Finance for Managers
Final Exam Questions
Course Introduction
Finance for Managers is designed to equip students with a fundamental understanding of core financial concepts and decision-making tools relevant to managerial roles. The course covers topics such as financial statement analysis, budgeting, capital investment, cost of capital, risk assessment, and working capital management. Emphasis is placed on practical applications, enabling managers to interpret financial data, make informed investment and financing decisions, and understand the financial implications of strategic choices within an organization. By bridging theory and real-world scenarios, this course prepares students to effectively contribute to their organization's financial health and strategic success.
Recommended Textbook
Corporate Finance 4th Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) You own 100 shares of a "C" corporation.The corporation earns $5.00 per share before taxes.Once the corporation has paid any corporate taxes that are due,it will distribute the rest of its earnings to its shareholders in the form of a dividend.If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend)income is 30%,then how much money is left for you after all taxes have been paid?
A)$210
B)$300
C)$350
D)$500
Answer: A
Q2) A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
A)shareholder proposal
B)leveraged buyout
C)shareholder action
D)hostile takeover
Answer: D
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Which of the following statements regarding the income statement is INCORRECT?
A)The income statement shows the earnings and expenses at a given point in time.
B)The income statement shows the flow of earnings and expenses generated by the firm between two dates.
C)The last or "bottom" line of the income statement shows the firm's net income.
D)The first line of an income statement lists the revenues from the sales of products or services.
Answer: A
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) What are the four financial statements that all public companies must produce?
Answer: 1.Balance Sheet
2.Income Statement
3.Statement of Cash Flows
4.Statement of Stockholder's Equity
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Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) A project that you are considering today is expected to provide benefits worth $168,000 in one year.If the risk-free rate of interest (r<sub>f</sub>)is 4.5%,then the value of the benefits of this project today are closest to:
A)$160,440
B)$160,766
C)$168,000
D)$175,560
Answer: B
Q2) Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the added benefit (cost)to you if you take the trade is closest to:
A)$730,600
B)$771,400
C)$40,800
D)$43,308
Answer: C
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
Page 5
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) The present value (at age 30)of your retirement savings is closest to:
A)$87,000
B)$108,000
C)$46,600
D)$75,230
Q2) If the current rate of interest is 8% APR,then the present value of an investment that pays $250 per quarter and lasts 20 years is closest to:
A)$18,519
B)$48,443
C)$9936
D)$20,000
Q3) Consider a growing perpetuity that will pay $100 in one year.Each year after that,you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment.This pattern of payments will continue forever.If the interest rate is 11%,then the value of this perpetuity is closest to:
A)$1667
B)$588
C)$2000
D)$909
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Chapter 5: Interest Rates
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Q1) Which of the following statements is FALSE?
A)Because interest rates may be quoted for different time intervals,it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.
B)The effective annual rate indicates the amount of interest that will be earned at the end of one year.
C)The annual percentage rate indicates the amount of simple interest earned in one year.
D)The annual percentage rate indicates the amount of interest including the effect of compounding.
Q2) The effective monthly discount rate that you should use to evaluate the truck lease is closest to:
A)0.487%
B)0.498%
C)1.500%
D)1.535%
Q3) Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q4) 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) The credit spread on BBB-rated corporate bonds is:
A)1.0%
B)1.5%
C)2.5%
D)4.1%
Q2) The price per $100 face value of a four-year,zero-coupon,risk-free bond is closest to:
A)$90.06
B)$89.16
C)$86.39
D)$84.66
Q3) The percentage change in the price of the bond "C" if its yield to maturity increases from 9% to 10% is closest to:
A)-17%
B)-6%
C)-4%
D)4%
Q4) 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: Investment Decision Rules
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Sample Questions
Q1) Assuming that your capital is constrained,so that you only have $600,000 available to invest in projects,which projects should you invest in and in what order?
A)CBFH
B)CBGF
C)BCFG
D)CBFG
Q2) 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
Q3) 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?
