Applied Financial Management
Final Exam Questions
Course Introduction
Applied Financial Management explores the practical aspects of financial decision-making within organizations, focusing on the analysis, planning, and control of financial resources. The course covers key topics such as capital budgeting, risk assessment, financial statement analysis, working capital management, and valuation of assets and businesses. Through case studies and real-world examples, students learn how to apply financial theories and tools to solve complex business problems, enhance organizational value, and support strategic objectives. The course is designed to equip students with the analytical skills and practical knowledge required for effective financial management in todays dynamic business environment.
Recommended Textbook
Financial Management Theory and Practice 3rd Canadian Edition by Eugene Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following best defines an income trust?
A)a fund that is set up for the purchase of debt for the company
B)a fund that is set up to receive the after-tax dividends of the corporation
C)a fund that is set up to receive the before-tax cash payments of the corporation
D)a fund that holds assets for the corporation
Answer: C
Q2) Which of the following statements best describes financial markets?
A)Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
B)If an investor sells shares of stock through a broker, then this would be an indirect finance transaction.
C)Money market mutual funds have a high degree of default risk.
D)Commercial papers have maturities longer than one year.
Answer: B
Q3) Today,trustee services can be arranged only with trust companies.
A)True
B)False
Answer: False
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) Which statement about the balance sheet is true?
A)The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
B)The balance sheet for a given year tells us how much money the company earned during that year.
C)For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
D)A balance sheet lists the assets that will be converted to cash first and the longest-lived ones last.
Answer: D
Q2) The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time,the income statement shows results over a period of time,and the statement of cash flows reflects changes in the firm's accounts over that period of time.
A)True
B)False
Answer: True
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4
Chapter 3: Analysis of Financial Statements
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Q1) Which of the following statements is correct?
A)If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
B)If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
C)The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
D)If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
Answer: B
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Chapter 4: Time Value of Money
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Q1) Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?
A)$28,532.45
B)$29,959.08
C)$31,457.03
D)$33,029.88
Q2) Your uncle has $300,000 invested at 7.5%,and he now wants to retire.He wants to withdraw $35,000 at the end of each year,beginning at the end of this year.He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account.For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?
A)14.96
B)15.71
C)16.49
D)17.32
Q3) Calculating present value and future value using simple interest will result in a smaller PV and FV than the same calculation using compound interest.
A)True
B)False
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Page 6
Chapter 5: Financial Planning and Forecasting Financial Statements
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Q1) Last year Godinho Corp.had $250 million of sales,and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions,how large could sales have been if the company had operated at full capacity?
A)$312.5
B)$328.1
C)$344.5
D)$361.8
Q2) Last year Wei Guan Inc.had $350 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity.In millions,by how much could Wei Guan's sales increase before it is required to increase its fixed assets?
A)$170.1
B)$179.0
C)$188.5
D)$197.9
Q3) One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.
A)True
B)False
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Chapter 6: Bonds, Bond Valuation, and Interest Rates
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Q1) A bond is currently priced at $800 on a par value of $1,000.Its term to maturity is 10 years and its coupon rate is 10% (stated annually,paid semiannually).If you buy the bond,and hold it to maturity,what would be the yield to maturity?
A)10%
B)12.50%
C)13.81%
D)8%
Q2) Which statement regarding bonds is true?
A)10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.
B)A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else is equal).
C)The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
D)The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
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Page 8
Chapter 7: Risk, Return, and the Capital Asset Pricing Model
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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) A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.
A)True
B)False
Q3) Diversifiable risk is an important factor in the arbitrage pricing model.
A)True
B)False
Q4) Diversification can reduce the riskiness of a portfolio of stocks.
A)True
B)False
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Chapter 8: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Q1) Prock Petroleum's stock has a required return of 13%,and the stock sells for $50 per share.The firm just paid a dividend of $1.00,and the dividend is expected to grow by 30% per year for the next 4 years,so D<sub>4</sub> = $1.00(1.30)<sup>4</sup> = $2.8561.After t = 4,the dividend is expected to grow at a constant rate of X% per year forever.What is the stock's expected constant growth rate after t = 4,i.e.,what is X?
A)7.46%
B)7.85%
C)8.26%
D)8.70%
Q2) Clinton's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $50.00,what is its effective annual (not nominal) rate of return?
A)7.52%
B)7.76%
C)8.00%
D)8.24%
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Page 10
Chapter 9: The Cost of Capital
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Q1) What are flotation costs?
A)They are part of the capital cost calculations for all debt and equity components.
B)They are normally ignored for long-term debt.
C)They are not considered for retained earnings.
D)They are costs associated with the issuance of company stock to members of employee stock purchase plans.
Q2) Suppose a firm uses a single source of capital to fund a project.Which of the following statements is correct?
A)Only the cost of that source should be used to evaluate the project.
B)This project should still be evaluated using the firm's WACC.
C)The average cost of all previously raised capital should be used for evaluation.
