Applied Financial Management
Question Bank
Course Introduction
Applied Financial Management is a course designed to provide students with practical knowledge and skills in analyzing, planning, and managing the financial activities of organizations. The course covers key concepts such as financial statement analysis, budgeting, working capital management, capital structure, investment decisions, and risk assessment. Students engage with real-world case studies and financial modeling exercises to develop effective decision-making strategies, enhance their understanding of financial markets, and learn techniques for optimizing organizational value. This course equips students for careers in corporate finance, banking, investment, and financial consulting by emphasizing practical applications and current financial management tools.
Recommended Textbook
Foundations of Financial Management 10th Canadian Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Q1) The primary market includes the sale of securities by way of initial public offerings. A)True
B)False Answer: True
Q2) Financial markets exist as a vast global network of individuals and financial institutions that may be lenders,borrowers,or owners of public companies worldwide.
A)True
B)False Answer: True
Q3) Businesses will increasingly rely on B2B Internet applications to speed up cash flows. A)True
B)False Answer: True
Q4) Issues over corporate governance are often agency problems. A)True
B)False Answer: True
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Chapter 2: Review of Accounting
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Q1) Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends.
A)True
B)False
Answer: False
Q2) Marketable securities are temporary investments of excess cash and are carried at the lower of cost or market.
A)True
B)False
Answer: True
Q3) Amortization is a source of cash inflow because:
A) it is a tax-deductible noncash expense.
B) it supplies cash for future asset purchases.
C) it is a tax-deductible cash expense.
D) it is a taxable expense.
Answer: A
Q4) What is a tax savings?
Answer: A tax savings is the reduction of taxes otherwise payable as a result of an allowable deduction of an expense from taxable income.
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Chapter 3: Financial Analysis
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Q1) Asset utilization ratios relate balance sheet assets to income statement sales.
A)True
B)False
Answer: True
Q2) Juniper,Ltd.report total sales of $10,000,000 in the prior year.If these sales were 15.50X total capital assets what was the company's capital asset position in the year?
A) $15,000,000
B) $155,000,000
C) $645,161
D) $6,451,613
Answer: C
Q3) Megaframe's return on equity is:
A) 44.44%.
B) 80.00%.
C) 50.05%.
D) 100.0%.
Answer: A
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Chapter 4: Financial Forecasting
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Q1) A firm has beginning inventory of 300 units at a cost of $11 each.Production during the period was 650 units at $12 each.If sales were 800 units,what is the value of the ending inventory using FIFO?
A) $1,800
B) $3,250
C) $3,600
D) $7,800
Q2) Level production schedules usually have the advantage of reducing overall production costs.
A)True
B)False
Q3) Explain how to best derive a sales projection.
Q4) The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
Q5) The cost of oil is very important in projecting manufacturing,transportation,and production costs of a company.How would you propose reducing reliance on variable oil prices to improve financial forecasting?
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Chapter 5: Operating and Financial Leverage
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Q1) Leverage is a strategic choice made by management based on assessment of risk and potential positive cash flows and the availability of financing
A)True
B)False
Q2) Firms with cyclical sales should employ a high degree of leverage.
A)True
B)False
Q3) The Degree of Financial Leverage (DFL)is:
A) 3.50x.
B) 1.40x.
C) 1.95x.
D) 1.58x.
Q4) ECG has a contribution margin of $196,000.If ECG earned $87,000 before taxes in the year,what is the firm's Degree of Combined Leverage?
A) 2.26x
B) 1.27x
C) 0.44x
D) 1.29x
Q5) Compute his break-even point in dollars.
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Chapter 6: Working Capital and the Financing Decision
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Q1) A firm will usually increase the ratio of short-term debt to long-term debt when:
A) short-term debt has a lower cost than long-term equity.
B) the term structure is inverted and expected to shift down.
C) the term structure is upward sloping and expected to shift up.
D) the firm is undertaking a large capital budgeting project.
Q2) Expected value techniques allow consideration of more than one possible outcome.