Q4) The internal rate of return rule can result in the wrong decision if the projects being compared have:
A)differences in scale.
B)differences in timing.
C)differences in NPV.
D)A and B are correct.
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Chapter 8: Fundamentals of Capital Budgeting
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Sales will ultimately decline as the product nears obsolescence or faces increased competition.
B)Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it,the prior investment will wasted.
C)With straight-line depreciation the asset's cost is divided equally over its life.
D)A projects unlevered net income is equal to its incremental revenues less costs and depreciation,evaluated on an pre-tax basis.
Q2) Which of the following statements is FALSE?
A)Depreciation expenses have a positive impact on free cash flow.
B)Free Cash Flow = (Revenues - Costs - Depreciation)× (1 - <sub>c</sub>)- Capital Expenditures - NWC + <sub>c</sub> × Depreciation.
C)The firm cannot use its earnings to buy goods,pay employees,fund new investments,or pay dividends to shareholders.
D)The depreciation tax shield is the tax savings that results from the ability to deduct depreciation.
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Chapter 9: Valuing Stocks
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Q1) You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The value of a share of KTI's stock is closest to:
A)$39.25
B)$20.00
C)$33.35
D)$12.50
Q2) Which of the following statements is FALSE?
A)A common approximation is to assume that in the long run,dividends will grow at a constant rate.
B)The dividend each year is the firm's earnings per share (EPS)multiplied by its dividend payout rate.
C)There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends.
D)During periods of high growth,it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.
Q3) 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) What is the expected payoff for Little Cure's ten drugs?
A)$500 million
B)$100 million
C)$1 billion
D)$0
Q2) The standard deviation of the overall payoff to Bank B is closest to:
A)$751,000
B)$2,179,000
C)$2,375,000
D)$21,794,000
Q3) Which of the following statements is FALSE?
A)When an investment is risky,there are different returns it may earn.
B)In finance,the variance of a return is also referred to as its volatility.
C)The expected or mean return is calculated as a weighted average of the possible returns,where the weights correspond to the probabilities.
D)The variance is a measure of how "spread out" the distribution of the return is.
Q4) What is the market portfolio?
Q5) Which pharmaceutical company faces less risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) How is the optimal portfolio choice affected if there are different rates for borrowers and savers?
Q2) The Sharpe ratio for the market (which is a 50-50 combination of the value and growth portfolios)portfolio is closest to:
A).53
B).58
C).61
D).79
Q3) The Sharpe Ratio for Rearden Metal is closest to:
A)0.40
B)0.56
C)0.80
D)1.00
Q4) The Sharpe ratio for your portfolio is closest to: A)1.2 B)0.6 C)1.0 D)0.7
Page 13
Q5) Calculate the covariance between Stock Y's and Stock Z's returns .
Q6) 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) If you hold 1000 shares of Merck,then the number of shares of Boeing that you hold is closest to:
A)240 shares
B)330 shares
C)510 shares
D)780 shares
Q2) Which of the following statements is FALSE?
A)We should be suspicious of beta estimates that are extreme relative to industry norms.
B)When using historical data,there is always the possibility of estimation error.
C)Evidence suggests that betas tend to revert toward zero over time.
D)For stocks,common practice is to use at least two years of weekly return data or five years of monthly return data when estimating beta.
Q3) Merck's market capitalization is closest to:
A)$38.2 billion
B)$77.4 billion
C)$89.4 billion
D)$115.6 billion
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) The alpha that investors in Galt's fund expect to receive is closest to:
A)-.80%
B)0.0%
C)0.80%
D)1.8%
Q2) Which of the following statements regarding portfolio "C" is/are correct?
1.Portfolio "C" has a negative alpha.
2.Portfolio "C" is overpriced.
3.Portfolio "C" is less risky than the market portfolio.
4.Portfolio "C" should not exist if the market portfolio is efficient.
