Finance for Managers Exam Bank
Course Introduction
Finance for Managers equips students with the essential financial concepts and analytical tools necessary for effective decision-making in managerial roles. The course covers topics such as financial statement analysis, budgeting, capital investment decisions, risk assessment, and the time value of money. By linking core financial principles to real-world business scenarios, students learn how to interpret financial data, evaluate performance, and make strategic decisions that align with organizational goals. Designed for non-financial managers, this course fosters financial literacy and enhances the ability to communicate effectively with finance professionals.
Recommended Textbook
Introduction to Corporate Finance 4th Edition by Sean Cleary
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Page 2
Chapter 1: An Introduction to Finance
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Q1) Explain what an auction market is and how it works.
Answer: Stock exchanges are auction markets.Brokers act on behalf of their clients and arrange to match buyers and sellers through an auction system.Trading takes place either on the floor of an exchange or by computer link.For their services,brokers charge a commission that is a percentage of the value of the transaction.
Q2) Define and describe the difference between the third and fourth markets.
Answer: The third market is an OTC market for the trading of securities that are listed on organized exchanges.The fourth market refers to transactions made directly between large institutions and/or wealthy individuals,thereby bypassing brokers and dealers.The third market involves extremely large transactions and is used primarily to avoid exchange commission fees.The fourth market involves relatively smaller trades and is used to avoid information leaks regarding who is trading which stock(s).
Q3) All common shares are comprised of which two components?
A) ownership and voting rights
B) ownership and dividend rights
C) voting and dividend rights
D) dividend and yield rights
Answer: A
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3
Chapter 2: Business Corporatefinance
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Q1) What does it mean to "go public"?
A) to sell goods and services to the public
B) to raise money from the stock market
C) to borrow money from the debt market
D) to do business with governmental firms
Answer: B
Q2) Which one of the following is NOT an example of the agency problem?
A) management refusing a merger because of the possibility of major changes in management
B) taking a high-risk project to increase the value of the stock options held by management
C) increasing the level of debt of the company to increase the return on equity value
D) distributing a low level of dividends to have enough cash for bonuses
Answer: C
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Chapter 3: Financial Statements
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Q1) The CPA Canada Handbook contains the accounting principles of:
A) The United States
B) Canada
C) The European Community
D) Ontario Answer: B
Q2) The shares of Tremblay Maple Syrup Company are listed on both the Toronto and New York stock exchanges.Tremblay could prepare its financial statements in accordance with:
A) I only
B) II only
C) I and III only
D) II and III
I.ASPE
II.US GAAP
III.IFRS
Answer: D
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Chapter 4: Financial Statement Analysis and Forecasting
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Q1) Which of the following ratios would be most useful for evaluating a firm's degree of leverage?
A) Earnings-power ratio
B) Debt-to-equity ratio
C) Current ratio
D) Asset turnover ratio
Q2) At the beginning of the year a company has $140 in inventory and at the end of the year the inventory on the balance sheet is $110.If the firm reports cost of goods sold on the income statement of $400,then the inventory turnover ratio would be closest to:
A) 1.60
B) 2.86
C) 3.20
D) 3.64
Q3) Why do banks look at the quick ratio in addition to the current ratio?
A) The quick ratio assets are larger than the current ratio assets.
B) The quick ratio is a better measure of how quickly liabilities are coming due.
C) The quick ratio is easier to calculate.
D) The quick ratio assets are more liquid than the current ratio assets.
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Chapter 5: Time Value of Money
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Q1) As the amortization period of a mortgage increases,holding interest rates constant,the monthly payments will
A) stay the same.
B) increase.
C) decrease.
D) There is no connection between the amortization period and the size of the payment.
Q2) Why is a dollar today always worth at least a dollar in the future?
A) because of the risk involved with investing
B) because of the opportunity cost of money
C) because of inflation
D) all of the above
Q3) As the term of a mortgage increases,holding interest rates constant,the monthly payments will
A) stay about the same.
B) increase.
C) decrease.
D) There is no connection between the term and the size of the payments.
Q4) Explain the difference between simple interest and compound interest.
