Applied Financial Management Exam
Preparation Guide
Course Introduction
Applied Financial Management is a comprehensive course designed to equip students with practical skills and knowledge in managing the financial resources of organizations. The course covers essential topics such as financial analysis, planning and forecasting, working capital management, capital budgeting, risk assessment, and financing strategies. Through case studies, real-world scenarios, and financial modeling, students learn to apply financial concepts and tools to make informed business decisions, optimize capital structure, and maximize shareholder value. Ideal for those seeking careers in corporate finance, investment banking, or financial consulting, this course bridges the gap between theoretical finance principles and their practical applications in the modern business environment.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) 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
Q2) The form of organization for a business is not an important issue,as this decision has very little effect on the income and wealth of the firm's owners.
A)True
B)False
Answer: False
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Chapter 2: Financial Statements, cash Flow, and Taxes
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Sample Questions
Q1) Swinnerton Clothing Company's balance sheet showed total current assets of $2,250,all of which were required in operations.Its current liabilities consisted of $575 of accounts payable,$300 of 6% short-term notes payable to the bank,and $145 of accrued wages and taxes.What was its net operating working capital that was financed by investors?
A) $1,454
B) $1,530
C) $1,607
D) $1,687
E) $1,771
Answer: B
Q2) Net operating profit after taxes (NOPAT)is the amount of net income a company would generate from its operations if it had no interest income or interest expense. A)True
B)False
Answer: True
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 3.1.What is the firm's cash flow per share?
A) $10.06
B) $10.59
C) $11.15
D) $11.74
E) $12.35
Answer: E
Q2) Suppose firms follow similar financing policies,face similar risks,have equal access to capital,and operate in competitive product and capital markets.Under these conditions,then firms that have high profit margins will tend to have high asset turnover ratios,and firms with low profit margins will tend to have low turnover ratios.
A)True
B)False
Answer: False
Q3) High current and quick ratios always indicate that a firm is managing its liquidity position well.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time Value of Money
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Sample
Questions
Q1) American Express and other credit card issuers must by law print the Annual Percentage Rate (APR)on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?
A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%
Q2) Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
A)True
B)False
Q3) A "growing annuity" is any cash flow stream that grows over time. A)True
B)False
Q4) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
A)True
B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where r<sub>d</sub> = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
B) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
C) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.
D) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.
E) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where r<sub>d</sub> = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
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Chapter 6: Risk and Return
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Sample Questions
Q1) Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r<sub>M</sub> F-r<sub>RF</sub>)were to increase but the risk-free rate (r<sub>RF</sub>)remained constant,which of the following would occur?
A) The required return would decrease by the same amount for both Stock A and Stock B.
B) The required return would increase for Stock A but decrease for Stock B.
C) The required return on Portfolio P would remain unchanged.
D) The required return would increase for Stock B but decrease for Stock A.
E) The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
Q2) Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?
A) 11.36%
B) 11.65%
C) 11.95%
D) 12.25%
E) 12.55%
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Chapter 7: Valuation of Stocks and Corporations
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Sample Questions
Q1) National Advertising just paid a dividend of D<sub>0</sub> = $0.75 per share,and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25,the required return on the market is 10.50%,and the risk-free rate is 4.50%.What is the company's current stock price?
A) $14.52
B) $14.89
C) $15.26
D) $15.64
E) $16.03
Q2) If D<sub>0</sub> = $2.25,g (which is constant)= 3.5%,and P<sub>0</sub> = $50,what is the stock's expected dividend yield for the coming year?
A) 4.42%
B) 4.66%
C) 4.89%
D) 5.13%
E) 5.39%
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Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) 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
Q2) Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?
A) The options with the $25 strike price will sell for less than the options with the $35 strike price.
B) The options with the $25 strike price have an exercise value greater than $5.
C) The options with the $35 strike price have an exercise value greater than $0.
D) If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
E) The options with the $25 strike price will sell for $5.
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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 percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt.
B) The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets.
C) There is an "opportunity cost" associated with using reinvested earnings, hence they are not "free."
