Finance for Managers Exam Solutions
Course Introduction
Finance for Managers provides a comprehensive overview of financial principles and practices essential for effective management decision-making. The course covers key topics such as financial statement analysis, budgeting, capital investment appraisal, risk and return, and working capital management, equipping managers with the tools needed to evaluate financial information and make informed strategic choices. Emphasis is placed on interpreting financial data, understanding the implications of financial decisions, and communicating financial information to stakeholders, ensuring that non-finance managers can confidently integrate finance concepts into their daily business operations.
Recommended Textbook
Essentials of Corporate Finance 8th Edition by
Stephen A. Ross
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Capital budgeting includes the evaluation of which of the following?
A)Size of future cash flows only
B)Size and timing of future cash flows only
C)Timing and risk of future cash flows only
D)Risk and size of future cash flows only
E)Size, timing, and risk of future cash flows
Answer: E
Q2) Which one of the following is a working capital decision?
A)How should the firm raise additional capital to fund its expansion?
B)What debt-equity ratio is best suited to the firm?
C)What is the cost of debt financing?
D)Which type of debt is best suited to finance the inventory?
E)How much cash should the firm keep in reserve?
Answer: E
Q3) Which type of financial market,dealer or auction,is best suited to expanding internationally and why?
Answer: A dealer market is best suited to international expansion because it is all electronic.An auction market is less adaptable to international expansion because it requires a physical trading floor.
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) How can a firm determine if its level of liquidity is appropriate?
Answer: If a firm has too little liquidity,it will encounter problems with its cash flow and at times have insufficient funds on hand to pay its debts.If a firm has too much liquidity,it will have extra cash that it never needs for its daily operations.Thus,the appropriate level of liquidity is somewhere in the middle between too little and too much.
Q2) Over the past year,a firm decreased its current assets and increased its current liabilities.As a result,the firm's net working capital:
A)had to increase.
B)had to decrease.
C)could have remained constant if the amount of the decrease in current assets equaled the amount of the increase in current liabilities.
D)could have either increased, decreased, or remained constant.
E)was unaffected as the changes occurred in the firm's current accounts. Answer: B
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) New Steel Products has total assets of $991,000,a total asset turnover rate of 1.1,a debt-equity ratio of 0.6,and a return on equity of 8.7 percent.What is the firm's net income?
A)$53,885.63
B)$58,303.33
C)$64,624.14
D)$70,548.09
E)$77,236.67
Answer: A
Q2) The Berry Patch has sales of $438,000,cost of goods sold of $369,000,depreciation of $37,400,and interest expense of $13,800.The tax rate is 35 percent.What is the times interest earned ratio?
A)2.29
B)3.46
C)3.87
D)4.38
E)4.79
Answer: A
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?
A)$8,397.74
B)$8,419.11
C)$8,511.15
D)$8,513.06
E)$8,520.22
Q2) Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds.Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest,compounded annually.How much more interest has Charles earned than Ben over the past 20 years?
A)$0
B)$2,109.16
C)$3,266.49
D)$7,109.16
E)$8,266.49
Q3) Draw a graph that illustrates the relationship between interest rates and the present value of $1,000 to be received in one year.
Q4) Explain the Rule of 72.
Page 6
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) Appalachian Bank offers you a $135,000,nine-year term loan at 7.5 percent annual interest.What will your annual loan payment be?
A)$18,507.16
B)$19,229.08
C)$20,660.02
D)$20,889.20
E)$21,163.57
Q2) Hometown Builders is borrowing $150,000 today for five years.The loan is an interest-only loan with an APR of 8.5 percent.Payments are to be made annually.What is the amount of the first annual payment?
A)$12,750.00
B)$20,610.90.00
C)$30,029.18
D)$36,461.10
E)$41,300.00
Q3) Consider an ordinary annuity and the variables that are related to that annuity.For each of the following sets of variables,identify whether the relationship between the two variables is direct (D)or inverse (I).Assume all other variables are held constant.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A bond has a $1,000 face value,a market price of $1,045,and pays interest payments of $80 every year.What is the coupon rate?
A)6.76 percent
B)7.00 percent
C)7.12 percent
D)8.00 percent
E)8.14 percent
Q2) Arts and Crafts Warehouse wants to issue 15-year,zero coupon bonds that yield 7.5 percent.What price should it charge for these bonds if the face value is $1,000? (Assume semiannual compounding.)