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Chapter 6: Bond Valuation and Interest Rates
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Q1) Two years ago,St.Laurent Shippers Co.issued seven year semi-annual pay bonds with a coupon rate of 8 percent.At issue,the yield to maturity was 7.5%.Today the market rate on the bonds is 9 percent.The current price of the bond is closest to:
A) $1,026.85
B) $1,020.53
C) $960.44
D) $948.89
Q2) A five-year annual pay bond is quoted at 93.011 with a market yield of 8 percent.The coupon rate is closest to
A) 4.12%
B) 6.25%
C) 6.28%
D) 9.19%
Q3) J&B Co.has 8.75 percent coupon bonds quoted with a market yield of 9.25 percent.The bonds have fifteen years to mature and make annual interest payments.What is the percentage change in price for a 10 percent decrease in market yield?
Q4) Explain the difference between nominal and real interest rates.
Q5) Explain the term "yield to maturity."
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Chapter 7: Equity Valuation
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Q1) Ontario Ice Corporation has an expected profit margin of 10 percent,turnover ratio of 3,and a leverage ratio of 0.50.The firm expects an EPS of $3 next year and maintains a retention ratio of 60 percent.What should the stock sell for today if the required return is 15 percent?
A) $13.33
B) $20.00
C) $26.67
D) $30.00
Q2) Determine the required rate of return on preferred shares that provide a $10 annual dividend if they are selling for $60?
A) 17.14%
B) 16.66%
C) 15.66%
D) 18.14%
Q3) Marvellous Ideas Inc.is selling for $18.33 per share.The required rate of return on the stock is 10 percent.What is the expected dividend in year five when the earnings and dividends are expected to decline at an annual rate of 2.5 percent indefinitely?
Q4) What factors impact the P/E ratio,and what is the direction of the impact?
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Chapter 8: Risk, return, and Portfolio Theory
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Q1) Discuss the validity of the following statement: "diversification benefits decreased because correlation between stocks increased."
Q2) Which one of the following is NOT an example of systematic risk?
A) Jump in oil prices to new highs
B) Central bank decides to increase interest rates
C) Recall of a newly released product
D) New regulations on industry subsidies
Q3) Indiana Jones intends to form a portfolio with two securities: Virtual and Real.Virtual has an expected return of 25 percent with a standard deviation of 5 percent.Real has an expected return of 12 percent with a standard deviation of 16 percent.The correlation between the two securities is 0.2.What is the portfolio standard deviation if the portfolio has an expected return of 20 percent?
A) 0.55%
B) 1.08%
C) 7.41%
D) 10.40%
Q4) Discuss the difference between expected returns using subjective probabilities and expected returns based on historical values.
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Chapter 9: The Capital Asset Pricing Model Capm
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Q1) A portfolio is composed of $2,000 invested in Stock A,$3,000 in Stock B,$4,000 in Stock C,and $5,000 in Stock D.What is the beta of the portfolio if the betas of Stock A,B,C,and D are 0.9,1.6,1.8 and 1.2,respectively?
A) 1.03
B) 1.26
C) 1.41
D) 1.65
Q2) _____________ is a measure of the risk of a security that cannot be avoided through diversification.
A) Variance
B) Standard deviation
C) Total risk
D) Beta
Q3) What is the main criticism of the CAPM referred to as Roll's critique?
A) The stock market is not efficient.
B) The CAPM does not hold because beta is not a good measure of risk.
C) The market portfolio is impossible to estimate.
D) The CAPM does not hold empirically.
Q4) What is the difference between CAPM and APT?
Q5) Explain the separation theorem.
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Chapter 10: Market Efficiency
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Q1) Which of the following is FALSE? Market efficiency implies:
A) new information disseminates quickly.
B) investors can take advantage of temporary time lags in information dissemination.
C) new information is instantly reflected in share prices.
D) the prices of securities are considered "right" at any time given their risk profile.
Q2) If markets were semi-strong form efficient,which of the following situations would yield abnormal returns?
A) Analyzing a company's earnings report.
B) Identifying a pattern in a company's stock price.
