Applied Financial Management Test
Preparation
Course Introduction
Applied Financial Management explores the practical aspects of managing a firm's financial resources to achieve strategic business objectives. This course covers essential topics such as budgeting, financial analysis, capital structure, risk management, working capital management, and investment decision-making. Emphasis is placed on real-world applications using case studies and financial tools, enabling students to develop skills in interpreting financial statements, evaluating projects, and making sound financial decisions. By the end of the course, students will understand how financial management principles are utilized to drive organizational value and performance in a dynamic economic environment.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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19 Chapters
3308 Verified Questions
3308 Flashcards
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Chapter 1: Foundations
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140 Verified Questions
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Sample Questions
Q1) The S-corporation was designed to address the concerns of shareholders of large, publicly traded companies that wanted to avoid the double taxation of their income.
A)True
B)False
Answer: False
Q2) The following position(s) and/or department(s) is/are in the finance department under the CFO:
A) Treasurer
B) Controller
C) Accounting department
D) All of these are correct.
Answer: D
Q3) All of the following are characteristics of S Corporations except:
A) unlimited life.
B) unlimited liability for the stockholders.
C) avoidance of double taxation.
D) ease of raising additional capital for expansion.
Answer: B
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) The biggest difference between the income statement and the balance sheet is:
A) the income statement shows incoming deposits, while the balance sheet shows account balances from the bank.
B) the income statement is submitted to the government, while the balance sheet is shown to investors.
C) the income statement is always more accurate than the balance sheet.
D) the balance sheet represents stocks of cash at a point in time, while the income statement reflects flows of cash over a time period.
Answer: D
Q2) Congress intended preferential tax treatment on capital gains, recognizing that offering an incentive to capital investments is healthy for the economy.
A)True
B)False
Answer: True
Q3) Leverage is the use of equity financing.
A)True
B)False
Answer: False
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Chapter 3: Cash Flows and Financial Analysis
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191 Flashcards
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Sample Questions
Q1) The ____ ratio, sometimes called the "acid test," is a more stringent measure of ____ than the current ratio.
A) quick; liquidity
B) fixed-asset turnover; activity
C) net profit margin; gross profit margin
D) None of the above
Answer: A
Q2) Given the following information, calculate the inventory for J&C videos. Quick ratio = 1.2; Current assets = $12,000; Current ratio = 2.5
A) $4,800
B) $6,240
C) $7,200
D) $5,660
Answer: B
Q3) Ratios are typically compared with similar figures from history, the competition, and budget.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Planning
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155 Flashcards
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Sample Questions
Q1) An operating plan:
A) translates business ideas into concrete relatively short-term projections.
B) backs up financial projections with a great deal of detail.
C) concentrates on broad strategic issues despite its shorter term focus.
D) a and b
Q2) A strategic plan consists of:
A) short-term issues of an organization.
B) detailed and accurate financial projections.
C) concepts and ideas expressed mostly with words.
D) translating business ideas into concrete projections.
Q3) Which of the following is true of projecting financial statements?
A) It involves translating planned physical activities into budgeted dollars.
B) It generally involves only making a sales forecast for the future period.
C) It can be constructed only for ongoing businesses.
D) It is easier to do for a new business than an ongoing one.
Q4) Which financial planning assumption does not have supporting detail?
A) Sales growth is based on the inflation rate.
B) Sales growth is based on the industry average sales growth rate.
C) Net income is based on the average net profit margin for the industry.
D) Operating expenses are 70% of the current year's sales.
Page 6
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) It is important to understand that money like any other commodity is subject to the forces of supply and demand. However, instead of being bought and sold, money is borrowed and lent. The supply curve of money originates from the desire to borrow and the demand curve from the willingness to lend.
A)True
B)False
Q2) The primary market is the market for original, first-time issues of securities.
A)True
B)False
Q3) Which of the following is a characteristic(s) of initial public offerings (IPOs)?
A) Very stable
B) General public can get involved right away
C) Institutions are the largest investors in IPOs
D) Secondary market transaction
Q4) A firm that goes public generally explains to potential investors how it intends to use the proceeds from the stock issue.
A)True
B)False
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Chapter 6: Time Value of Money
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Sample Questions
Q1) A four-year annuity of $1,000 annual payments at the end of each year, with a 10% interest rate is worth how much today?
A) $2,914.67
B) $3,486.85
C) $3,169.87
D) None of the above
Q2) Preferred stock dividends are:
A) paid on demand.
B) amortized.
C) a perpetuity.
D) due at the end of an investment.
Q3) You have just won a lottery that promises to pay you and your heirs $1000 dollars a year forever. How much could you get for this stream of cash today if the interest rate is 6%?
A) $12,500
B) $16,667
C) $943
D) None of the above
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8
Chapter 7: The Valuation and Characteristics of Bonds
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174 Flashcards
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Sample Questions
Q1) The ____ a bond has to maturity, the ____ sensitive the bond's price is to changes in market interest rates.