D)Book values of the funding source should be used in calculating WACC.
Q3) The cost of equity raised by retaining earnings can be less than,equal to,or greater than the cost of external equity raised by selling new issues of common stock,depending on tax rates,flotation costs,the attitude of investors,and other factors.
A)True
B)False
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Page 11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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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)A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.
B)A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting to find the IRR.
C)If a project's IRR is smaller than the WACC, then its NPV will be positive.
D)A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
Q2) Normal Projects Q and R have the same NPV when the discount rate is zero.However,Project Q's cash flows come in faster than those of R.Therefore,we know that at any discount rate greater than zero,R will have a higher NPV than Q.
A)True
B)False
Q3) Theoretically speaking,hard capital rationing does not exist.
A)True
B)False
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) What will result from an increase in the risk-adjusted discount rate for a risky project?
A)no change in the NPV
B)an increase in the IRR
C)an increase in the NPV
D)a decrease in the NPV
Q2) Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than one of the company's average projects.Also,the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information,which of the following statements is correct?
A)The proposed new project would have more stand-alone risk than the firm's typical project.
B)The proposed new project would increase the firm's corporate risk.
C)The proposed new project would not affect the firm's risk at all.
D)The proposed new project would have less stand-alone risk than the firm's typical project.
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Page 13
Chapter 12: Capital Structure Decisions
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Sample Questions
Q1) The Congress Company has identified two methods for producing playing cards.One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards.The other method would use a less expensive machine (fixed cost = $5,000),but with greater variable costs ($1.50 per deck of cards).If the selling price per deck of cards is the same under each method,at what level of output will the two methods produce the same net operating income (EBIT)?
A)5,000 decks
B)10,000 decks
C)15,000 decks
D)20,000 decks
Q2) Which of the following statements is correct regarding interest tax shields?
A)The benefits of interest tax shields are captured only by debtholders.
B)The benefits of interest tax shields are captured only by equity investors.
C)The benefits of interest tax shields are captured only by CRA.
D)The benefits of interest tax shields are captured by both debt and equity investors.
Q3) The MM model is the same as the Miller model,but with zero corporate taxes.
A)True
B)False
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Chapter 13: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) Sheehan Corp.is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000,and it is committed to maintaining a $2.00 dividend per share.It finances with debt and common equity,but it wants to avoid issuing any new common stock during the coming year.Given these constraints,what percentage of the capital budget must be financed with debt?
A)32.15%
B)33.84%
C)35.63%
D)37.50%
Q2) Becker Financial recently completed a 7-for-2 stock split.Prior to the split,its stock sold for $90 per share.If the total market value was unchanged by the split,what was the price of the stock following the split?
A)$23.21
B)$24.43
C)$25.71
D)$27.00
Q3) Share repurchases result in a decrease in EPS. A)True B)False
Page 15
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Chapter 14: Initial Public Offerings Investment Banking and Financial Restructuring
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Q1) For providing funds to start-up firms,venture capital investors would like to be equity holders getting stocks rather than just being lenders.
A)True
B)False
Q2) The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price.Since this dilutes the value of the public stockholders,it "carves out" some of their value.
A)True
B)False
Q3) Going public establishes a market value for the firm's shares,and it also ensures that a liquid market will continue to exist for the firm's shares.This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
Q4) Best efforts deals are commonly used by well-known,established issuers. A)True
B)False
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Chapter 15: Lease Financing
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Q1) Which type of terms are often included in operating leases?
A)terms including maintenance of the equipment by the lessor
B)terms including full amortization over the life of the lease
C)terms including very high penalties if the lease is cancelled
D)terms including restrictions on how much the leased property can be used
Q2) Sutton Corporation,which has a zero tax rate due to tax loss carryforwards,is considering a 5-year,$6,000,000 bank loan to finance service equipment.The loan has an interest rate of 10% and would be amortized over 5 years,with five end-of-year payments.Sutton can also lease the equipment for five end-of-year payments of $1,790,000 each.How much larger or smaller is the bank loan payment than the lease payment? (Hint: Subtract the loan payment from the lease payment.)
A)$177,169
B)$196,854
C)$207,215
D)$217,576
Q3) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under CRA guidelines.
A)True
B)False
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Page 17
Chapter 16: Capital Market Financing: Hybrid and Other Securities
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Q1) Refer to Scenario: Saunders.Based on your answers to the three preceding questions,what is the minimum price (or "floor" price) at which the Saunders bonds should sell?
A)$734.89
B)$773.57
C)$814.29
D)$857.14
Q2) The design of stepped-up exercise prices is to control the timing of equity capital raised for the firm.
A)True
B)False
Q3) A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.
A)True
B)False
Q4) The ultimate credit risk of asset-backed securities lies with the special purpose vehicle that is the central payor.
A)True
B)False
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Chapter 17: Working Capital Management and Short-Term Financing
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Q1) Firms must have high credit quality in order to issue commercial paper; therefore,all commercial papers are equally risky.
