Finance for Managers
Mock Exam
Course Introduction
Finance for Managers is designed to provide non-financial managers with a solid understanding of key financial principles and tools essential for effective decision-making in a business environment. The course covers fundamental concepts such as financial statement analysis, budgeting, cost control, capital budgeting, risk assessment, and working capital management. Emphasis is placed on interpreting financial data to evaluate organizational performance, set objectives, and plan strategically. By mastering these financial skills, managers will be able to communicate more effectively with financial professionals, allocate resources efficiently, and contribute to the overall fiscal health of their organizations.
Recommended Textbook
Financial Management Theory and Practice 3rd Canadian Edition by Eugene Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following is NOT a primary disadvantage of a regular partnership?
A)unlimited liability
B)limited life of the organization
C)difficulty in transferring ownership
D)unlimited life of the organization
Answer: D
Q2) The primary goal of a company's management is the maximization of which of the following?
A)reported profit
B)fundamental share price
C)market share
D)personal wealth
Answer: B
Q3) Two key advantages to proprietorship are that,as a business,it pays no corporate income tax and is easily and inexpensively formed.
A)True
B)False
Answer: True
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) Which of the following is NOT considered a "good" use of free cash flow?
A)that it pay interest to bond holders
B)payment down bond principal
C)they pay dividends
D)payment of senior management bonuses
Answer: D
Q2) In 2012,XYZ Inc.located in Ontario had income from operation of $3,850,000,received interest of $150,000,paid $200,000 in interest,received dividends from another Canadian corporation of $100,000,and paid $400,000 in dividends to its common shareholders.If the applicable income tax rate is 33%,what is the corporation's tax liability?
A)$1,155,000
B)$1,254,000
C)$1,287,000
D)$1,353,000
Answer: B
Q3) Total net before-tax operating income is equal to net fixed assets.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Last year Altman Corp.had $205,000 of assets,$303,500 of sales,$18,250 of net income,and a debt-to-total-assets ratio of 41%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold,enabling it to reduce its total assets to $152,500.Sales,costs,and net income would not be affected,and the firm would maintain the 41% debt ratio.By how much would the reduction in assets improve the ROE?
A)4.69%
B)4.93%
C)5.19%
D)5.45%
Answer: C
Q2) Companies HD and LD have the same sales,tax rate,interest rate on their debt,total assets,and basic earning power.Both companies have positive net incomes.Company HD has a higher debt ratio and,therefore,a higher interest expense.Which of the following statements is correct?
A)Company HD pays less in taxes than Company LD.
B)Company HD has a lower equity multiplier than Company LD.
C)Company HD has a higher ROA than Company LD.
D)Company HD has more net income than Company LD.
Answer: A
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Page 5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Your friend just won the lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000,with the first payment coming 1 year from today.What rate of return is built into the annuity?
A)2.79%
B)3.10%
C)3.44%
D)3.79%
Q2) You deposit $1,000 today in a savings account that pays 3.5% interest,compounded annually.How much will your account be worth at the end of 25 years?
A)$2,245.08
B)$2,363.24
C)$2,481.41
D)$2,605.48
Q3) Which of the following bank accounts has the highest effective annual return?
A)an account that pays 8% nominal interest with monthly compounding
B)an account that pays 7% nominal interest with daily (365-day) compounding
C)an account that pays 7% nominal interest with monthly compounding
D)an account that pays 8% nominal interest with daily (365-day) compounding
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6
Chapter 5: Financial Planning and Forecasting Financial Statements
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Q1) Two firms with identical capital intensity ratios are generating the same amount of sales.However,Firm A is operating at full capacity,while Firm B is operating below capacity.If the two firms expect the same growth in sales during the next period,then Firm A is likely to need more additional funds than Firm B,other things held constant.
A)True
B)False
Q2) Suppose a firm has net income of $8 on sales of $40,fixed assets of $75,and total assets of $90.The firm retains 50% of its earnings.If the firm is operating at 80% capacity,what are the full capacity sales?
A)$40
B)$48
C)$50
D)$72
Q3) Which of the following is NOT an issue in the process of the FFS method?
