Applied Financial Management
Exam Materials
Course Introduction
Applied Financial Management focuses on the practical implementation of key financial concepts and decision-making tools used by businesses to maximize value and manage risk. The course covers topics such as financial statement analysis, capital budgeting, working capital management, cost of capital, and short- and long-term financing strategies. Students will analyze real-world case studies and apply quantitative techniques to solve financial problems, building skills necessary for sound corporate financial management and strategic planning in dynamic business environments.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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21 Chapters
2273 Verified Questions
2273 Flashcards
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Chapter 1: The Goals and Functions of Financial Management
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105 Flashcards
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Sample Questions
Q1) In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.
A)True
B)False Answer: True
Q2) If a company has a written code of ethics, they will generally avoid ethical problems.
A)True
B)False Answer: True
Q3) The Sarbanes Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to select their preferred candidates to the Board of Directors.
A)True
B)False Answer: False
Q4) Higher return always induces stockholders to invest in a company.
A)True
B)False Answer: False
Page 3
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Chapter 2: Review of Accounting
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130 Flashcards
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Sample Questions
Q1) Book value is the same as A) stockholders' equity.
B) fixed assets minus long-term debt.
C) net worth.
D) current assets minus current debt.
Answer: C
Q2) Assuming a tax rate of 40%, the after-tax cost of interest expense of $1,000,000 is
A) $1,000,000
B) $140,000
C) $600,000
D) $400,000
Answer: C
Q3) Reinvested funds from retained earnings theoretically belong to:
A) bond holders.
B) common stockholders.
C) employees.
D) all of these.
Answer: B
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Chapter 3: Financial Analysis
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126 Flashcards
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Sample Questions
Q1) Refer to the figure above. Using the DuPont method, return on assets (investment) for Marni is approximately
A) 200%
B) 7.5%
C) 3.75%
D) None of these.
Answer: B
Q2) XYZ's receivables turnover is 4x. The accounts receivable at year-end are $600,000. The average collection period is 90 days. What was the sales figure for the year assuming all sales are on credit?
A) $60,000
B) $6,000,000
C) $2,400,000
D) None of these
Answer: C
Q3) Times interest earned is an example of a profitability ratio.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the:
A) pro forma income statement.
B) cash budget.
C) prior balance sheet.
D) statement of retained earnings.
Q2) As the dividend payout ratio declines more external funds are required.
A)True
B)False
Q3) Total production costs should be equal to cost of goods sold in the proforma income statement.
A)True
B)False
Q4) Level production schedules usually have the advantage of reducing overall production costs.
A)True
B)False
Q5) Growth in sales volume prevents a shortage of funds.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Refer to the figure above. The Degree of Combined Leverage is
A) 2.2x
B) 1.9x
C) 2.9x
D) 1.7x
Q2) Refer to the figure above. This firm's break-even point is
A) 445 units
B) 634 units
C) 714 units
D) 180 units
Q3) Firms with a high degree of operating leverage are
A) easily capable of surviving large changes in sales volume
B) usually trading off lower levels of risk for higher profits.
C) significantly affected by changes in interest rates.
D) trading off higher fixed costs for lower per-unit variable costs.
Q4) A high DOL means:
A) there are high labor costs.
B) there is high debt.
C) there is a large amount of equity.
D) there are high fixed costs.
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) An inverted yield curve would suggest that
A) interest rates are expected to rise.
B) interest rates are expected to fall.
C) inflation is expected to rise in the future.
D) long-term rates are being pushed up by federal reserve policy.
Q2) Heavy use of long-term financing generally leads to lower financing costs.
A)True
B)False
Q3) The more short-term financing relative to long-term financing, the more risky the financial structure.
A)True
B)False
Q4) Which of the following is not a condition under which a prudent manager would accept some risk in financing?
A) Predictable cash-flow patterns
B) Inventory is highly perishable
C) Price of inventory is stable
D) Basic access to capital markets
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Chapter 7: Current Asset Management
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Sample Questions
Q1) When a potential customer has a mediocre credit history, a firm should not consider allowing them to become a customer.