C) Obtaining insider information.
D) None of the above would yield abnormal returns.
Q3) If markets were weak form efficient,which of the following situations would NOT yield abnormal returns?
A) Analyzing a company's earnings report
B) Identifying a pattern in a company's stock price
C) Obtaining insider information
D) All of the above would yield abnormal returns
Q4) State the semi-strong form of market efficiency and its implications.
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Page 12
Chapter 11: Forwards,futures,and Swaps
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Q1) Forward contracts can be used either to hedge or to speculate.These actions:
A) increase risk in both cases.
B) decrease risk in both cases.
C) spread or minimize risk in both cases.
D) none of the above.
Q2) Find the forward price for one forward contract for gold that is selling for $1,449 spot,if the storage cost is $10 for the year and financing cost is 10% per year.
Q3) What is a relatively small (in terms of the contract value)deposit made with the clearinghouse?
A) Maintenance margin
B) Margin call
C) Initial margin
D) Daily resettlement
Q4) When does counterparty risk arise?
A) When the spot price increases.
B) When the investor takes a naked position.
C) When the speculator loses to the counter party.
D) When the counterparty defaults.
Q5) What are the differences between forwards and futures contracts?
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Chapter 12: Options
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Q1) Given: S = $55,X = $50,r = 5%,t = 4 months and = 20% calculate d<sub>1</sub> and d<sub>2</sub>.
A) -0.62334, -0.73881 respectively
B) 1.0275, -0.4501 respectively
C) -0.62334, -0.82334 respectively
D) 1.0275, 0.9120 respectively
Q2) _________is an estimate of the ________ of the underlying asset based on observed option prices.
A) Price volatility; estimated volatility
B) Implied volatility; price volatility
C) Price volatility; implied volatility
D) Estimated volatility; price volatility
Q3) Which of the following best defines a covered call?
A) Purchase a put option to protect a long position in an underlying asset.
B) Position between the floor and ceiling price.
C) The right, but not an obligation, to sell an underlying asset at a fixed price for a specified time.
D) Selling call options while owning the underlying asset
Q4) Briefly explain how to replicate the payoff of a risk-free asset using put-call parity.
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Chapter 13: Capital Budgeting, risk Considerations, and Other Special Issues
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Q1) Suppose you have an opportunity to invest in a project,which is expected to generate $6,800 in year 1,$7,200 in year 2,and $7,500 in year 3.The appropriate risk-adjusted discount rate for the project is 10.5 percent.The project's initial investment is $15,000.What is the profitability index?
A) 1.29
B) 1.17
C) 0.85
D) 0.17
Q2) Under what circumstances will the IRR method of project evaluation conflict with the NPV method?
Q3) Which of the following is the best answer for a reason(s)that firms make foreign investments?
A) They want to enter new markets.
B) They want to have access to new technology.
C) They want to take advantage of cheaper resources.
D) All of the above
Q4) Explain why capital expenditures can be viewed as the most important decisions a firm can make.
Q5) When a business faces capital rationing,what discount rate is used and why?
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Chapter 14: Cash Flow Estimation and Capital Budgeting
Decisions
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Q1) A pharmaceutical company has discovered a new drug that treats gastrointestinal disorders.The R&D costs for the drug were $3 million.In the testing phase of this new drug,the company further discovered that there is a possibility that the drug would be effective against migraine headaches if they invest another 10% in R&D.When evaluating the capital budgeting decision for the migraine remedy,what portion of the R&D costs for the drug should be attributed to the migraine budget?
A) 0 percent of the R&D costs.
B) $300,000 of the R&D costs.
C) $1.65 million of the R&D costs.
D) It cannot be determined until the drug is further tested. There may be more uses for this drug and further testing is required.
Q2) Explain what externalities are and give an example.
Q3) Explain how you would estimate the change in working capital in a firm by using financial statements.
Q4) Why do cash flows need to be projected in nominal terms when market discount rates are used?
Q5) Discuss the two ways inflation impacts capital budgeting.
Page 16
Q6) Explain the importance of scenario analysis in capital budgeting.
