Finance for Managers
Exam Answer Key
Course Introduction
Finance for Managers introduces the fundamental principles and tools of financial management essential for decision-making in modern organizations. The course covers key topics such as financial statement analysis, budgeting, capital structure, time value of money, investment appraisal, and risk management. Designed for current and aspiring managers without a deep background in finance, it emphasizes the practical application of financial concepts to real-world business scenarios, enabling students to effectively interpret financial information, evaluate projects, and contribute to strategic planning in their organizations.
Recommended Textbook
Fundamentals of Corporate Finance 4th Edition Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.
A)True
B)False
Answer: True
Q2) Which of the following features of a corporation is LEAST accurate?
A) The owners' identities are separate from a corporation.
B) The owners of a corporation are not liable for any obligations the corporation enters into.
C) Changes in ownership do not result in the dissolution of the corporation.
D) Earnings from a corporation are taxed only once.
Answer: D
Q3) Partnerships are the most common type of business firm in the world. A)True
B)False
Answer: False
Q4) What is the term for the applicable price that the seller gets when he sells a stock on the exchange?
Answer: The seller gets the bid price when he sells a stock on the exchange.
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.
A)True
B)False
Answer: True
Q2) Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?
A) debt-equity or equity multiplier ratio
B) market-to-book ratio
C) market debt-equity ratio
D) current or quick ratio
Answer: A
Q3) Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008?
A) from investment activities
B) by sale of stock
C) from its operations
D) by issuing debt
Answer: D
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Page 4
Chapter 3: Time Value of Money: an Introduction
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Sample Questions
Q1) Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?
A) $1,200,000
B) $3,900,000
C) $2,700,000
D) $9,000,000
Answer: B
Q2) The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?
A) The State Bank would experience a surge in demand for loans.
B) The Colonial Bank would experience a surge in demand for deposits.
C) The State Bank would experience a fall in demand for deposits.
D) The Colonial Bank would experience a surge in demand for loans.
Answer: D
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?
A) $7291.00
B) $14,582.00
C) $17,012.34
D) $12,151.67
Q2) How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000?
A) 4.25 years
B) 3.25 years
C) 5.25 years
D) 6.25 years
Q3) A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).
A)True
B)False
Q4) Can we apply the growing perpetuity equation for negative growth as well?
Page 6
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Chapter 5: Interest Rates
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Q1) How do we decide on opportunity cost when we have several opportunities that need to be foregone?
Q2) When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.
A)True
B)False
Q3) Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?
A) The number of borrowers seeking funds is low.
B) The expected inflation rate is expected to be low.
C) The borrower is judged to have a low degree of risk.
D) The loan will be for a long period of time.
Q4) What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV) of an annuity?
Q5) How are interest and return of principal handled in an amortizing loan payment?
Q6) How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?
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Page 7
Chapter 6: Bonds
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Q1) The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1081.73, then the YTM for this bond is closest to
A) 5.2%
B) 7.87%
C) 6.56%
D) 9.18%
Q2) Under what situation should the clean price, dirty price, and the price calculated by the basic annuity and present value (PV) equations for a bond be equal?
Q3) What issues should one be careful of when calculating the bond price from its yield to maturity using the "time value of money" (TVM) keys of a financial calculator?
Q4) How can the financial calculator be used to calculate the price of a coupon bond from its yield to maturity?
Q5) How much are each of the semiannual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for?
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Chapter 7: Stock Valuation
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Q1) Forecasting dividends requires forecasting the firm's earnings, dividend payout rate, and future share count.
A)True
B)False
Q2) What are dividend payments?
A) payments made to a company by investors for a share of the ownership of that company
B) incremental increases in the value of the stock held by an investor due to rises in share price
C) the difference between the original cost price of a share and the price an investor receives when that share is sold
D) a share of the profits paid to each shareholder on the basis of the number of shares they hold
Q3) How can the dividend-discount model handle changing growth rates?
Q4) A firm can either pay its earnings to its investors, or it can keep them and reinvest them.