A) longer; less
B) shorter; less
C) longer; more
D) Both b & c
Q2) Call features generally include a call premium paid to bondholders if issuers pay off their indebtedness early.
A)True
B)False
Q3) If a bond is selling at par value, which of the following would be the same as its coupon rate?
A) Current Yield
B) Yield to Maturity
C) Market Interest Rate
D) Both b & c
E) All of the above
Q4) Bond ratings are the primary measure of default risk.
A)True
B)False
Page 9
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Chapter 8: The Valuation and Characteristics of Stock
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180 Flashcards
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Sample Questions
Q1) Using the Gordon Model, which of the following statements is most correct?
A) A stock's intrinsic value cannot be calculated if its growth rate is zero.
B) A stock's intrinsic value cannot be calculated if its growth rate is negative.
C) A stock's intrinsic value cannot be calculated unless dividend payments are assumed currently or in the future.
D) b. and c. above are correct.
E) All of the above statements are correct.
Q2) The considerations associated with stock valuation do not include:
A) the expected future dividend performance of the stock.
B) the estimated selling time and price of the stock.
C) the exchange on which the stock is traded.
D) the market return on stocks of that type.
Q3) Janet Lee is considering purchasing shares in DM Designs. The share price is currently $64. Alternatively, Janet can buy an out of the money call option with a striking price of $65, that is currently priced at $2.25. Janet expects the stock price to rise to $68. What is the difference between the stock's return on investment and the option's return on investment?
Q4) Are growth rate models such oversimplifications of reality that they're useless?
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Chapter 9: Risk and Return
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Sample Questions
Q1) The wider the distribution of returns, the smaller is the investment's risk.
A)True
B)False
Q2) Explain systematic risk and unsystematic risk.
Q3) Ken Howard has a two stock portfolio consisting of Acton Inc. and Boron Corp. Assume the following conditions exist. \(\begin{array}{l}
\text {Return on the market }&=13 \% \\
\text {3 month Treasury bill rate }&=6 \% \\
\text { Acton's beta}&=1.15 \\
\text {Boron's beta }&=1.40\\
\text { Market value of Ken's investment in Acton}&=\$ 125,000 \\
\text {Market value of Ken's investment in Boron }&=\$ 250,000 \\
\text { }&\$ 375,000
\end{array}\) What does the SML predict is Ken's required rate of return for the overall portfolio?
A) 15.24%
B) 14.93%
C) 23.12%
D) 20.90%
Q4) What is the market risk premium?
Page 11
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Chapter 10: Capital Budgeting
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162 Flashcards
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Sample Questions
Q1) A project's NPV profile will cross the horizontal axis at:
A) the cost of debt.
B) the cost of capital.
C) the internal rate of return.
D) zero.
Q2) Although quick and easy to apply, the payback method is deficient. In that it:
A) disregards the time value of money.
B) it assumes that inflows are reinvested at the internal rate of return until the end of the project's life.
C) disregards cash flows after the payback period.
D) a and c
Q3) The main criticism of the Payback method is:
A) it doesn't use time value.
B) it ignores cash flows after the payback is reached.
C) it assumes that inflows can be reinvested at the internal rate of return.
D) a and b
Q4) If a project's NPV is greater than zero, its IRR must be equal to the cost of capital.
A)True
B)False
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Chapter 11: Cash Flow Estimation
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201 Flashcards
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Sample Questions
Q1) Define sunk costs and explain their role in capital budgeting.
Q2) Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.
A) $380,000
B) $397,500
C) $400,000
D) None of the above
Q3) Subjective benefits:
A) based upon opinions are hard to quantify.
B) are unethical.
C) contain bias.
D) All of these are correct.
Q4) An increase in net working capital increases operating cash flows.
A)True
B)False
Q5) Define opportunity costs and explain their role in capital budgeting.
Page 13
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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118 Flashcards
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Sample Questions
Q1) A ____ is a course of action that can be made available, usually at a cost, which improves financial results under certain conditions.
A) probability distribution
B) decision tree
C) risk-adjusted option
D) real option
Q2) The ____ makes risky projects less acceptable by simply lowering the cash flow estimates themselves.
A) overlay approach
B) pure play method
C) certainty equivalent approach
D) accounting beta method
Q3) Ignoring ____ in capital budgeting can lead to incorrect decisions and change the character of the firm.
A) liability
B) risk
C) working capital
D) opportunity costs
Q4) Explain the certainty equivalent approach.
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Chapter 13: Cost of Capital
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Sample Questions
Q1) Hatter Inc. has the following capital components and costs. Calculate Hatter's WACC. \(\begin{array}{lll}
\text { Component } & \text { Value } & \text { Cost } \\
\text { Debt } & 15,500 & 10 \% \\
\text { Preferred Stock } & 7,500 & 12 \% \\
\text { Common Equity } & 10,000 & 14 \%
\end{array}\)
A) 11.67%
B) 12.41%
C) 13.73%
D) 14.55%
Q2) For the purpose of calculating the cost of capital, the capital components are:
A) long-term debt and common stock.