A)True
B)False
Q3) Immediate access to capital markets allows greater risk-taking capability.
A)True
B)False
Q4) The behaviour of various kinds of financial institutions determines the shape of the yield curve,according to the segmentation theory.
A)True
B)False
Q5) A normal yield curve is downward sloping to the right.
A)True
B)False
Q6) What influences the amount of liquidity in the firm?
Page 8
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Chapter 7: Current Asset Management
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Q1) Explain what a float is and what causes it to occur.
Q2) One of the first considerations in cash management is:
A) to have as much cash as possible on hand.
B) synchronization of cash inflows and cash outflows.
C) profitability.
D) to put any excess cash into accounts receivable.
Q3) Which of the following is not a valid quantitative measure of accounts receivable collection policies?
A) Average collection period
B) Aging of accounts receivables
C) Ratio of debt to equity
D) Ratio of bad debts to credit sales
Q4) AC's average AR is ______________.
A) $3,238,999
B) $1,486,310
C) $1,698,640
D) $15,500,000
Q5) Describe and explain several benefits and downsides of a Just-in-Time inventory program.
Page 9
Q6) SWIFT stands for the Society for Worldwide International Funds Transfer.
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Chapter 8: Sources of Short-Term Financing
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Q1) Large firms tend to be:
A) net users of trade credit.
B) net suppliers of trade credit.
C) firms with high levels of profitability.
D) firms with low levels of inventory turnover and accounts receivable turnover.
Q2) Which of the following is not a true statement about commercial paper?
A) Finance paper is sold directly to the lender by the finance company.
B) Finance paper is also referred to as direct paper.
C) Dealer paper is sold directly to the lender by a finance company.
D) Industrial companies,utility firms,or finance companies too small to sell direct paper will sell dealer paper.
Q3) Compensating balances have been important for banks because their existence allows them to make loans at lower quoted rates.
A)True
B)False
Q4) A cash discount calls for a reduction in price if payment cannot be made within a specified time period.
A)True
B)False
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Chapter 9: The Time Value of Money
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Q1) The interest factor for the present value of a single sum is equal to (1 + i)/i.
A)True
B)False
Q2) The interest factor for a future value (FV<sub>IF</sub>)is equal to (1 + i)<sup>n</sup>.
A)True
B)False
Q3) Higher interest rates (discount rates)reduce the present value of amounts to be received in the future.
A)True
B)False
Q4) John Doeber borrowed $125,000 to buy a house.His loan cost was 11% and he promised to repay the loan over 15 years (amortization).How much are the monthly payments with semiannual compounding?
A) $1,146
B) $1,380
C) $1,421
D) $1,402
Q5) What is the difference between a nominal interest rate and an effective interest rate?
11
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Chapter 10: Valuation and Rates of Return
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Q1) A rise in yield to maturity would be coupled with an increase in the price of a bond. A)True
B)False
Q2) State Street Corp.will pay a dividend on common stock of $4.80 per share at the end of the year.The required return on common stock (Ke)is 13.2%.The firm has a constant growth rate of 7.2%.Compute the current price of the stock (Po).
Q3) The value of a share is the present value of the expected stream of future dividends. A)True
B)False
Q4) The preferred stock of Gapers Inc.pays an annual dividend of $6.50.What is the price of the preferred stock if the required return is:
A)6%
B)8%
C)10%
Q5) As time to maturity increases,bond price sensitivity decreases.
A)True
B)False
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Chapter 11: Cost of Capital
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Q1) The market Beta is always 1.00.
A)True
B)False
Q2) What options do small businesses have for raising capital? How does small business cost of capital compare to the cost of capital for a large business?
Q3) New common stock is more expensive than k<sub>e</sub>:
A) to compensate for risk.
B) to compensate for more dividends.
C) to compensate for expansionary problems.
D) to cover distribution costs.
Q4) A firm that does not earn the cost of capital in the short run will probably be in bankruptcy.
A)True
B)False
Q5) By definition the market has a beta of zero.