A)True
B)False
Q2) Hedging
A) is a way to protect your accounts receivable position.
B) increases risk.
C) is a legal agreement to buy or sell a financial futures contract.
D) can be carried out with a futures contract.
Q3) Minimizing cash balances can improve overall corporate profitability.
A)True
B)False
Q4) Characteristics of a money market deposit account include
A) a lower risk than money market funds.
B) insured by federal agencies.
C) generally a limit of three deposits or withdrawals per month.
D) all of these
Q5) A lock-box is used to safeguard the corporation's marketable securities.
A)True
B)False
Page 9
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Business Book Publishing needs to borrow $800,000 in order to finance its new inventory. Two banks they were considering offered different annual loan terms: Marine Bank offered a 7% loan with a 15% compensating balance to be paid back in quarterly payments. McLean National Bank offered Business Book Publishing a 8.25% loan to be paid back semi-annually. Which loan terms should Business Book Publishing take?
Q2) A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.
A)True
B)False
Q3) From the banker's point of view, short-term bank credit is an excellent way of financing
A) fixed assets.
B) permanent working capital needs.
C) repayment of long-term debt.
D) seasonal bulges in inventory and receivables.
Q4) A compensating balance will be lower in periods of tight money than in periods of credit ease.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Cash flow decisions that ignore the time value of money will probably not be as accurate as those decisions that do rely on the time value of money.
A)True
B)False
Q2) Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.
A)True
B)False
Q3) The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions.
A)True
B)False
Q4) Joe Nautilus has $210,000 and wants to retire. What return must his money earn so he may receive annual benefits of $30,000 for the next 10 years.
A) 12%
B) Between 12% and 13%
C) About 7%
D) Greater than 15%
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
A) below par.
B) at par.
C) above par.
D) what is equal to the face value of the bond plus the value of all interest payments.
Q2) An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32 assuming a constant growth rate of 4%. What is the required rate of return?
A) 10.3%
B) 10.1%
C) 8.1%
D) None of these
Q3) To use a dividend valuation model, a firm must have a constant growth rate and the discount rate must not exceed the growth rate.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Most firms are able to use _____ percent debt in their capital structure without exceeding norms acceptable to creditors and investors.
A) 30-50
B) 40-60
C) 50-70
D) 60-80
Q2) The cost of retained earnings is equal to the required rate of return on a firm's outstanding common stock.
A)True
B)False
Q3) A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (K<sub>p</sub>= D/P<sub>o</sub>+ g).
A)True
B)False
Q4) The cost of new common stock is greater than the cost of outstanding common stock.
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) The net present value profile
A) doesn't work if projects have a negative net present value.
B) is a substitute for the IRR.
C) graphically portrays the relationship between the discount rate and the net present value.
D) two of the above.
Q2) An asset fitting into the 7-year MACRS category was purchased 2 years ago for $72,000. The book value of this asset is now
A) $44,064
B) $31,200
C) $48,317
D) $60,052
Q3) A tax loss on the sale of a depreciable asset used in business or trade may be written off against income.
A)True
B)False
Q4) Capital budgeting is only a concern of finance and accounting personnel.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Computers are helpful for "what if" simulations, but so far they are not able to assess project risk.
A)True
B)False
Q2) An investment with a $500 standard deviation and a $5,000 expected value has higher risk than an investment with a $4,000 standard deviation and a $50,000 expected value.
A)True
B)False
Q3) All of the following are methods of evaluating the risk of a project except:
A) net present value profile
B) Monte Carlo Simulation
C) decision trees
D) coefficient of variation
Q4) Cyclical businesses are likely to have higher costs of capital than firms with less variability in earnings. Therefore, more cyclical firms should typically use a higher discount rate in project evaluation.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) In times of recession, retain earnings decline as a percent of internal funds.
A)True
B)False
Q2) The dollar value of common stock issuances exceeds the level of preferred stock issuances and corporate bond issuances.
A)True
B)False
Q3) The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible as are interest paid on bonds.
A)True
B)False
Q4) Which of the following are benefits of financial intermediaries?
