Finance for Managers
Chapter Exam Questions
Course Introduction
Finance for Managers is designed to equip non-financial managers with a solid understanding of fundamental financial principles and tools essential for decision-making in todays business environment. The course explores key topics such as interpreting financial statements, budgeting, financial planning, and investment analysis. Emphasis is placed on understanding how financial data informs strategic decisions, managing resources efficiently, and evaluating financial performance to drive organizational success. Through practical examples and case studies, managers will develop the confidence to collaborate with finance professionals and contribute effectively to their organizations financial health.
Recommended Textbook
Corporate Finance 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation.
Answer: 11ea7cce_3d45_e812_928c_210991f18b30_TB1626_00
Q2) Which of the following are subject to double taxation?
A)Corporation
B)Partnership
C)Sole proprietorship
D)A and B
Answer: A
Q3) In a corporation,the ultimate decisions regarding business matters are made by:
A)the Board of Directors.
B)debt holders.
C)shareholders.
D)investors.
Answer: A
Q4) Explain the benefits of incorporation.
Answer: 1.Limited liability
2.Unlimited life
3.Access to capital markets/availability of outside funding
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) The change in Luther's quick ratio from 2008 to 2009 is closest to:
A)a decrease of .10
B)an increase of .10
C)a decrease of .15
D)an increase of .15
Answer: B
Q2) Luther's EBITDA coverage ratio for the year ending December 31,2009 is closest to:
A)1.64
B)1.78
C)1.98
D)2.19
Answer: B
Q3) Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities?
A)Add increases in accounts payable
B)Add back depreciation
C)Add increases in accounts receivable
D)Deduct increases in inventory
Answer: C
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Page 4
Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) A McDonald's Big Mac value meal consists of a Big Mac Sandwich,Large Coke,and a Large Fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to ensure the absence of an arbitrage opportunity and uphold the law of one price?
A)$4.08
B)$4.38
C)$5.47
D)$5.77
Answer: C
Q2) If the interest rate is 7%,the NPV of alternative #2 is closest to:
A)$350,000
B)$357,196
C)$370,561
D)$401,121
Answer: C
Q3) In a normal market with transactions costs,is it possible for different investors to place different values on an investment opportunity? Are there any limits on the amount that their values can differ?
Answer: Values can differ,but only up to the total amount of transactions costs.
Page 5
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Chapter 4: The Time Value of Money
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Q1) You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year.As the ore closest to the surface is removed it will become more difficult to extract the ore.Therefore,the value of the ore that you mine will decline at a rate of 8% per year forever.If the appropriate interest rate is 6%,then the value of this mining operation is closest to:
A)$71,429
B)$500,000
C)$166,667
D)This problem cannot be solved.
Q2) After your grandmother retired,she purchased an annuity contract for $250,000 that will pay her $25,000 at the end of every year until she dies.The appropriate interest rate for this annuity is 8%.The number of years that your grandmother must live in order to get more value out of the annuity than what she paid for it is closest to:
A)21
B)16
C)8
D)10
Q3) In terms of present value,how much will Joe receive for selling the family business?
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Chapter 5: Interest Rates
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Q1) The present value of the lease payments for the delivery truck is closest to:
A)$206,900
B)$207,050
C)$207,680
D)$198,420
Q2) If you forgo the $2500 rebate and finance your new car through the dealership your monthly payments (with payments made at the end of the month)will be closest to:
A)$520
B)$573
C)$595
D)$799
Q3) If your income tax rate is 30%,then the after-tax return you receive on your money market fund is closest to:
A)3.7%
B)5.1%
C)3.6%
D)4.2%
Q4) Should you purchase the delivery truck or lease it? Why?
Q5) What is the effective after-tax rate of each instrument,expressed as an EAR?
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Chapter 6: Valuing Bonds
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Q1) Which of the following statements is FALSE?
A)Given the spot interest rates,we can determine the price and yield of any other default-free bond.
B)As the coupon increases,earlier cash flows become relatively less important than later cash flows in the calculation of the present value.
C)When the yield curve is flat,all zero-coupon and coupon-paying bonds will have the same yield,independent of their maturities and coupon rates.
D)When U.S.bond traders refer to "the yield curve," they are often referring to the coupon-paying Treasury yield curve.