A)$308.15
B)$331.40
C)$356.08
D)$362.14
E)$369.94
Q3) Explain what a mortgage-backed security (MBS)is and how it functions.Also,explain why these securities were such a problem during 2008.
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend.The last annual dividend was $0.90 a share but all future dividends will be decreased by 10 percent annually.What is a share of this stock worth today at a required return of 15 percent?
A)$3.06
B)$3.24
C)$3.41
D)$3.59
E)$3.95
Q2) A DMM is a(n):
A)employee who executes orders to buy and sell for clients of his or her brokerage firm. B)individual who trades on the floor of an exchange for his or her personal account.
C)NYSE member who functions as a dealer for a limited number of securities.
D)broker who buys and sells securities from a market maker.
E)trader who deals only with primary offerings.
Q3) How is the stated value of a preferred stock utilized?
Q4) Explain the differences between a broker market and a dealer market.
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9
Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) A project has expected cash inflows,starting with year 1,of $2,200,$2,900,$3,500,and finally in year 4,$4,000.The profitability index is 1.14 and the discount rate is 12 percent.What is the initial cost of the project?
A)$7,899.16
B)$8,098.24
C)$8,166.19
D)$9,211.06
E)$9,250.00
Q2) The net present value profile illustrates how the net present value of an investment is affected by which one of the following?
A)Project's initial cost
B)Discount rate
C)Timing of the project's cash inflows
D)Inflation rate
E)Real rate of return
Q3) In words,explain how the crossover rate is computed and why the net present value profile is useful.
Q4) Explain why the net present value is considered to be the best method of analyzing an investment.
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) Explain the concept of incremental cash flow analysis and its purpose.
Q2) A project requires $360,000 of equipment that is classified as seven-year property.What is the depreciation expense in year 3 given the following MACRS depreciation allowances,starting with year 1: 14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent?
A)$38,033
B)$41,267
C)$51,444
D)$62,964
E)$88,164
Q3) The opportunities that a manager has to modify a project once it has started are called:
A)sensitivity choices.
B)managerial options.
C)scenario adjustments.
D)restructuring options.
E)erosion control measures.
Q4) Explain the difference between scenario analysis and sensitivity analysis and identify the purpose of each.
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Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?
A)The dollar return is dependent on the size of the investment while the percentage return is not.
B)The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not.
C)The dollar return considers the time value of money while the percentage return does not.
D)Dollar returns are based on capital gains while percentage returns are based on the total rate of return.
E)Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive.
Q2) Over the period of 1926-2011:
A)long-term government bonds underperformed long-term corporate bonds.
B)small-company stocks underperformed large-company stocks.
C)inflation exceeded the rate of return on U.S. Treasury bills.
D)U.S. Treasury bills outperformed long-term government bonds.
E)large-company stocks outperformed all other investment categories.
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Page 12
Chapter 11: Risk and Return
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Sample Questions
Q1) You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent.Currently,you own $16,700 of Stock A and $24,200 of Stock
B.The expected return for Stock A is 18.7 percent,and for Stock B it is 11.2 percent.What is the expected rate of return for Stock C?
A)13.67 percent
B)14.14 percent
C)15.38 percent
D)15.87 percent
E)16.11 percent
Q2) Which one of the following portfolios will have a beta of zero?
A)A portfolio that is equally as risky as the overall market
B)A portfolio that consists of a single stock
C)A portfolio comprised solely of U. S. Treasury bills
D)A portfolio with a zero variance of returns
E)No portfolio can have a beta of zero.
Q3) Using a security market line graph,illustrate a security that is overpriced and has a beta of 0.89.Label all relevant points,including those that represent the overall market.Explain why the security plots as you have illustrated it.
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Page 13
Chapter 12: Cost of Capital
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Sample Questions
Q1) Which of the following features are advantages of the dividend growth model?
I.Easy to understand
II.Model simplicity
III.Constant dividend growth rate
IV.Model's applicability to all common stocks
A)II only
B)I and III only
C)II and IV only
D)I and II only
E)I, II, and III only
Q2) Four years ago,the Morgan Co.issued 15-year,7.0 percent semiannual coupon bonds at par.Today,the bonds are quoted at 101.6.What is this firm's pretax cost of debt?
A)6.97 percent
B)7.08 percent
C)6.79 percent
D)6.83 percent
E)7.39 percent
Q3) Explain the concept of the subjective approach to assigning a required return to a project.
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases?