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Chapter 15: Mergers and Acquisitions
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Q1) Securities legislation is a:
A) Federal responsibility.
B) Provincial responsibility.
C) National responsibility.
D) Both federal and provincial responsibility.
Q2) An issuer bid occurs when:
A) I only
B) I and II
C) II and III
D) IV only
I.An acquirer owns a majority stake of a target firm and wishes to acquire the remainder.
II.A potential acquirer with no stake in the target firm makes an offer for 50% of the shares.
III.An acquirer who owns a majority stake in the target recommends new management be put in place.
IV.An acquirer wishes to reverse its purchase of the target firm.
Q3) Define and distinguish between acquisitions and amalgamations.
Q4) What is a tender offer?
Q5) Define synergy and explain what effect it can have on a merged company.
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Chapter 16: Leasing
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Questions
Q1) Use the following statement to answer this question: Capital leases are evaluated by discounting the lease payments at the company's WACC
A) True
B) False
C) Need additional information
Q2) Under a financial lease:
A) lessee pays the rental payments
B) lessee pays for the insurance
C) lessor maintains the asset
D) a and b
E) all of the above
Q3) The Canada Revenue Agency's definition of financial lease allows:
A) the lessor to benefit from high CCA
B) the lessor to own the asset
C) the lessee to expense payments to the lessor
D) the lessee to own the asset
Q4) What are the possible limitations to the idea that the value of the firm is immune to leasing?
Page 18
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Chapter 17: Investment Banking and Securities Law
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Q1) Identify and describe the two ways a new issue of securities can be distributed by the underwriter.
Q2) What does the acronym SEC stand for in regards to the financial system?
A) Security Exchange of Canada
B) Securities and Exchange Commission
C) Security Enforcement Coalition
D) Stock Exchange of Canada
Q3) When interest payments are made by mailing a cheque to the officially listed owner,the bonds must have been issued in ______ form.
A) registered
B) consolidated
C) bearer
D) booked
Q4) Which of the following is part of a prospectus?
A) Description of the proposed business activity
B) Description of the potential market
C) Description of the risk factors
D) All of the above
Q5) Briefly explain the term "underpricing."
Q6) Discuss some challenges with initial public offerings (IPOs).
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Chapter 18: Debt Instruments
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Q1) The purpose of a covenant is:
A) to protect the lender in the event of default by the borrower.
B) to protect the borrower in the event of increasing product market competition.
C) to protect the borrower in the event of default by the lender.
D) to protect the borrower in the event of a deterioration of the credit quality of the lender.
Q2) In general a "floating rate" on a debt issue refers to:
A) I and II
B) II
C) II and III
D) I and III
I.Variable payment times for the interest payments
II.Variable interest payments
III.Yield on the debt equals the average dividend yield on the Toronto Stock Exchange
Q3) You have observed that the credit ratings of firms are very stable over time.However,you have also observed that the earnings of firms are cyclical.Explain how this is possible when credit ratings are supposed to reflect the credit risk of the firm's debt.
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Chapter 19: Equity and Hybrid Instruments
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Q1) Which of the following statements is correct?
A) Family trusts ensure income flows to the people descended from the company founder.
B) Family trusts ensure all the votes are held by the trustees.
C) Family trusts nominate the managers of the corporation.
D) all of the above.
E) a and b
Q2) Which of the following statements is correct?
A) Companies issue preferred shares only to have better control of the firm.
B) Preferred shares pay a guaranteed dividend.
C) Preferred dividends are not tax deductible to the issuing firm.
D) None of the above
Q3) Which of the following statements regarding income bonds is/are true?
A) They appear similar to debt but are closer to equity.
B) They are generally issued after a reorganization.
C) The interest is tied to some level of the cash flow of the firm.
D) All of the above statements are true.
Q4) Why is there a difference between the way the market classifies debt and the way the CRA classifies it.
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Chapter 20: Cost of Capital
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Q1) James Bay Water Park Company's preferred shares pay an annual dividend of $3 per share.What is the cost of preferred stock if the current price is $80 per share and after-tax flotation costs are $6 per share?