Q2) Suppose a five- year bond with a 7% coupon rate and semiannual compounding is trading for a price of $951.58.Expressed as an APR with semiannual compounding,this bonds yield to maturity (YTM)is closest to:
A)7.0%
B)7.5%
C)7.8%
D)8.2%
Q3) Assuming that this bond trades for $1035.44,then the YTM for this bond is equal to:
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Page 8
Chapter 7: Investment Decision Rules
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Q1) If your new strip mall will have 15,000 square feet of retail space available to be leased,to which businesses should you lease and why?
Q2) If the discount rate for project A is 16%,then what is the NPV for project A?
Q3) Assume that your capital is constrained,so that you only have $600,000 available to invest in projects.If you invest in the optimal combination of projects given your capital constraint,then the total NPV for all the projects you invest in will be closest to:
A)$65,000
B)$80,000
C)$69,000
D)$111,000
Q4) The payback period for this project is closest to:
A)2.1 years
B)3.0 years
C)2.0 years
D)2.2 years
Q5) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%,then given that these are mutually exclusive projects,which project would you take and why?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) You are considering adding a microbrewery on to one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.This equipment will be depreciated straight line over five years.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's depreciation tax shield in the first year of operation?
A)$2800
B)$14,000
C)$5200
D)$26,000
Q2) Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pre-tax income from now on,Luther first pays taxes in:
A)7 years
B)2 years
C)4 years
D)5 years
Q3) What is the NPV of the Epiphany's project?
Q4) Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.
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Chapter 9: Valuing Stocks
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Q1) Suppose you plan to hold Von Bora stock for one year.The price one would expect to be able to sell a share of Von Bora stock for in one year is closest to:
A)$26.50
B)$22.70
C)$23.15
D)$24.10
Q2) Which of the following statements is FALSE?
A)The most common valuation multiple is the price-earnings (P/E)ratio.
B)You should be willing to pay proportionally more for a stock with lower current earnings.
C)A firm's P/E ratio is equal to the share price divided by its earnings per share.
D)The intuition behind the use of the P/E ratio is that when you buy a stock,you are in sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.
Q3) What are the implications of the efficient market hypothesis for corporate managers?
Q4) What are some common multiples used to value stocks?
Q5) Calculate the enterprise value for DM Corporation.
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Suppose that Gold Digger's beta is -0.8.If the market risk premium is 8% and the risk-free interest rate is 4%,then the expected return for Gold Digger's stock is?
A)-2.4%
B)4.8%
C)2.4%
D)10.4%
Q2) The geometric average annual return on Stock A from 2000 to 2009 is closest to: A)12.4%
B)16.7%
C)13.2%
D)17.8%
Q3) Which of the following is NOT a systematic risk?
A)The risk that oil prices rise,increasing production costs
B)The risk that the Federal Reserve raises interest rates
C)The risk that the economy slows,reducing demand for your firm's products
D)The risk that your new product will not receive regulatory approval
Q4) Do expected returns for individual stocks increase proportionately with volatility?
Q5) What is the market portfolio?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset
Pricing
Model
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Q1) Which of the following statements is FALSE?
A)An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment.
B)Conservative investors will invest a small amount in the tangent or efficient portfolio,choosing a portfolio on the line near the risk-free investment.
C)Only aggressive investors will choose to hold the portfolio of risky assets,the tangent or efficient portfolio.
D)Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin.
Q2) The Volatility on Stock Y's returns is closest to:
A)35%
B)31%
C)42%
D)18%
Q3) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
Q4) Calculate the correlation between Stock Y's and Stock Z's returns .
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Chapter 12: Estimating the Cost of Capital
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Q1) In a world with taxes,which of the following is the rate we should use to evaluate an all-equity financed project with the same risk as the firm?
A)The weighted-average cost of capital
B)The pre-tax WACC
C)The cost of equity
D)The cost of debt
Q2) Your estimate of the asset beta for Nielson Motors is closest to:
A)0.59
B)0.66
C)0.71
D)1.75
Q3) The a<sub>i</sub> in the regression:
A)measures the sensitivity of the security to market risk.
B)measures the deviation from the best fitting line and is zero on average.