A) Increase market liquidity
B) Provide a direct market for investors
C) Act as agents of the government
D) Only a and b
Q5) Capital markets consist of securities having maturities greater than one year. A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Underpricing occurs
A) when additional shares are to be issued for companies with securities already publicly traded.
B) to aid in the market's reception of the securities.
C) in large secondary offerings.
D) all of these.
Q2) All of the following are disadvantages of going public except
A) the firm may now become active in mergers and acquisitions.
B) the company must make all information available to the public through filings to the SEC and the state.
C) an erosion in value may take place after the initial offering.
D) there is a high cost associated with going public.
Q3) ______________ occurs when a company is broken up into smaller divisions and sold for a profit.
A) Liquidation
B) Internal reorganization
C) Chapter 11
D) Restructuring
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Which of the following is the lowest in priority of claims against a bankrupt firm?
A) A junior mortgage bond
B) A senior debenture
C) Common stock
D) A subordinated debenture
Q2) If a company has promised to pay interest on debt, it must pay the interest even if it shows no profit for the year, or else it may go bankrupt.
A)True
B)False
Q3) Short-term bond yields are generally ______ than long-term bond yields whereas long-term bond prices are generally ________ than short-term bond prices.
A) more volatile; less volatile
B) less volatile; more volatile
C) less volatile; less volatile
D) more volatile; more volatile
Q4) Debentures are commonly issued by small companies.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Sharpe Products has 1 million outstanding shares and 7 directors to be elected. Cumulonimbus Holdings owns 200,000 shares of Sharpe. How many directors can Cumulonimbus elect with cumulative voting?
A) 0
B) 1
C) 2
D) 3
Q2) Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund expansions.
A)True
B)False
Q3) The difference between the rights-on and ex-rights price is equal to the subscription price divided by N.
A)True
B)False
Q4) To the individual recipient, preferred stock dividends offer no advantage over common stock dividends.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?
A) Retained earnings
B) Cash
C) Common stock
D) Dividends-in-arrears
Q2) According to the law, dividends may be funded from:
A) past earnings.
B) current earnings.
C) future earnings.
D) Only a and b.
Q3) Firm X has declared a stock dividend that pays one share of stock for every 5 shares owned. After the stock dividend, earnings per share will
A) remain the same.
B) decline 20%.
C) decline 5%.
D) not enough information.
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Convertible bonds offer minimal risk of loss to the investor due to their floor value.
A)True
B)False
Q2) Expectations of a significant increase in the price of a firm's common stock will result in
A) large conversion premiums for the firm's convertible bonds.
B) small conversion premiums for the firm's convertible bonds.
C) negative conversion premiums for the firm's convertible bonds.
D) no effect at all on conversion premiums.
Q3) The floor value of a bond can change if market interest rates for competitive bonds change.
A)True
B)False
Q4) A convertible bond has both a downside limit (the pure bond value) and an upside limit (the conversion price).
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) An example of a horizontal merger would be
A) Pepsi and Sears.
B) McDonalds and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca Cola and Dr. Pepper.
Q2) In planning mergers, there is a tendency to _____ synergistic benefits.
A) overestimate
B) underestimate C) correctly estimate
D) not estimate
Q3) The desire to expand management and marketing capabilities is a direct financial motive.
A)True
B)False
Q4) A motive for selling stockholders may be the bias against smaller companies.
A)True
B)False
Q5) Synergy is said to take place when the whole is less than the sum of the parts. A)True
B)False
22
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Chapter 21: International Financial Management
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Sample Questions
Q1) All of the following groups are subject to foreign exchange risk except:
A) Importers and exporters
B) Investors
C) MNCs
D) All of these are subject to foreign exchange risk
Q2) If a forward discount is prevalent in U.S. dollars to Swiss Francs:
A) The forward rate is lower than the spot rate
B) The forward rate is higher than the spot rate
C) Markets expect the Swiss Franc to appreciate relative to the dollar
D) A and C
Q3) Eurodollars are
A) United States dollars deposited in foreign banks.
B) foreign dollars deposited in United States banks.
C) investments of common market countries.
D) none of these.
Q4) A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the least amount of political risk.
A)True
B)False
Q5) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
Page 23
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