A)True
B)False
Q6) Why are the options for raising capital in a small business limited?
Q7) Briefly explain what a firm's cost of capital is and how it is determined.
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Chapter 12: The Capital Budgeting Decision
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Q1) The investment tax credit:
A) increases the tax bill for the year in which the asset is purchased.
B) has a provision for a cash refund.
C) increases the base upon which CCA is calculated.
D) increases the amount of CCA write-off available each year.
Q2) The internal rate of return is the average annual rate of return from the investment.
A)True
B)False
Q3) Cash flow can be said to equal:
A) income before amortization and taxes minus taxes.
B) income before amortization and taxes plus taxes.
C) income before amortization and taxes plus amortization.
D) income after taxes minus amortization.
Q4) List the 5 methods for evaluating cash flows as described in the text.
Q5) Most real estate property is amortized over a 10 year period.
A)True
B)False
Q6) List the 5 steps in the decision making process of a good capital budgeting program.
Page 14
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Chapter 13: Risk and Capital Budgeting
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Q1) The concept of being risk averse means:
A) for a given situation investors would prefer relative uncertainty to certainty.
B) investors would prefer investments with high standard deviations and greater opportunity for gain.
C) that the higher the risk the lower the expected return must be.
D) investors prefer low risk to high risk investments.
Q2) The firm's highest risk-adjusted discount should be applied to:
A) the repair of old machinery.
B) a new product in a related field.
C) a new product in a foreign market.
D) the purchase of new equipment.
Q3) Using the risk-adjusted discount rate approach,the firm's cost of capital is applied to projects with:
A) normal risk.
B) high risk.
C) no risk.
D) low risk.
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Chapter 14: Capital Markets
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Q1) Security markets are efficient when each of the following exist except:
A) there is a continuous market in which each successive trade is made at a price close to the previous price.
B) the markets can absorb large dollar amounts of stock without destabilizing the price.
C) prices adjust rapidly to new information.
D) all of the trades occur between 9:30 am and 4:00 pm.other conditions must exist.
Q2) The bulk of bond trading is generally done:
A) on the TSE.
B) on the regional exchanges.
C) over-the-counter.
D) on the Toronto Bond Exchange.
Q3) The semi-strong form of the efficient market hypothesis states that:
A) past price data is unrelated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) an investor can exploit public information to earn abnormal profits.
Q4) List 5 funding sources of nonfinancial institutions as described in the text.
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Chapter 15: Investment Banking: Public and Private
Placement
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Q1) Dilution of earnings occurs because:
A) a new issue of common stock creates more shares outstanding that reduces earnings per share temporarily.
B) the company suffers a decline in earnings after taxes.
C) the investment dealer collects an underwriting fee.
D) poor financial performance leading to reduced earnings.
Q2) Maxwell Corp.is coming to the market with a new offering of 300,000 shares,at $25 to the public.Maxwell will receive $22 per share.The firm has 1 million shares outstanding and earnings of $6 million.What is the amount of dilution in earnings per share?
A) $2.00.
B) $1.38.
C) $1.77.
D) No dilution occurs since new money is received by Maxwell.
Q3) Which of the following is not a recent trend in the investment industry?
A) Consolidation of capital among a few investment dealers.
B) Specialization of investment dealers.
C) Increasing numbers of dealers because of high returns.
D) The movement of non brokerage firms into the investment field.
Q4) Define private placement and explain its advantages.
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Chapter 16: Long-Term Debt and Lease Financing
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Q1) List and describe the 3 bases on which bond yields are quoted.Use a $1,000 bond paying $100/year for 10 years and currently selling in the market for $900 as the basis for your example.
Q2) In an inflationary economy,debt must be paid back with "more expensive dollars."
A)True
B)False
Q3) The best measure of an investor's rate of return is:
A) the coupon rate.
B) the current yield.
C) the yield to maturity.
D) nominal yield.
Q4) A call provision,which allows the corporation to force an early maturity on a bond issue,usually contains all but which of the following characteristics?
A) Most bonds must be outstanding at least 5 years before being called.