A)True
B)False
Q5) Can the dividend-discount model handle negative growth rates?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) What is the Net Present Value rule?
Q2) You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR) for investing in this bond is closest to ________.
A) 5.0%
B) 7.1%
C) 6.0%
D) 8.2%
Q3) An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?
A) $498,597
B) $747,896
C) $797,756
D) $847,615
Q4) How can you calculate the y-intercept of a net present value (NPV) profile without using TVM concepts?
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Page 10
Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) If available, should MACRS be preferred to straight-line depreciation?
Q2) A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000. This in turn would cause inventory to increase by $125,000, accounts receivable to increase by $100,000, and accounts payable to increase by $90,000. What is the firm's expected change in net working capital?
A) $1,735,000
B) $315,000
C) $225,000
D) $135,000
Q3) Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product?
A) the fluctuations in the cost of capital over the period in question
B) the sales of a new product will typically accelerate, plateau, and ultimately decline over time
C) the prices of technology products generally fall over time
D) competition tends to reduce profit margins over time in most industries
Q4) What is the correct tax rate that should be used for capital budgeting decisions?
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Page 11
Chapter 10: Stock Valuation: a Second Look
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Q1) Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.
A)True
B)False
Q2) On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%.
Which of the following is the LEAST likely consequence of such an announcement?
A) The price of the stock would rise.
B) Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high.
C) Investors would increase their forecast of future cash flows in that firm.
D) Investors would revise their estimates of the net present value (NPV) of the firm.
Q3) In the method of comparables, the known values of a firm's cash flows are used to estimate the unknown cash flows of a similar firm.
A)True
B)False
Q4) Which is the best valuation technique when using comparables?
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Chapter 11: Risk and Return in Capital Markets
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Q1) The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?
A) 3.00%
B) 3.50%
C) 2.25%
D) 2.50%
Q2) Which of the following statements is FALSE?
A) The geometric average return is a better description of the long-run historical performance of an investment.
B) The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns.
C) The compounded geometric average return is most often used for comparative purposes.
D) We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance.
Q3) What care, if any, should be taken when selecting stocks for an investment portfolio?
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240 shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to $80 and the price of Yahoo decreases to $18 per share, what is the return on your portfolio?
A) 12.77%
B) 8.51%
C) 9.37%
D) 10.22%
Q2) The amount of a stock's risk that is diversified away ________.
A) is independent of the portfolio that you add it to
B) depends on market risk premium
C) depends on risk-free rate of interest
D) depends on the portfolio that you add it to
Q3) Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium.
A) between 10% and 12%
B) between 14% and 16%
C) between 5% and 7%
D) between 11% and 13%
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Page 14
Chapter 13: The Cost of Capital
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Q1) An all-equity firm had a dividend expense of $20,000 last year. The market value of the firm is $600,000 and the dividend is expected to increase at 5% each year. What is the cost of equity for this firm?
A) 6.80%
B) 7.65%
C) 8.50%
D) 9.35%
Q2) When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average market risk of the firm's investments.
A) diversifiable risk
B) market risk
C) unsystematic risk
D) volatility
Q3) Is it incorrect to use the coupon rate of debt toward cost of debt?
Q4) Internal financing is more costly than external financing because of issuance costs.
A)True
B)False
Q5) What is the assumption about risk when using WACC to evaluate a project?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A) The preferred stock issued by young companies typically does not pay regular cash dividends.
B) The preferred stock issued by young companies usually gives the owner an option to convert it to common stock on some future date, so it is often called callable preferred stock.
C) If a company runs into financial difficulties, the preferred stockholders have a senior claim on the assets of the firm relative to any common stockholders.
D) Preferred stock issued by mature companies such as banks usually has a preferential dividend and seniority in any liquidation and sometimes special voting rights.
Q2) Which of the following statements is FALSE?
A) SEO rights offers have lower costs than cash offers.
B) The decision to raise financing externally usually implies that a firm plans to pursue an investment opportunity.
C) Although not as costly as IPOs, seasoned offerings are still expensive.