C)measures the diversifiable risk in returns.
D)measures the historical performance of the security relative to the expected return predicted by the SML.
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Investors that suffer from a familiarity bias:
A)prefer not to invest in companies they are familiar with.
B)favor investments in companies they are familiar with.
C)invest in the same stocks that their friends or family recommend.
D)tend to overestimate the precision of their knowledge.
Q2) The term is a(n):
A)measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio.
B)error term that has an expectation of zero and is uncorrelated with either factor.
C)measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio.
D)constant term.
Q3) The tendency to hang on to losers and sell winners is known as the:
A)cascade effect.
B)disposition effect.
C)overconfidence bias.
D)systematic behavior bias.
Q4) What does the existence of a positive alpha investment strategy imply?
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Page 15
Chapter 14: Capital Structure in a Perfect Market
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Q1) Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase how many shares will Luther have outstanding?
A)1.0 billion
B)1.2 billion
C)0.75 billion
D)1.1 billion
Q2) The NPV for this project is closest to:
A)$6250
B)$14,100
C)$10,000
D)$18,600
Q3) With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?
A)$25
B)$24
C)$15
D)$20
Q4) What is a market value balance sheet and how does it differ from a book value balance sheet?
Page 16
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Chapter 15: Debt and Taxes
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Q1) If Flagstaff currently maintains a debt to equity ratio of 1,then the value of Flagstaff as an all equity firm would be closest to:
A)$73 million
B)$80 million
C)$115 million
D)$100 million
Q2) Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income.If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently,then the effective tax advantage of this debt would be closest to:
A)10%
B)15%
C)25%
D)30%
Q3) In 2005,the effective tax rate for debt holders was closest to:
A)58%
B)35%
C)40%
D)65%
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Page 17
Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.EGI's share price following the release of the new video game will be closest to:
A)$18.00
B)$19.00
C)$20.00
D)$16.00
Q2) Suppose that MI has zero-coupon debt with a $125 million face value due next year.The total value of MI with leverage is closest to:
A)$133 million
B)$140 million
C)$147 million
D)$125 million
Q3) In order for Nielson Motor's to be willing to invest,project 3 must have an NPV greater than:
A)$12.5 million
B)$15.0 million
C)$22.5 million
D)$27.0 million
18
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Chapter 17: Payout Policy
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Q1) Which of the following statements is FALSE?
A)When a firm pays a dividend,shareholders are taxed according to the dividend tax rate.If the firm repurchases shares instead,and shareholders sell shares to create a homemade dividend,the homemade dividend will be taxed according to the capital gains tax rate.
B)When the tax rate on dividends exceeds the tax rate on capital gains,shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.
C)Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
D)The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.
Q2) The NPV of Iota's expansion project is closest to:
A)-$110 million
B)-$137.5 million
C)$0
D)$75 million
Q3) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Page 19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) If Wyatt adjusts its debt continuously to maintain a constant debt-equity ratio of 50%,then the value of this new project is closest to:
A)$188 million
B)$188.5 million
C)$320 million
D)$340 million
Q2) Nielson's estimated equity beta is closest to:
A)0.95
B)1.00
C)1.25
D)1.45
Q3) The unlevered value of Luther's Product Line is closest to:
A)$25 million
B)$60 million
C)$45 million
D)$40 million
Q4) Given that Rose issues new debt of $50 million initially to fund the acquisition,the total value of this acquisition using the APV method is equal to?
Q5) Calculate the NPV for Iota's new project.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Nike is closest to:
A)14.7%
B)10.2%
C)9.1%
D)13.5%
Q2) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
Q3) The amount of the increase in net working capital for Ideko in 2008 is closest to:
A)$4685
B)$3665
C)$4090
D)$5230
Q4) The unlevered beta for Luxottica is closest to:
A)1.00
B)0.60
C)0.70
D)1.50
21
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Chapter 20: Financial Options
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Q1) Which of the following statements is FALSE?
A)A holder would not exercise an in-the-money option.
B)The option seller,also called the option writer,sells (or writes)the option and has a short position in the contract.
C)Because the long side has the option to exercise,the short side has an obligation to fulfill the contract.
D)When the exercise price of an option is equal to the current price of the stock,the option is said to be at-the-money.