A)True
B)False
Q2) Which of the following borrowers benefits the most from a revolving line of credit?
A)a local grocery retailer located in downtown Toronto
B)an owner of a gift shop with the majority of its annual sales during Christmas season
C)an ice cream seller whose business is located in a Niagara Falls resort
D)a manufacturer of hand tools whose sales are generally evenly distributed throughout the year
Q3) Other things held constant,which strategy would tend to reduce the cash conversion cycle?
A)maintaining the same level of receivables as sales decline
B)placing larger orders for raw materials to take advantage of price breaks
C)taking all discounts that are offered
D)not taking all discounts that are offered to get more trade credit
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Chapter 18: Current Asset Management
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Q1) Suppose you have $10,000 in your chequing account.You write a cheque for $2,000 and deposit $3,000.What is your disbursement float?
A)$2,000
B)$3,000
C)$7,000
D)$8,000
Q2) Providing much higher yields than operating assets,marketable securities are often held in sizable amounts.
A)True
B)False
Q3) Outsourcing is a practice of selling a significant percentage of intermediate components to outside suppliers from the in-house productions.
A)True
B)False
Q4) Refer to Scenario: Ontario Corp.What is BC Corp.'s EOQ?
A)207
B)197
C)1,197
D)4,000
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Chapter 19: Financial Options and Applications in Corporate Finance
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Q1) Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share.If you bought this option for $510.25 and Delva's stock price actually dropped to $60,what would be your pre-tax net profit?
A)-$510.25
B)$1,989.75
C)$2,089.24
D)$2,193.70
Q2) The current price of a stock is $22,and at the end of 1 year its price will be either $27 or $17.The annual risk-free rate is 6.0%,based on daily compounding.A 1-year call option on the stock,with an exercise price of $22,is available.Based on the binominal model,what is the option's value?
A)$2.43
B)$2.70
C)$2.99
D)$3.29
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Page 21
Chapter 20: Enterprise Risk Management
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Q1) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
Q2) Which of the following best describes a natural hedge?
A)a situation in which only farm products are hedged
B)a situation in which total risk is reduced by a derivatives transaction between two parties
C)a hedge on two strongly related currencies, such as, the USD and the CAD
D)a hedge transaction in which arbitrage profits are naturally occurring.
Q3) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q4) An option is a definite agreement leading to a firm completion of the transaction.
A)True
B)False
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Page 22
Chapter 21: International Financial Management
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Q1) 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
Q2) A product sells for $7,500 in Canada.The exchange rate is $1USD:$1.33CAD.If the law of one price holds,what is the price of the product in United States?
A)$5,639 USD
B)$9,975 USD
C)$6,750 USD
D)$7,162 USD
Q3) An American citizen is travelling to Canada for 6 months.If the exchange rate is $1USD:$1.33CAD,what is the value (in CAD) of his or her travel spending money (assume he or she has saved $25,000 for the trip to Canada)?
A)$25,000 CAD
B)$33,250 CAD
C)$18,797 CAD
D)$33,250 USD
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Page 23
Chapter 22: Corporate Valuation and Governance
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Q1) Akyol Corporation is undergoing a restructuring,and its free cash flows are expected to be unstable during the next few years.However,FCF is expected to be $50 million in Year 5,i.e.,FCF at t = 5 equals $50 million,and the FCF growth rate is expected to be constant at 6% beyond that point.If the weighted average cost of capital is 12%,what is the horizon value (in millions) at t = 5?
A)$757
B)$797
C)$839
D)$883
Q2) Value-based management focuses on sales growth,profitability,capital requirements,the weighted average cost of capital,and the dividend growth rate. A)True
B)False
Q3) Leverage has unclear impact on corporate value as debt can reduce one aspect of agency costs (wasteful spending),but it may increase another (underinvestment).
A)True B)False
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Chapter 23: Mergers,Acquisitions,and Restructuring
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Q1) Which of the following best defines a joint venture?
A) a joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.
B)A joint venture is one in which two , or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually expansive in scope.
C)A joint venture is one in which two, or sometimes more, independent companies agree to merge into a single firm , usually wider in scope.
D)A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope .
Q2) Currently,mergers in Canada can be accounted for using either the purchase method or the pooling method.
A)True
B)False
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Chapter 24: Decision Trees,real Options and Other Capital Budgeting Techniques
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Q1) Refer to Scenario: Diplomat.Based on the above data,what is the project's net present value?
A)-$1,312,456
B)-$1,104,607
C)-$875,203
D)$105,999
Q2) Refer to Scenario: Oklahoma.Based on the above information,what is the F-200's expected net present value?
A)-$6,678
B)-$3,251
C)$15,303
D)$20,004
Q3) Which circumstance will NOT increase the value of a real option?
A)lengthening the time in which a real option must be exercised
B)an increase in the volatility of the underlying source of risk
C)an increase in the risk-free rate
D)an increase in the cost of obtaining the real option
Q4) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
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