A)analyzing the interaction of all decisions of the firm
B)projecting the consequences of decisions to avoid surprises
C)establishing capital budgeting procedures
D)measuring performance against the plan
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Chapter 6: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) An investor has two bonds in his investment portfolio.Bond A matures in 5 years and Bond B matures in 10 years.All else equal,which bond would have a greater price sensitivity to a given change in interest rates?
A)Bond A would have a greater sensitivity to a given change in interest rates due to its relative shorter term to maturity.
B)Bond A and Bond B would have relatively similar changes in price given a change in interest rates since term to maturity has no effect on bond price sensitivity.
C)Bond B would have a greater sensitivity to a given change in interest rates as it has a longer term to maturity.
D)There is no relationship between changes in interest rates and the price of bonds.
Q2) Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.
A)True
B)False
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8
Chapter 7: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Over the past 75 years,we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns.This observation supports the notion that there is a positive correlation between risk and return.Which of the following options correctly ranks investments from highest to lowest risk (and return),where the security with the highest risk is shown first,and the one with the lowest risk last?
A)small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, Treasury bills
B)large-company stocks, small-company stocks, long-term corporate bonds, Treasury bills, long-term government bonds
C)small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, Treasury bills
D)large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, Treasury bills
Q2) Efficient portfolio has the best risk and expected return combination for any given level of risk or return.
A)True
B)False
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Page 9
Chapter 8: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) Clinton's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $50.00,what is its effective annual (not nominal) rate of return?
A)7.52%
B)7.76%
C)8.00%
D)8.24%
Q2) You are considering buying a zero growth stock.If the firm pays a $5.00 annual dividend,and your required rate of return is 5%,what is the maximum price you would pay for this stock?
A)$10
B)$100
C)$25
D)$125
Q3) Closing stock market quotes as published in the business section of major newspapers represent the most reliable source of information used in choosing to buy or sell stock.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) You have the following data: D<sub>1</sub> = $1.30; P<sub>0</sub> = $42.50; and g = 7.00% (constant).What is the cost of equity from retained earnings based on the DCF approach?
A)9.08%
B)9.56%
C)10.06%
D)10.56%
Q2) Which of the following best describes what the cost of capital should reflect?
A)The cost of capital should reflect the average cost of the various sources of short-term funds a firm uses to acquire assets.
B)The cost of capital should reflect the average cost of the various sources of long-term bonds a firm uses to acquire fixed assets.
C)The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.
D)The cost of capital should reflect the average cost of the various sources of long-term capital, as well as supplier capital, the firm uses to acquire fixed assets.
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11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Edelman Electric Systems is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative),in which case it will be rejected. \(\begin{array}{lcccc}
\text { WACC: } & 10.00 \% \\
\text { Year: } & 0 & 1 & 2 & 3 \\ \hline \text { Cash flows: } & -\$ 800 & \$ 350 & \$ 350 & \$ 350 \end{array}\)
A)9.58%
B)10.64%
C)11.82%
D)13.14%
Q2) Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
A)True
B)False
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which statement best describes sensitivity analysis?
A)Straightforward sensitivity analysis, as it is generally employed, is incomplete in that it fails to consider the range of likely values for the key input variables and the probabilities of different input values.
B)Sensitivity analysis is a statistically based behavioural approach to project analysis that applies predetermined probability distributions in the scenario approach.
C)Sensitivity analysis is a method for evaluating a project that uses a number of possible values for a given variable, such as cash inflows, to assess its impact on the firm's return in simulation analysis.
D)Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in key variables and the likely range of variable values.
Q2) In capital budgeting terminology,an externality is defined as something that is outside,or external to,a proposed new project.Therefore,externalities are not considered in project cash flow estimates.
A)True
B)False
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Chapter 12: Capital Structure Decisions
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Q1) If debt financing is used,which of the following is correct?
A)The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.
B)The percentage change in net operating income will be equal to a given percentage change in net income.
C)The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.
D)The percentage change in net income will be greater than the percentage change in net operating income.
Q2) Which of the following would increase the likelihood that a company would increase its debt ratio,other things held constant?