D) The WACC as used in capital budgeting would be simply the after-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year.
E) The WACC as used in capital budgeting is an estimate of a company's before-tax cost of capital.
Q2) The before-tax cost of debt,which is lower than the after-tax cost,is used as the component cost of debt for purposes of developing the firm's WACC.
A)True B)False
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11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A) The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
B) If a project's NPV is greater than zero, then its IRR must be less than the WACC.
C) If a project's NPV is greater than zero, then its IRR must be less than zero.
D) The NPVs of relatively risky projects should be found using relatively low WACCs.
E) A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.
Q2) When evaluating mutually exclusive projects,the modified IRR (MIRR)always leads to the same capital budgeting decisions as the NPV method,regardless of the relative lives or sizes of the projects being evaluated.
A)True
B)False
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
B) A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank's other offices.
C) A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
D) If sunk costs are considered and reflected in a project's cash flows, then the project's calculated NPV will be higher than it otherwise would be.
E) An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
Q2) The coefficient of variation,calculated as the standard deviation of expected returns divided by the expected return,is a standardized measure of the risk per unit of expected return.
A)True
B)False
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Page 13
Chapter 12: Corporate Valuation and Financial Planning
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Sample Questions
Q1) One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.
A)True
B)False
Q2) As long as a firm does not pay out 100% of its earnings,the firm's annual profit that is retained in the business (i.e.,the addition to retained earnings)is another source of funds for a firm's expansion.
A)True
B)False
Q3) Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence,they have a greater need for external financing.There are currently no alternatives for these types of firms to lower their asset requirements.
A)True
B)False
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14
Chapter 13: Agency Conflicts and Corporate Governance
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Sample Questions
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) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
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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Q1) Which of the following statements is correct?
A) One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
B) An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
C) If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
D) Stock repurchases make the most sense at times when a company believes its stock is undervalued.
E) Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
Q2) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used. A)True B)False
Q2) Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value.Right now,Cartwright has a capital structure that consists of 20% debt and 80% equity,based on market values.(Its D/S ratio is 0.25.)The risk-free rate is 6% and the market risk premium,r<sub>M</sub> -r<sub>RF</sub>,is 5%.Currently the company's cost of equity,which is based on the CAPM,is 12% and its tax rate is 40%.What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
A) 13.00%
B) 13.64%
C) 14.35%
D) 14.72%
E) 15.60%
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Page 17
Chapter 16: Supply Chains and Working Capital Management
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Sample Questions
Q1) Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S.,and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million,and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15,000,what pre-tax net annual savings would be realized?
A) $29,160
B) $32,400
C) $36,000
D) $40,000
E) $44,000
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.
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Chapter 17: Multinational Financial Management
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Sample Questions
Q1) Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
A) $0
B) $1,834.86
C) $4,517.26
D) $5,712.31
E) $7,547.17
Q2) Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially,the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
A)True
B)False
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Page 19
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Q1) Which of the following statements is most CORRECT?
A) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
B) Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
C) The SEC requires that all private placements be handled by a registered investment banker.
D) Private placements can generally bring in funds faster than is the case with public offerings.
E) In a private placement, securities are sold to private (individual) investors rather than to institutions.
Q2) The term "leaving money on the table" refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm's new stock offering.The banker is,in effect,"buying the job" with the low bid and thus not getting all the money his firm would normally earn on the job.
A)True
B)False
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. \(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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21
Chapter 19: Lease Financing
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Q1) Which of the following statements is most CORRECT?
A) Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
B) The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
C) Capital, or financial, leases generally provide for maintenance by the lessor.
D) A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.
E) Firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.
Q2) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles
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Q1) Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.
A)True
B)False
Q2) Potter & Lopez Inc.just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?
A) $3.76
B) $3.94
C) $4.14
D) $4.35
E) $4.56
Q3) The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.
A)True
B)False
Page 23
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Chapter 21: Dynamic Capital Structures
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Q1) The Miller model begins with the MM model with taxes and then adds personal taxes.
A)True
B)False
Q2) In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
Q3) MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.