B) After the call date,the call premium tends to decline over time.
C) The provision typically calls for debt conversion into common stock.
D) The corporation will pay a premium over par for the bonds.
Q5) List and discuss reasons why a firm might decide to lease instead of purchase equipment.
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Chapter 17: Common and Preferred Stock Financing
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Q1) Which of the following is not true about preferred stock?
A) 100% of dividends are nontaxable to other corporations which hold preferred stock.
B) The aftertax cost is higher than debt with the same yield.
C) Dividends are legal obligations of the firm.
D) Preferred stocks are often cumulative in respect to dividends.
Q2) Which of the following is not a very common feature of preferred stock?
A) Cumulative dividends
B) Voting rights
C) Call feature
D) Conversion feature
Q3) A rights offering:
A) gives a firm a built-in market for new securities.
B) will likely lead to considerably higher distribution costs.
C) will increase the shareholder's total valuation.
D) is the least expensive way to raise capital.
Q4) When a cumulative voting method is used,it is possible for those who hold less than a 50 percent interest to elect board members.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) Retained earnings accurately portray the liquidity position of the firm.
A)True
B)False
Q2) A stock split is different from a stock dividend due to:
A) delisting by stock exchanges.
B) the resulting change in market price of the common shares.
C) the shares outstanding after the split or dividend will have an increased market value.
D) no transfer of funds from retained earnings to the capital accounts.
Q3) Most dividends,like interest,are paid semiannually.
A)True
B)False
Q4) The "clientele effect" assumes that:
A) taxes affect shareholder dividend preferences.
B) capital gains taxes are equal to taxes on dividends.
C) investors prefer dividends over capital gains regardless of their marginal tax bracket.
D) investors are indifferent between stable dividends and irregular dividends.
Q5) Why might a company repurchase its own shares?
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Chapter 19: Convertibles, Warrants and Derivatives
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Q1) Simba Inc.has warrants outstanding,which are selling at a $2 premium above intrinsic (or minimum)value.Each warrant allows its owner to purchase one share of common stock at $24.If the common stock currently sells for $29,what is the warrant price?
A) $5.00
B) $7.00
C) $12.00
D) $14.50
Q2) Which of the following is true about warrants?
A) As the market value of a warrant increases,so does the premium.
B) A rising share price is usually followed by an increase in the price of the warrant.
C) Warrants guarantee a return for the holder.
D) Warrant premiums are independent of the market price of shares.
Q3) Options trade at their intrinsic value.
A)True
B)False
Q4) Canada's derivative market is concentrated in Montreal (acquired by the TSX).
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Q1) If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm,the surviving firm will automatically get an increase in EPS.
A)True
B)False
Q2) Statutory amalgamation under the Canada Business Corporations Act requires all merger combinations of two or more firms to form an entirely new entity.
A)True
B)False
Q3) Shareholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.
A)True
B)False
Q4) To avoid an unfriendly takeover,management may institute one or more of several takeover defences.List and explain in detail these defences.
Q5) List and describe financial motives for mergers.
Q6) List and describe nonfinancial motives for mergers.
Q7) Discuss briefly the diversification benefits and pitfalls of a merger.
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Chapter 21: International Financial Management
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Q1) When Country A's currency strengthens against Country B's,citizens of Country A will:
A) pay less to buy Country B's products.
B) pay more to buy Country B's products.
C) pay more to buy domestically produced products.
D) not be affected by the change in their currency's value.
Q2) Assume that you had dollar quotes for the Japanese yen and the British pound.If you want to know the yen/pound exchange rate,you would rely on:
A) forward rates.
B) cross rates.
C) spot rates.
D) hedge ratios.
Q3) The lower borrowing costs in the Eurocurrency market as compared to Canada are often attributed to:
A) lower inflation abroad.
B) higher inflation in the Canada.
C) slower money growth in Canada.
D) smaller overhead costs and the absence of reserve requirements abroad.
Q4) List and discuss in detail the main factors that influence exchange rates.
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