D) Researchers have found that, on average, the market greets the news of an SEO with a price increase.
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Page 16
Chapter 15: Debt Financing
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Q1) What is an original issue discount bond?
Q2) Tompkinson's PLC., a British company, issues a bond in U.S. dollars in the United States which is intended for U.S. investors. Which of the following best describes this bond?
A) a domestic bond
B) a Eurobond
C) a global bond
D) a Yankee bond
Q3) A firm issues $300 million in straight bonds at an original issue discount of 0.50% and a coupon rate of 7%. The firm pays fees of 2.0% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?
A) $248,625,000
B) $263,250,000
C) $277,875,000
D) $292,500,000
Q4) What are secured debt?
Q5) What is yield to worst?
Q6) What is yield to maturity?
Q7) What are debentures?
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Chapter 16: Capital Structure
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Q1) The pecking order hypothesis states that managers will have a preference to fund investment by using ________, followed by ________, and will issue ________ as a last resort.
A) debt, equity, retained earnings
B) retained earnings, equity, debt
C) retained earnings, debt, equity
D) debt, retained earnings, equity
Q2) The market value of Luther's non-cash assets is closest to ________.
A) $20 billion
B) $19 billion
C) $25 billion
D) $24 billion
Q3) When investors use leverage in their own portfolios to adjust the leverage choice made by the firm, it is referred to as ________.
A) outside debt
B) retained earnings
C) homemade leverage
D) payout ratio
Q4) What considerations should managers have while deciding on firms' capital structure?
Page 18
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Chapter 17: Payout Policy
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Q1) Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 9% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that Omicron uses the entire $60 million to repurchase shares. The amount of the regular yearly dividends in the future is closest to ________.
A) $3.56
B) $5.34
C) $4.45
D) $8.90
Q2) The Record Date falls before the Ex-Dividend Date.
A)True
B)False
Q3) The typical reason for a stock split is to ________.
A) allow for growth in the company assets
B) allow liabilities to grow
C) increase earnings per share
D) keep the share price in a range
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) A firm has $70 million in equity and $30 million of debt, it pays dividends of 30% of net income, and has a net income of $10 million. What is the firm's internal growth rate?
A) 6%
B) 7%
C) 8%
D) 9%
Q2) Given the following data for a given period, compute the free cash flow to the firm: Net Income = $5,000
After-tax Interest Expense = $500
Depreciation = $500
Increase in NWC = $1,000
Capital Expenditures = $2,000
A) $3,000
B) $3,500
C) $3,700
D) $3,900
Q3) Is total net working capital or incremental net working capital more relevant for calculation of free cash flow?
Q4) What are a firm's options when it generates more cash than planned?
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Chapter 19: Working Capital Management
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Q1) 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.
Q2) Collection float is made up of all of the following EXCEPT ________.
A) disbursement float
B) processing float
C) mail float
D) availability float
Q3) Luther's Accounts Payable days is closest to ________.
A) 39 days
B) 32 days
C) 59 days
D) 42 days
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Page 21
Chapter 20: Short-Term Financial Planning
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Q1) Which of the following statements regarding commercial paper is FALSE?
A) With dealer paper, dealers sell the commercial paper to investors in exchange for a spread (or fee) for their services.
B) With dealer paper, the spread increases the proceeds that the issuing firm receives, thereby decreasing the effective cost of the paper.
C) The minimum face value is $25,000, and most commercial paper has a face value of at least $100,000.
D) With direct paper, the firm sells the security directly to investors.
Q2) Which of the following companies has the smallest need for short-term financial planning?
A) a company that produces Christmas decorations.
B) a toy manufacturer.
C) a company that makes condiments such as ketchup.
D) a company that provides catering services for weddings.
Q3) An uncommitted line of credit is obtained through a nonbinding, informal agreement.
A)True
B)False
Q4) What are compensating balance and what effect does it have on the loan?
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Chapter 21: Option Applications and Corporate Finance
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Q1) A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.