A)an increase in costs incurred when filing for bankruptcy
B)an increase in the corporate tax rate
C)an increase in the personal tax rate
D)the company's stock price hitting a new low
Q3) The bankruptcy risk produces an ambiguous effect on agency costs.
A)True
B)False
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Chapter 13: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) Saskatchewan Corp.is considering a 15-for-3 stock split.The current stock price is $86.00 per share,and the firm believes that its total market value would increase by 2% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?
A)$17.20
B)$89.00
C)$35.44
D)$17.54
Q2) If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.
A)True
B)False
Q3) If a firm adheres strictly to the residual dividend policy,what would the issuance of new common stock suggest?
A)The dividend payout ratio has remained constant.
B)The dividend payout ratio is increasing.
C)No dividends were paid during the year.
D)The dividend payout ratio is decreasing.
Page 15
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Chapter 14: Initial Public Offerings Investment Banking and Financial Restructuring
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Sample Questions
Q1) Which of the following entities does NOT belong to the TMX Group?
A)Toronto Stock Exchange
B)ICE Futures Canada
C)Montreal Exchange
D)TSX Venture Exchange
Q2) With no recourse,firms prefer to use project financing for risky but small capital investments.
A)True
B)False
Q3) Which of the following projects is more likely to be funded with project financing by investors?
A)smaller-scale but complex projects
B)large-scale and stable projects
C)smaller-scale and independent projects
D)large-scale and risky projects
Q4) Which statement about equity carve-outs is true?
A)They are overpriced issues.
B)They are sold by private placements.
C)No prospectus is required.
D)They are a special type of IPO.
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Chapter 15: Lease Financing
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Sample Questions
Q1) If a lease is capitalized,how is it reported under International Accounting Standards IAS 17?
A)It shows up as a liability on the lessor's financial statements.
B)It is a debt on the right-hand side of the lessee's balance sheet, and an asset on the left.
C)The lease's present value shows as a liability on the lessee's balance sheet, but not as an asset.
D)The lease becomes a capital asset for the lessor, allowing the firm to capitalize on its value to borrow more.
Q2) Consider the following information: original investment = $1,900,PV of CCA tax shield = $1,000,PV of after-tax lease payments = $900.What is the NAL?
A)$2,550
B)$1,650
C)$0.00
D)-$350
Q3) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
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Page 17
Chapter 16: Capital Market Financing: Hybrid and Other Securities
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Q1) Curry Corporation is setting the terms on a new issue of bonds with warrants.The bonds will have a 30-year maturity and annual interest payments.Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant.The investment bankers estimate that each warrant will have a value of $10.00.A similar straight-debt issue would require a 10% coupon.What coupon rate should be set on the bonds with warrants so that the package would sell for $1,000?
A)6.75%
B)7.11%
C)7.48%
D)7.88%
Q2) Which of the following best describes the sale of warrants and their effects on stockholder's earnings?
A)The sale of warrants do not dilute stockholder's earnings.
B)The sale of warrants dilute stockholder's earnings to the extent that dividends are paid out.
C)The sale of warrants do not dilute stockholder's earnings to the extent that dividends are paid out.
D)The sale of warrants dilute stockholder's earnings.
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Chapter 17: Working Capital Management and Short-Term Financing
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Q1) Suppose the credit terms offered to your firm by your suppliers are 2/10,net 30 days.Out of convenience,your firm is not taking discounts,but is paying after 25 days,instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is not taking discounts and is paying on Day 25,what is the effective annual cost (NOT the nominal cost) of your firm's current practice,using a 365-day year?
A)60.3%
B)63.5%
C)66.7%
D)70.0%
Q2) Canada Corp.,needs $16,000 for one quarter to finance a deficit.Interest charges are 4% per quarter.Your bank requires an 8% compensating balance.How much must your firm borrow in order to obtain the needed funds?
A)$16,320
B)$17,392
C)$17,270
D)$19,900
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Page 19
Chapter 18: Current Asset Management
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Sample Questions
Q1) Bello Inc.had sales of $2,500,000 per year (all credit),and its DSO was 35 days.What was its average amount of accounts receivable outstanding,based on a 365-day year?