Q2) You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in or out of the money?
Q3) Consider the following equation:
C = P + S - PV(K)- PV(Div)
In this equation the term K refers to:
A)the value of the call option.
B)the strike price of the option.
C)the price of a zero coupon bond.
D)the stock's current price.
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Chapter 21: Option Valuation
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Q1) Which of the following is NOT an input required by the Black-Scholes option pricing model?
A)The expected volatility of the stock
B)The expected return on the stock
C)The risk-free interest rate
D)The current stock price
Q2) Which of the following statements is FALSE?
A)The option delta, ,has a natural interpretation: It is the change in the price of the stock given a $1 change in the price of the option.
B)Because a leveraged position in a stock is riskier than the stock itself,this implies that call options on a positive beta stock are more risky than the underlying stock and therefore have higher returns and higher betas.
C)Only one parameter input for the Black-Scholes formula,the volatility of the stock price,is not observable directly.
D)Because a stock's volatility is much easier to measure (and forecast)than its expected return,the Black-Scholes formula can be very precise.
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Chapter 22: Real Options
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Q1) Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.Draw a decision tree detailing this problem.
Q2) Which of the following statements is FALSE?
A)When the investment cannot be delayed,the optimal rule is to invest whenever the profitability index is greater than zero.
B)It is often better to wait too long (use a profitability index criterion that is too high)than to invest too soon (use a profitability index criterion that is too low).
C)When the source of uncertainty that creates a motive to wait is interest rate uncertainty,the hurdle rate is relatively easy to calculate.
D)When there is an option to delay,a good rule of thumb is to invest only when the profitability index is at least 1.
Q3) Given the embedded option to sell the plant,the value of your plant will be closest to:
A)$5.0 million
B)$4.0 million
C)$6.5 million
D)$8.0 million
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Chapter 23: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A)In a rights offer,the firm offers the new shares only to existing shareholders.
B)Secondary shares are shares sold by existing shareholders,including the company's founder.
C)If a firm's management is concerned that its equity may be under priced in the market,by using a rights offering the firm can continue to issue equity without imposing a loss on its current shareholders.
D)In the United States,most offers are rights offers.
Q2) Based upon the price/revenue ratio,what would be a reasonable value for KD?
Q3) When a private equity firm purchases the outstanding equity of a publicly traded firm,thereby taking the company private,the transaction is called a(n):
A)private leveraged transaction.
B)leveraged buyout.
C)cash offer.
D)initial public offering.
Q4) What will the offer price of these shares be if Luther is selling 800,000 shares?
Q5) Describe the four characteristics of IPOs that puzzle financial economists.
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Page 25
Chapter 24: Debt Financing
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Q1) Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then its yield to call is closest to:
A)3.8%
B)7.0%
C)7.6%
D)8.0%
Q2) An asset-backed security backed by home mortgages is a:
A)mortgage-backed security.
B)primary home-backed security.
C)bond-backed security.
D)real estate-backed security.
Q3) Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called:
A)domestic bonds.
B)Yankee bonds.
C)Eurobonds.
D)foreign bonds.
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Page 26
Chapter 25: Leasing
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Q1) Which of the following statements is FALSE?
A)By offering assets together with complementary services,lessors can achieve efficiency gains and offer attractive lease rates.
B)Assets leased under a true lease are afforded bankruptcy protection and cannot be seized in the event of default.
C)Because of the higher recovery value in the event of default,a lessor may be able to offer more attractive financing through the lease than an ordinary lender could.
D)Lessors often have efficiency advantages over lessees in maintaining or operating certain types of assets.
Q2) Assuming that Rearden's annual lease payments are $1.2 million,then the effective after-tax lease borrowing rate is closest to:
A)7.2%
B)8.0%
C)8.8%
D)9.1%
Q3) Calculate the monthly lease payments for a four year $1.00 out lease of the bulldozer.
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Chapter 26: Working Capital Management
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Q1) What is a compensating balance?
Q2) Which of the following statements is FALSE?
A)Under the Modigliani-Miller assumptions of perfect capital markets,the amount of inventory is irrelevant.
B)Unlike trade credit,inventory represents one of the required factors of production.