A)1 and 3
B)2 and 4
C)1,3,and 4
D)3 only
Q3) When investors imitate each other's actions,this is known as ________ behavior.
A)pack
B)flock
C)herd
D)shepherd
Q4) What does the existence of a positive alpha investment strategy imply?
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Chapter 14: Capital Structure in a Perfect Market
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Q1) The number of shares that Galt must issue is closest to:
A)15 million
B)25 million
C)30 million
D)40 million
Q2) Based upon the three comparable firms,what asset beta would you recommend using for your firm's new project?
Q3) At the conclusion of this transaction,the number of shares that d'Anconia Copper will repurchase is closest to:
A)5 million
B)15 million
C)20 million
D)40 million
Q4) Suppose that you borrow $30,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:
A)21%
B)15%
C)20%
D)25%
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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 Flagstaff's after-tax WACC is closest to:
A)10.25%
B)10.00%
C)9.50%
D)8.75%
Q2) In 2000,assuming an average dividend payout ratio of 50%,the effective tax rate for equity holders was closest to:
A)69%
B)65%
C)55%
D)30%
Q3) Which of the following statements is FALSE?
A)The value of a firm is equal to the amount of money the firm can raise by issuing securities.
B)By reducing a firm's corporate tax liability,debt allows the firm to pay more of its cash flows to investors.
C)Equity investors must pay taxes on dividends but not capital gains.
D)For individuals,interest payments received from debt are taxed as income.
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Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) If its managers increase the risk of the firm,then the expected market value of Luther's assets is closest to:
A)$260
B)$240
C)$300 million
D)$280 million
Q2) Assume that EGI decides to wait until after the release of the new video game before they raise the $100 million through the issuance of new shares.EGI's share price following the release of the new video game will be closest to:
A)$18.00
B)$20.00
C)$16.00
D)$19.00
Q3) The value of Luther with leverage is closest to:
A)$315 million
B)$340 million
C)$205 million
D)$300 million
Q4) List five general categories of indirect costs associated with bankruptcy.
19
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Chapter 17: Payout Policy
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Q1) In which years were dividends tax disadvantaged?
A)1987 - 2002
B)1987,1993 - 2002
C)1987,1991 - 2002
D)1988 - 1990,2003 - 2009
Q2) If Wyatt Oil distributes the $70 million as a share repurchase,then its debt-to-equity ratio after the share repurchase will be closest to:
A)0.9
B)1.0
C)1.1
D)1.4
Q3) Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend,investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price?
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Consider the following equation for the Project WACC with a fixed debt schedule:
R<sub>wacc</sub> = r<sub>U</sub> - d <sub>c</sub>[rD + f(r<sub>U</sub>r<sub>D</sub>)]
The term f in this equations represents:
A)the annual adjustment percentage to the amount of debt.
B)a measure of the permanence of the debt level.
C)the dollar amount of debt outstanding.
D)the debt-to-value ratio.
Q2) Rose's unlevered cost of capital is closest to:
A)8.0%
B)7.5%
C)7.0%
D)9.0%
Q3) The unlevered value of Aardvark's new project is closest to:
A)$205
B)$100
C)$164
D)$202
Q4) Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.
Page 21
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation EV/Sales ratio of Ideko in 2010 is closest to:
A)1.7
B)1.9
C)1.6
D)1.8
Q2) Ideko's Accounts Receivable Days is closest to:
A)84 days
B)95 days
C)90 days
D)75 days
Q3) Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2007?
A)1505 units
B)1323 units
C)1914 units
D)1115 units
Q4) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
22
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Chapter 20: Financial Options
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Q1) In describing Galt's equity as a call option,the maturity of this option is:
A)5 years
B)10 years
C)20 years
D)infinite
Q2) KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The intrinsic value of this put option is:
A)$0
B)-$2
C)$2
D)$30
Q3) You are long both a put option and a call option on Rockwood stock with the same expiration date.The exercise price of the call option is $40 and the exercise price of the put option is $30.Graph the payoff of the combination of options at expiration.