A)True
B)False
Q2) ________ options allow the holder to exercise the option on any date up to and including the expiration date.
A) Canadian
B) American
C) European
D) None of the above
Q3) The ________ is the total number of contracts of a particular option that have been written and not yet closed.
A) mark interest
B) open interest
C) turnover
D) local turnover
Q4) When is an option in-the-money?
Q5) What effect does volatility of the underlying asset have on the price of the option?
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Chapter 22: Mergers and Acquisitions
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Q1) Most acquirers pay an acquisition premium for a target. Upon announcement of the bid, the target's stock price increases, on average, so that the stock price is the same as the price bid by the acquirer.
A)True
B)False
Q2) The period of the ________ is known as the conglomerate wave because firms typically acquired firms in unrelated businesses.
A) 1960s
B) 1970s
C) 1980s
D) 1990s
Q3) KT corporation has announced plans to acquire MJ corporation. KT is trading for $25 per share and MJ is trading for $45 per share, with a premerger value for MJ of $3 billion dollars. If the projected synergies from the merger are $750 million, what is the maximum exchange ratio that KT could offer in a stock swap and still generate a positive NPV?
Q4) What is a white knight?
Q5) If Martin pays no premium to acquire Luther, what will the earnings per share be after the merger?
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Chapter 23: International Corporate Finance
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Q1) The Law of One Price asserts that we will obtain the same valuation of a project whether
(a) we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or (b) we use the corresponding foreign cost of capital and then convert the present value (PV) of the foreign currency value of the cash flows at the spot rate.
A)True
B)False
Q2) If a firm purchases its inputs and sells its goods in the same foreign market, evaluation of the project ________.
A) requires us to consider the exchange rate risk of output only
B) requires us to consider exchange rate risk of inputs only
C) does not require consideration of exchange rate risk
D) none of the above
Q3) What are internationally segmented capital markets?
Q4) What are the timings of the foreign exchange market?
Q5) What is cash-and-carry strategy?
Q6) What is floating rate?
Q7) What is covered interest parity?
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Chapter 24: Leasing
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Q1) Which of the following statements is FALSE?
A) Absent market imperfections, leases represent another form of zero-NPV financing available to a firm, and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value, but serve only to divide the firm's cash flows and risks in different ways.
B) In a perfect market, the cost of leasing is equivalent to the cost of purchasing and reselling the asset.
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand.
D) Features of leases will be priced as part of the lease payment. Terms that give valuable options to the lessee lower the amount of the lease payments, whereas terms that restrict these options will raise them.
Q2) Which of the following is a valid argument for leasing?
A) tax differences
B) reduced resale costs
C) efficiency gains from specialization
D) All of the above are valid arguments for leasing.
Q3) Calculate the monthly lease payments for a four-year $1.00-out lease of the Bulldozer.
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Page 26
Chapter 25: Insurance and Risk Management
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Q1) To protect the firm against the loss of earnings if the business operations are disrupted due to fire, accident, or some other insured peril a firm would purchase
A) property insurance
B) key personnel insurance
C) business liability insurance
D) business interruption insurance
Q2) Farmville Industries is a major agricultural firm and is concerned about the possibility of drought impacting corn production over the next year. In the event of a drought, Farmville Industries anticipates a loss of $75 million. Suppose the likelihood of a drought is 10% per year, and the beta associated with such a loss is 0.4. If the risk-free interest rate is 5% and the expected return on the market is 10%, then what is the actuarially fair insurance premium?
Q3) 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?
Q4) What is the actuarially fair cost of full insurance?
Q5) What are some of the disadvantages of long-term supply contracts?
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Chapter 26: Corporate Governance
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Q1) Tammy is a member of the Board of Directors of Moon Corporation. Her husband is the manager of a large division. What type of director is Tammy?
A) inside director
B) outside director
C) gray director
D) resident director
Q2) Which of the following statements is FALSE?
A) The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity.
B) The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure.
C) While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects.
D) In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy.
Q3) What is the difference between inside, gray, and outside directors?
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