C)It is the firm's financial manager who must arrange for the financing necessary to support the firm's inventory policy and who is responsible for ensuring the firm's overall profitability.
D)Inventory management receives extensive coverage in courses on operations management.
Q3) Your firm purchases goods from its supplier on terms of 2/10,net 40.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:
A)20.1%
B)15.9%
C)13.0%
D)11.1%
Q4) Describe "just-in-time" inventory management.
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Chapter 27: Short-Term Financial Planning
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Q1) Which of the following statements is FALSE?
A)Commercial banks,finance companies,and factors,which are firms that purchase the receivables of other companies,are the most common sources for secured short-term loans.
B)The factoring arrangement may be without recourse,in which case the lender bears the risk of bad-debt losses.
C)In a floating lien,general lien,or blanket lien arrangement,specific inventory is used to secure the loan.
D)If a firm sells its goods on terms of net 30,then the factor will pay the firm the face value of its receivables,less a factor's fee,at the end of 30 days.
Q2) Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If this loan has an origination fee of 1%,then the effective annual rate (EAR)for this loan is closest to:
A)12.0%
B)12.6%
C)4.1%
D)13.8%
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Page 29
Chapter 28: Mergers and Acquisitions
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Q1) Which of the following statements regarding mergers and taxes is FALSE?
A)Carryback and carryforward provisions essentially deliver the benefits of conglomeration to a small firm with volatile earnings.
B)It might appear that a conglomerate has a tax advantage over a single-product firm simply because losses in one division can offset profits in another division.
C)Companies with current-year losses can also use them to offset earnings (carryback)for the twenty prior years.
D)The IRS will disallow a tax break if it can show that the principal reason for a takeover is tax avoidance,so it is unlikely that the tax advantage could,by itself,be a valid reason to acquire another firm.
Q2) If Wal-Mart and Target were to merge,this would be an example of a ________ merger.
A)conglomerate
B)vertical
C)horizontal
D)diagonal
Q3) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
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Chapter 29: Corporate Governance
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Q1) Which of the following statements is FALSE?
A)An active takeover market is part of the system through which the threat of dismissal is maintained.
B)When internal governance systems such as ownership,compensation,board oversight,and shareholder activism fail,the one remaining way to remove poorly performing managers is by mounting a hostile takeover.
C)Because hostile takeovers and internal governance systems are substitute mechanisms,researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity.
D)The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover.
Q2) Backdating refers to:
A)choosing the strike price of a stock option retroactively.
B)choosing the exercise date of the stock option retroactively.
C)choosing the share conversion ratio retroactively.
D)choosing the grant date of a stock option retroactively.
Q3) What is corporate governance?
Q4) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
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Chapter 30: Risk Management
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Q1) Assuming that your firm will purchase insurance,what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?
Q2) Which of the following statements is FALSE?
A)Long-term supply contracts cannot be entered into anonymously;the buyer and seller know each other's identity.This lack of anonymity may have strategic disadvantages.
B)A futures contract is an agreement to trade an asset on some future date,at a price that is locked in today.
C)An alternative to vertical integration or storage is a long-term supply contract.
D)Long-term supply contracts are unilateral contracts negotiated by a seller.
Q3) If your firm is uninsured,the NPV of implementing the new safety policies is closest to:
A)$2.25 million
B)-$.25 million
C)$2.5 million
D)$2.15 million
Q4) What are some of the disadvantages of long-term supply contracts?
Q5) What is the actuarially fair cost of full insurance?
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Page 32
Chapter 31: International Corporate Finance
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Q1) Assuming that the Japanese and Mexican subsidiaries did not exist,the U.S.tax liability on the Irish subsidiary would be closest to:
A)$81 million
B)$103 million
C)$106 million
D)$156 million
Q2) Which of the following statements is FALSE?
A)In some countries,especially in the developing world,all investors do not have equal access to financial securities.
B)Firms may face differential access to markets if there is any kind of asymmetry with respect to information about them.
C)In some cases,a country's risk-free securities are internationally integrated but markets for a specific firm's securities are not.
D)When countries' capital markets are not integrated we call them disintegrated capital markets.
Q3) Calculate the pound denominated cost of capital for Luther's project.
Q4) What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?
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