Q4) Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.
Q5) Graph the payoff at expiration of a short position in a put option with a strike price of $20.
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Chapter 21: Option Valuation
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Q1) Assuming the Beta on KD stock is 1.1,the calculated beta for a one-year call option on KD stock with a strike price of $20 is closest to:
A)-1.8
B)2.4
C)-7.7
D)4.6
Q2) Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A)-7.7
B)2.4
C)4.6
D)-1.8
Q3) Using the binomial pricing model,the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to:
A)$2.40
B)$2.00
C)$2.15
D)$1.45
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24
Chapter 22: Real Options
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Q1) The rate on a risk-free annuity that can be called at any time is known as the:
A)callable annuity rate.
B)callable auction rate.
C)callable hurdle rate.
D)risk-free rate.
Q2) What is the failure cost index of the remote technology?
A)0.00200
B)0.99800
C)0.00210
D)0.99810
Q3) Assuming you are able to see the plant,draw a decision tree detailing this problem.
Q4) When the value of one project depends on the outcome of one or more other projects,this is known as:
A)mutually independent investments.
B)equivalent annual investments.
C)staged dependent investments.
D)mutually dependent investments.
Q5) Can value can be created by waiting for uncertainty to resolve?
Q6) Do out-of-the-money real options have value?
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Chapter 23: Raising Equity Capital
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Q1) How much money did Luther raise?
Q2) Which of the following statements is FALSE?
A)After deciding to go public,managers of the company work with an underwriter,an investment banking firm that manages the offering and designs its structure.
B)The shares that are sold in the IPO may either be new shares that raise new capital,known as a secondary offering,or existing shares that are sold by current shareholders (as part of their exit strategy),known as a primary offering.
C)Many IPOs,especially the larger offerings,are managed by a group of underwriters.
D)At an IPO,a firm offers a large block of shares for sale to the public for the first time.
Q3) When referring to IPOs,what is book building?
Q4) The IRR on the investments made by Galt Ventures is closest to:
A)9.9%
B)12.4%
C)14.9%
D)15.8%
Q5) Based upon the price/revenue ratio,what would be a reasonable value for KD?
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Chapter 24: Debt Financing
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Q1) What is the Yield to Call (YTC)on this bond?
Q2) Which of the following statements regarding the private debt market is FALSE?
A)Private debt has the advantage that it avoids the cost of registration.
B)Bank loans are an example of private debt,debt that is not publicly traded.
C)Private debt has the disadvantage of being illiquid.
D)The public debt market is larger than the private debt market.
Q3) Asset securitization is the process of creating a(n):
A)collateralized security.
B)asset-backed security.
C)municipal security.
D)payment security.
Q4) A(n)________ cash flows come from the cash flows of underlying financial securities.
A)general obligation security's
B)revenue bond's
C)asset-backed security's
D)double-barreled bond's
Q5) What is the Yield to Maturity (YTM)on this bond?
Q6) What is the Yield to Maturity (YTM)on this bond?
Q7) What is the Yield to Call (YTC)on this bond?
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Chapter 25: Leasing
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Q1) A lease where the lessee has the option to purchase the asset at the end of the lease for a set price that is set upfront in the lease contract is called a:
A)fixed price lease.
B)$1.00 out lease.
C)fair market value lease.
D)fair market value cap lease.
Q2) A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a:
A)$1.00 out lease.
B)fixed price lease.
C)fair market value lease.
D)fair market value cap lease.
Q3) The lease rate for which the lessor will break even is closest to:
A)$1,110,000
B)$1,130,000
C)$1,150,000
D)$1,160,000
Q4) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?
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Chapter 26: Working Capital Management
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Q1) Hammond's cash conversion cycle in 2009 is closest to:
A)22 days
B)44 days
C)58 days
D)66 days
Q2) What is a compensating balance?
Q3) Describe "just-in-time" inventory management.