B) debt and preferred stock.
C) long term debt, common stock and preferred stock.
D) long-term and short-term debt.
Q3) Retained earnings are not free because stockholders deserve a return on invested funds regardless of the source of those funds.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) When fixed operating costs are incurred by the firm, a relative change in ____ is magnified into a larger relative change in earnings before interest and taxes.
A) overhead expenses
B) interest charges
C) labor costs
D) sales revenue
Q2) Borrowing to pay a premium in an acquisition may be theoretically justified if value is increased with leverage.
A)True
B)False
Q3) Financial leverage increases a firm's ROE and EPS under which of the following circumstances?
A) ROCE = cost of debt
B) ROCE > after tax cost of debt
C) ROCE < pretax cost of debt
D) ROCE = cost of equity
Q4) EBIT-EPS analysis tells management exactly how much leverage to use.
A)True
B)False
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Chapter 15: Dividends
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Sample Questions
Q1) Which of the following is a tax benefit associated with capital gains on stock?
A) Taxed at lower rates.
B) Taxes are deferred until the stock is sold.
C) Taxes are waived if the stock transfers to an heir at the owner's death.
D) a and b.
E) All of the above
Q2) Dividends can't be paid by a(n) _____firm and must come from current or prior earnings.
A) insolvent
B) very rapidly growing
C) inequitable
D) stable
Q3) The IRS accepts stock repurchases as a legitimate corporate action completely independent of the payment of dividends.
A)True
B)False
Q4) Under dividend aversion investors prefer future capital gains to current dividends because of lower tax rates.
A)True
B)False
Page 17
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Chapter 16: The Management of Working Capital Multiple
Choice Questions
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Sample Questions
Q1) Which of the following is NOT used to accelerate cash receipts?
A) Lock Box Systems
B) Wire Transfers
C) Concentration Banks
D) Remote Disbursing
Q2) Loans to purchase inventory are considered self-liquidating because ____.
A) these types of loans have little risk
B) these loans are paid according to a set schedule
C) these loans are paid as soon as the inventory is sold
D) these loans have claims against the firm in general and not to a specific asset
Q3) When a lender uses trust receipts in financing a borrower's inventory:
A) the specific units of inventory pledged as collateral are identified.
B) the lender has a general claim on all of the borrower's inventory.
C) the lender retains physical control over the inventory.
D) public warehouses are frequently utilized.
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18
Chapter 17: The Management of Working Capital
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Sample Questions
Q1) Net working capital is the sum of all current assets.
A)True
B)False
Q2) Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.
A)True
B)False
Q3) Relaxation of credit policy normally involves an expansion of investment in accounts receivable.
A)True
B)False
Q4) Under just-in-time (JIT) inventory systems, manufacturers shifts the task of maintaining inventory to their suppliers, who in turn shift it to their own suppliers.
A)True
B)False
Q5) Explain the difference between a promissory note, a line of credit, and a revolving credit agreement.
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) Which of the following is true of the fourth wave of mergers from 1981 to 1989?
A) It was characterized as a period of congeneric mergers and hostile takeovers the mergers of very large companies.
B) It reflected the globalization of businesses.
C) It was characterized by private equity groups buying up companies for purely financial reasons.
D) It was characterized by conglomerate mergers.
Q2) Two companies are competitors. The following facts about the companies and their industry are significant.
a. Both firms use similar production, distribution, and sales techniques.
b. One firm is losing money, while the other is profitable.
c. There is a great deal of overhead in the business.
d. The industry is dominated by a single firm that's about as big as these two combined. The two companies are considering a merger. State several arguments in favor of the combination.
Q3) Merger analysis is always a straightforward exercise in capital budgeting.
A)True
B)False
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Page 20
Chapter 19: International Finance
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Sample Questions
Q1) If the U.S. dollar weakens against the British pound, which of the following will not be true?
A) British goods will be more expensive in the US.
B) U.S. production will diminish because of reduced demand for U.S. products in Britain.
C) U.S. goods will be less expensive in Britain.
D) All of the above are true.
Q2) Exchange rate risk is the possibility of a gain or loss in a business transaction from exchange rate movement aside from the business deal itself.
A)True
B)False
Q3) TMK International just purchased equipment manufactured in Japan. The contract calls for the payment of 120 million Japanese yen, due in 90 days. Assume the present exchange rate is 109 yen per U.S. dollar, but rises to 112 yen per U.S. dollar in 90 days. What is the U.S. dollar gain or loss if no hedge is taken?
Q4) Describe the difference between fixed and floating exchange rate systems.
Q5) Why don't firms avoid exchange rate risk by purchasing a supply of foreign currency and simply holding it until it's needed?
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Page 21