A)M&M Proposition I, without taxes
B)M&M Proposition II, without taxes
C)M&M Proposition I, with taxes
D)Static theory of capital structure
E)No theory suggests this.
Q2) Great Lakes Shipping is an all-equity firm with anticipated earnings before interest and taxes of $439,000 annually forever.The present cost of equity is 16.4 percent.Currently,the firm has no debt but is considering borrowing $1.25 million at 8.5 percent interest.The tax rate is 36 percent.What is the value of the levered firm?
A)$2,163,171
B)$2,406,519
C)$2,588,547
D)$2,666,667
E)$2,818,181
Q3) Explain why the capital structure of a firm is irrelevant to equity investors.
Q4) Explain how taxes affect the value of a firm based on M&M Proposition I.
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Page 15
Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) Cookies and Cream has 9,000 shares of stock outstanding at a market price of $14.65 per share.What will the price per share be after the firm declares a 12 percent stock dividend? Ignore taxes and market imperfections.
A)$12.24
B)$13.08
C)$14.65
D)$14.96
E)$15.00
Q2) Which one of the following is a drawback of cash dividends?
A)Firms may have to forgo positive net present value projects.
B)Stock prices tend to increase as annual dividend amounts increase.
C)Cash dividends support stock prices.
D)Dividends are felt to be directly related to agency costs.
E)Dividend-paying firms tend to attract a wider field of investors than do non-dividend-paying firms.
Q3) What are the differences between a regular cash dividend,a liquidating dividend,a special dividend,and an extra cash dividend?
Q4) Explain why a firm might prefer a stock repurchase rather than an increase in the firm's regular dividend.
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Chapter 15: Raising Capital
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Sample Questions
Q1) You own 100 of the 15,000 outstanding shares of Delta Movers stock.The firm just announced that it will be issuing an additional 5,000 shares to the general public in a cash offer at $22 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?
A)Dutch auction
B)Seasoned equity offering
C)Private placement
D)IPO
E)Rights offer
Q2) A.B.Securities assists issuers by pricing and selling new securities to the general public.Which one of the following terms best fits the role that A.B.Securities is playing?
A)Underwriter
B)Investment advisor
C)Specialist
D)Securities dealer
E)Venture capitalist
Q3) What are some of the key factors an individual should consider before selecting a first-stage venture capitalist?
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) Which of the following are inversely related to increases in a firm's current assets?
I.Reorder costs
II.Shortage costs
III.Restocking costs
IV.Carrying costs
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, III, and IV only
Q2) Which one of the following statements is correct?
A)If a firm decreases its inventory period, its accounts receivable period will also decrease.
B)The longer the cash cycle, the more cash a firm typically has available to invest.
C)A firm would prefer a negative cash cycle over a positive cash cycle.
D)Decreasing the inventory period will also decrease the payables period.
E)Both the operating cycle and the cash cycle must be positive values.
Q3) How can a firm benefit from preparing a short-term financial plan?
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18
Chapter 17: Working Capital Management
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Sample Questions
Q1) On any given day,a firm receives numerous checks worth an average combined total of $5,900.The funds from the deposited checks are generally available after two days.Every day,the firm mails out checks totaling $4,400 that generally take three days to clear the bank.What is the amount of the collection float?
A)$4,400
B)$5,900
C)$11,800
D)$13,250
E)$13,400
Q2) How are checks that are deposited into a typical lockbox handled?
A)The checks are deposited into a local bank which then overnights one check for the entire amount to the firm.
B)The checks are collected once a day, normally in the early morning, by a bank employee.
C)The checks are posted to the customer's account prior to being deposited.
D)The checks are collected throughout the day and immediately deposited into the firm's account.
E)The checks are collected and sent overnight to the firm's main office for processing.
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) You live in the U.S.and want to invest in a Chinese company,which will be referred to as "CC," because you believe its stock is uniquely positioned to be unusually profitable over the next five years.However,you do not have direct access to the Chinese financial markets.You may be able to indirectly invest in CC by purchasing which one of the following?
A)Swap
B)ADR
C)Gilt
D)Bulldog bond
E)Samurai bond
Q2) Currently,you can exchange $1 for 100.37 yen or 0.7538 in New York.In Tokyo,the exchange rate is ¥1 = 0.0077.If you have $1,200,how much profit can you earn using triangle arbitrage?
A)$18.08
B)$25.27
C)$30.32
D)$31.50
E)$33.14
Q3) Explain how the forward exchange market can help reduce short-run exposure to exchange rate risk.
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