures
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Q1) The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a rate of 5%,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is Firm L's cost of equity?
A) 11.4%
B) 12.0%
C) 12.6%
D) 13.3%
E) 14.0%
Q2) The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what would Firm L's total value be if it had no debt?
A) $358,421
B) $377,286
C) $397,143
D) $417,000
E) $437,850
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Page 24
Chapter 22: Mergers and Corporate Control
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Q1) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True
B)False
Q2) Which of the following statements is most CORRECT?
A) Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
B) Defensive mergers are designed to make a company less vulnerable to a takeover.
C) Hostile mergers always create value for the acquiring firm.
D) In a tender offer, the target firm's management always remain after the merger is completed.
E) A conglomerate merger is one where a firm combines with another firm in the same industry.
Q3) Although goodwill created in a merger may not be amortized for shareholder reporting purposes,it may be amortized for Federal tax purposes.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) A commercial bank recognizes that its net income suffers whenever interest rates increase.Which of the following strategies would protect the bank against rising interest rates?
A) Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
B) Purchase principal only (PO) strips that decline in value whenever interest rates rise.
C) Enter into a short hedge where the bank agrees to sell interest rate futures.
D) Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
E) Buying inverse floaters.
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07.What is the implied annual interest rate inherent in the futures contract?
A) 6.86%
B) 7.22%
C) 7.60%
D) 8.00%
E) 8.40%
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q2) Bankruptcy plays no role in settling labor disputes and product liability suits.Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
Q3) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q4) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Assume that the market is in equilibrium and that stock betas can be estimated with historical data.The returns on the market,the returns on United Fund (UF),the risk-free rate,and the required return on the United Fund are shown below.Based on this information,what is the required return on the market,r<sub>M</sub>? \(\begin{array} { l c r } \text { Year } & \text { Market } & { U F } \\
2008& -9 \% & - 14 \% \\
2009 & 11 \% & 16\% \\ 2010 & 15 \% & 22\% \\
2011 & 5 \% & 7 \% \\
2012 & - 1 \% & -2 \% \end{array}\)
\(\mathrm { r } _ { \mathrm { RF } : } \mathrm { 7.00 \%} \) \(
\)\( \quad \)\( \quad \) \(r _ { \text {United } } : 15.00 \%\)
A) 10.57%
B) 11.13%
C) 11.72%
D) 12.33%
E) 12.95%
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Chapter 26: Real Options
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Q1) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
Q2) Which one of the following is an example of a "flexibility" option?
A) A company has an option to close down an operation if it turns out to be unprofitable.
B) A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change.
C) A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.
D) A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.
E) A company has an option to invest in a project today or to wait a year.
Q3) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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Q1) If sales are seasonal,the days sales outstanding will fluctuate from month to month,even if the amount of time customers take to pay remains unchanged.
A)True
B)False
Q2) DSO analysis of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.
A)True
B)False
Q3) The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q4) The collection process,although sometimes difficult,is a fairly inexpensive component of doing business.
A)True
B)False
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Q1) New England Charm,Inc.specializes in selling scented candles.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy? Ortering cost \( \quad \) \( \quad \) \(\quad = \$ 10\) per orter
Carring cost \( \quad \) \( \quad \) \( \quad \)\( \quad \)\(= 20 \%\) of purchase price
purchase price \( \quad \) \( \quad \)\( \quad \) \(= \$ 10\) per unit
Tatal sales for year \( \quad \) \( \quad \) \(= 1,000\) urits
Sefety stack \( \quad \) \( \quad \)\( \quad \) \(\quad = 0\)
A) Total costs will be the same, since the current policy is optimal.
B) Total costs under the current policy will be less than total costs under the EOQ by $10.
C) Total costs under the current policy exceed those under the EOQ by $3.
D) Total costs under the current policy exceed those under the EOQ by $10.
E) Cannot be determined due to insufficient information.
Q2) If a company increases its safety stock,then its average inventory will go up.
A)True
B)False
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Chapter 29: Pension Plan Management
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Q1) Which of the following statements about pension plans if any,is incorrect?
A) Under a defined benefit plan, the employer agrees to give retirees a specifically defined benefit, such as $500 per month or 50 percent of the employee's final salary.
B) A portable pension plan is one that an employee can carry from one employer to another.
C) An employer's obligation is satisfied under a defined contribution plan when it makes the required contributions to the plan. The risk of inadequate investment returns is borne by the employee.
D) If assets exceed the present value of benefits, the pension plan is fully funded.
E) A defined contribution plan is, in effect, a savings plan that is funded by employers, although many plans also permit additional contributions by employees.
Q2) From a pure cost standpoint,a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
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Chapter 30: Financial Management in Not For Profit
Businesses
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Q1) Which of the following statements about project risk analysis in not-for-profit firms is incorrect?
A) A project's corporate beta measures the contribution of the project to the overall corporate risk of the firm.
B) A project's corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.
C) A project's corporate beta is defined as ( \(\sigma\)<sub>P</sub>/ \(\sigma\)<sub>F</sub>)r<sub>PF</sub>, where \(\sigma\)<sub>P</sub> is the standard deviation of the project's returns, \(\sigma\)<sub>F</sub> is the standard deviation of the firm's returns, and r<sub>PF</sub> is the correlation among the two sets of returns.
D) In practice, it is usually difficult, if not impossible, to directly measure a project's corporate risk, so project risk analysis typically focuses on stand-alone risk.
E) The market risk of a project is not relevant to not-for-profit firms.
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