A)True
B)False
Q4) Other things held constant,an increase in financial leverage will increase a firm's market (or systematic)risk as measured by its beta coefficient.
A)True
B)False
Q5) The MM model is the same as the Miller model,but with zero corporate taxes.
A)True
B)False
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Chapter 22: Mergers and Corporate Control
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Q1) The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.
A)True
B)False
Q2) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
Q3) Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.
A)True
B)False
Q4) If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.
A)True
B)False
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25
Chapter 23: Enterprise Risk Management
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Q1) Which of the following statements is most CORRECT?
A) Futures contracts generally trade on an organized exchange and are marked to market daily.
B) Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
C) There are futures contracts for currencies but no forward contracts for currencies.
D) Futures contracts don't have any margin requirements but forward contracts do.
E) One advantage of forward contracts is that they are default free.
Q2) Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09.What is the implied annual interest rate inherent in this futures contract?
A) 6.32%
B) 6.65%
C) 7.00%
D) 7.35%
E) 7.72%
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) Bankruptcy laws have been used to help reach settlements in major product liability lawsuits.By using financial projections to show that contingent claims against the company jeopardize its existence,agreements are reached,partially satisfying claimants,and allowing the firm to continue operating.
A)True
B)False
Q2) What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act? 1 is the highest claim,5 is the lowest.
(1)Trustees' costs to administer and operate the firm.
(2)Common stockholders.
(3)General,or unsecured,creditors.
(4)Secured creditors,who have a claim to the proceeds from the sale of specific property pledged to secure a loan.
(5)Taxes due to federal and state governments.
A) 5, 4, 1, 3, 2
B) 4, 1, 5, 3, 2
C) 5, 1, 4, 2, 3
D) 1, 5, 4, 3, 2
E) 1, 4, 3, 5, 2
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Page 27
Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by managerial actions.
A)True
B)False
Q2) Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20.She is in the process of buying 100 shares of Safety Corp.at $10 a share and adding it to her portfolio.Safety has an expected return of 15.0% and a beta of 2.00.The total value of your current portfolio is $9,000.What will the expected return and beta on the portfolio be after the purchase of the Safety stock? r<sub>p</sub> b<sub>p</sub>
A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
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Page 28
Chapter 26: Real Options
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Q1) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q2) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q3) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
Q4) Real options are most valuable when the underlying source of risk is very low. A)True
B)False
Q5) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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29 Verified Questions
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Sample Questions
Q1) When deciding whether to offer a discount for cash payment,a firm must balance the profits from additional sales with the lost revenues from the discount.
A)True B)False
Q2) The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.
A)True B)False
Q3) No Tree Too Tall,Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?
A) 9.50%
B) 10.19%
C) 15.22%
D) 16.99%
E) 22.05%
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Sample Questions
Q1) Humphrey's Housing has been practicing cash management for some time by using the Baumol model for determining cash balances.Some time ago,the model called for an average balance (C*/2)of $500; at that time,the rate on marketable securities was 4 percent.A rapid increase in interest rates has driven the interest rate up to 9 percent.What is the appropriate average cash balance now?
A) $200
B) $333
C) $414
D) $500
E) $666
Q2) A just-in-time system is designed to stretch accounts payable as long as possible. A)True
B)False
Q3) The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates.
A)True
B)False
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Chapter 29: Pension Plan Management
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Q1) 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
Q2) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio.One way to incorporate risk into performance measurement is to examine the portfolio's alpha,which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
Q3) Under a defined contribution plan,employees agree to contribute some percentage of their salaries,up to 20 percent,to the firm's pension fund.
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 a not-for-profit firm's cost of capital estimate is most correct?
A) The capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
B) The cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 - T in the WACC estimate to reflect the fact that such firms do not pay taxes.
C) Equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
D) Not-for-profit firms have a zero cost of capital.
E) Since a not-for-profit firm has no shareholders, its WACC estimate does not include a cost of equity (fund capital) estimate.
Q2) The primary goal of investor-owned firms is shareholder wealth maximization,while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example,to provide health care services to the communities served.
A)True
B)False
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