A)$239,726
B)$251,712
C)$264,298
D)$277,513
Q2) Which of the following is NOT likely to be a proper investment for temporarily idle cash?
A)Treasury bills
B)commercial paper
C)recently issued long-term AAA corporate bonds
D)government bonds due within 1 year
Q3) Suppose you have $10,000 in your chequing account.You write a cheque for $2,000 and deposit $3,000.What is your net float?
A)$5,000
B)$1,000
C)-$1,000
D)-$5,000
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Chapter 19: Financial Options and Applications in Corporate Finance
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Q1) Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share.If you buy this option for $310.25 and Johnson's stock price actually rises to $45,what would your pre-tax net profit be?
A)-$310.25
B)$1,689.75
C)$1,774.24
D)$1,862.95
Q2) GCC Corporation is planning to issue options to its key employees,and it is now discussing the terms to be set on those options.Which circumstance would decrease the value of the options,other things held constant?
A)GCC's stock price becomes more risky (higher variance).
B)The exercise price of the option is increased.
C)The life of the option is increased, i.e., the time until it expires is lengthened.
D)The government takes actions that increase the risk-free rate.
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Chapter 20: Enterprise Risk Management
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Q1) Suppose the quoted price for a June 2008 10-year CGB futures contract has changed from 118.72 to 118.77.What is the corresponding change in value in this futures contract?
A)$70
B)$60
C)$50
D)$30
Q2) Linear risks are risks that result in losses when prices are high and gains when prices are low.
A)True
B)False
Q3) Which of the following best describes counterparty risk?
A)the risk that one party defaults on its counterparty risk
B)the risk that one party defaults on its bond coupon payments
C)the risk that one party defaults on its derivatives contract obligations
D)there is no such thing as counterparty risk in derivatives markets
Q4) An option is a definite agreement leading to a firm completion of the transaction.
A)True
B)False
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22
Chapter 21: International Financial Management
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Q1) Exchange rate risk refers to the risk that cash flows from a foreign project,when converted to the parent company's currency,will be worth less than was originally projected because of exchange rate fluctuations.
A)True
B)False
Q2) The cash flows relevant for a foreign investment should,from the parent company's perspective,include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
A)True
B)False
Q3) A product sells for $750 in Canada.The exchange rate is $1 to 9.55 pesos.If the law of one price holds,what is the price of the product in Mexico?
A)4,375.00 pesos
B)5,545.50 pesos
C)6,750.00 pesos
D)7,162.50 pesos
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23
Chapter 22: Corporate Valuation and Governance
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Q1) Vasudevan Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the Year 0 value of operations,in millions? \(\begin{array}{llll}
\text { Year: } & 1 & 2 & 3 \\
\text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45 \end{array}\)
A)$586
B)$617
C)$648
D)$680
Q2) Simonyan Inc.forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?
A)$840
B)$882
C)$926
D)$972
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Page 24
Chapter 23: Mergers,Acquisitions,and Restructuring
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Q1) Using the purchase accounting method to report mergers,goodwill is not amortized; rather,it is subject to an annual impairment test.
A)True
B)False
Q2) Refer to Scenario: Maritime.What is the highest price TV Emporium pays for Maritime?
A)$67.75 million
B)$76.28 million
C)$81.10 million
D)$90.64 million
Q3) The income statement of the post-merger firm will be the same regardless of the accounting method used.
A)True
B)False
Q4) Which of the following are synergistic benefits of a merger?
A)operating economies of scale
B)financial economies
C)improved managerial efficiency
D)all of the above
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Chapter 24: Decision Trees,real Options and Other Capital Budgeting Techniques
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Q1) Lighthouse Corporation uses the NPV method for selecting projects,and it does a reasonably good job of estimating projects' sales and costs.However,it never considers real options that might be associated with projects.Which of the following statements is most likely to describe its situation?
A)Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account.
B)Its estimated capital budget is probably too large due to its failure to consider abandonment and growth options.
C)Failing to consider abandonment and flexibility options probably makes the optimal capital budget too large, but failing to consider growth and timing options probably makes the optimal capital budget too small, so it is unclear what impact not considering real options has on the overall capital budget.
D)Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget.
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Page 26