Q4) Which of the following money market investments is a short-term debt obligation of the U.S.government?
A)Treasury Bill
B)Repurchase Agreement
C)Commercial Paper
D)Certificates of Deposit (CD)
E)Banker's Acceptance
Q5) The percentage of Wyatt's receivables that are still eligible to take the discount is closest to:
A)20.1%
B)32.1%
C)38.3%
D)42.2%
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Chapter 27: Short-Term Financial Planning
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Q1) d'Anconia Copper has borrowed $5 million for six months at a stated annual rate of 10%,using inventory stored in a field warehouse as collateral.The warehouse charges a $25,000 fee,payable at the end of the six months.The effect annual rate on this loan is closest to:
A)9.3%
B)11.3%
C)15.2%
D)17.1%
Q2) Which of the following statements is FALSE?
A)Unlike long-term debt,because of its short maturity,commercial paper is not rated by credit rating agencies.
B)The interest on commercial paper is typically paid by selling it at an initial discount.
C)Commercial paper is short-term,unsecured debt used by large corporations that is usually a cheaper source of funds than a short-term bank loan.
D)Extending the maturity of commercial paper beyond 270 days triggers a registration requirement with the Securities and Exchange Commission (SEC),which increases issue costs and creates a time delay in the sale of the issue.
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Chapter 28: Mergers and Acquisitions
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Q1) What is Reardon's price-earnings ratio after the takeover?
A)$1.85
B)$1.90
C)$2.00
D)$2.25
Q2) In a ________ merger,the target and the acquirer operate in the same industry.
A)conglomerate
B)vertical
C)horizontal
D)diagonal
Q3) Which of the following statements is FALSE?
A)Chief among the costs associated with size is that larger firms are more difficult to manage.
B)For most investors an investment in the stock market is a zero-NPV investment.
C)Diversification benefits are by far the most common justification that bidders give for the premium they pay for a target.
D)An acquirer might be able to add economic value,as a result of an acquisition,that an individual investor cannot add.
Q4) What is a white knight?
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Chapter 29: Corporate Governance
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Q1) Which of the following statements is FALSE?
A)New SEC rules require firms to report option grants within two days of the grant date,which may help prevent further abuses.
B)Studies have found evidence that the practice of timing the release of information to maximize the value of CEO stock options is widespread.
C)Managers have an incentive to manipulate the release of financial forecasts so that good news comes out before options are granted and bad news is delayed until after the options are granted.
D)The factor contributing most to the climb in CEO total compensation for the 1990s was the sharp increase in the value of stock and options granted each year.
Q2) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q3) Corporate governance is best defined as:
A)the system of laws and regulations that control corporations.
B)the system of controls,regulations,and incentives designed to prevent fraud and minimize conflicts of interest.
C)the system that determines who controls and runs a corporation.
D)the system that minimizes agency costs between bondholders and stockholders.
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Chapter 30: Risk Management
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Q1) If d'Anconia Copper enters into a contract to supply copper to end users at an average price of $1.48 per pound,then d'Anconia Copper's operating profit next year will be closest to:
A)$325 million
B)$365 million
C)$375 million
D)$425 million
Q2) Which of the following statements is FALSE?
A)The swap contract-like forward and futures contracts-is typically structured as a "zero-cost" security.
B)An interest rate swap is a contract entered into with a bank,much like a forward contract,in which the firm and the bank agree to exchange the coupons from two different types of loans.
C)In a standard interest rate swap,one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period.
D)If short-term interest rates were to fall while long-term rates remained stable,then short-term securities would fall in value relative to long-term securities,despite their shorter duration.
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Chapter 31: International Corporate Finance
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Q1) The amount of the taxes paid in dollars for the Irish operations is closest to:
A)$20.5 million
B)$5.1 million
C)$29.5 million
D)$50.0 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) The NPV of this project in Euros is closest to:
A) 54 million
B) 57 million
C) 62 million
D) 65 million
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