A) 4.05%
B) 3.75%
C) 7.50%
D) 7.79%
Q2) Toronto Skaters Co.has a return on equity of 8 percent and pays out 20 percent of its earnings in dividends.The expected growth in dividends is:
A) 1.6%
B) 6.4%
C) 8%
D) 20%
Q3) Which of the following is not needed to determine a firm's WACC?
A) The book value of the equity.
B) The market value of the debt.
C) The current share price.
D) The current yield on preferred shares.
Q4) What is the cost of internally generated funds?
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Chapter 21: Capital Structure Decisions
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Q1) A company's capital structure is made up of 200,000 common shares and $1,000,000 debt at 12 percent interest.The company's tax rate is 50 percent.An additional $500,000 has to be raised,and the following financing alternatives are available: Common shares: The company can sell additional shares at $10 a share.Hence,50,000 new shares would have to be issued.
Debt: Debt can be issued at 12 percent,requiring interest payments of $60,000.
Compute EPS as a function of EBIT for both alternatives and derive the break-even point.
Q2) Which of the following statements is true?
A) With zero taxes and zero bankruptcy costs, the value of the firm is independent of its debt-equity ratio.
B) With taxes and zero bankruptcy costs, the value of the firm reaches a maximum and then declines as the debt-equity ratio increases.
C) With taxes and bankruptcy costs, the value of the firm reaches a maximum when firms maximize their debt.
D) All of the above are true
Q3) Briefly explain the trade-off theory of capital structure.
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Chapter 22: Dividend Policy
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Q1) The concept of homemade dividends requires the following:
A) I
B) II
C) III
D) I and III
I.No taxes,transactions costs,or other market imperfections.
II.Management cooperation to implement.
III.The actions of individuals through their own behaviour
Q2) Which of the following is not a side effect of a stock split?
A) There is no effect on retained earnings account
B) Investors face no tax implications
C) The average share price will be reduced to reflect the split
D) There will be no change in the number of shares outstanding
Q3) What is the most probable reason for stock splits?
A) The economic benefit for the firm
B) The increase in the number of shares where the price stays the same
C) Trading price at an acceptable level for small investors
D) Trading price at the penny stock level
Q4) Evaluate the following statement: "If a firm has a number of positive NPV projects,it can cut its dividend so that it is not passing up good opportunities."
Page 24
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Chapter 23: Working Capital Management: General Issues
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Q1) All of the following are important warning signs indicating potential liquidity problems,except:
A) build-up of long-term assets
B) decreases in net working capital
C) increases in accounts receivable
D) increase in debt ratios
Q2) In the event that a business' cash budget forecasts a cash deficit for a short future period of time,what should be done?
A) Close the business, as it is unprofitable.
B) Arrange for some short-term borrowing around the expected time of the deficit.
C) Try to make the cash forecast positive by decreasing / cutting costs somehow.
D) Change the credit granting policy of the business.
Q3) The payables turnover ratio concerns:
A) Accounts receivable
B) Long-term liabilities
C) Bad debts
D) Accounts payable
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Chapter 24: Working Capital Management: Current Assets and
Current Liabilities
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Q1) Queue de Castor Company is being offered a one-year $1.45 million operating line of credit at a rate of 5.75%.There is a monthly 0.5% commitment fee on the unused amount.The firm borrows only $0.5 million during the first 8 months of the loan and reduces its loan by a further $0.2 million for the remaining 4 months.What is the effective annual cost (in percent)of this loan arrangement?
Q2) If the current credit policy is 3/30 net 60,which of the following tightens the credit policy?
A) 3/30 net 90
B) 3/35 net 75
C) 2/30 net 60
D) 3/20 net 45
Q3) All of the following are tasks performed by a factor except:
A) purchasing payables and extending loans.
B) purchasing receivables.
C) checking customers' credit and authorizing credit.
D) receivables bookkeeping and collection.
Q4) Current trends show firms holding less cash physically and preferring to hold liquidity in near-cash or cash equivalent securities or relying on standby lending.Explain fully why you think this is so.
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