Finance for Managers Practice Exam
Course Introduction
Finance for Managers introduces the fundamental concepts and tools of financial management essential for effective decision-making in the modern business environment. The course emphasizes understanding and interpreting financial statements, budgeting, capital investment analysis, and working capital management. Students will learn how to assess financial performance, evaluate investment opportunities, and manage resources to achieve organizational goals. The curriculum also covers key financial concepts such as time value of money, risk and return, and cost of capital, equipping managers with the necessary skills to communicate with finance professionals and support strategic business decisions.
Recommended Textbook
Introduction to Corporate Finance 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Q1) Which of the following represents career opportunities in finance?
A) Corporate finance
B) Investment banking
C) Consulting
D) All of the above
Answer: D
Q2) Which of the following is NOT a strength of the corporate form of business?
A) Unlimited life of the business
B) Unlimited access to capital
C) Unlimited liability
D) Individual contracting
Answer: C
Q3) Capital budgeting is the single most important activity of the firm's financial manager.Which of the following is not a part of the capital budgeting process?
A) Identifying potential investments.
B) Identifying investments that create shareholder value.
C) Developing new products.
D) Implementing and monitoring the selected investments.
Answer: C
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Page 3
Chapter 2: Financial Statement and Cash Flow Analysis
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Q1) In general,the more debt a firm uses in relation to its total assets
A) the less risk there is to the equity holders of the firm.
B) the less financial leverage it uses.
C) the greater the financial leverage it uses.
D) the greater extent to which it uses equity.
Answer: C
Q2) What is Cold Weather Sports' operating cash flow for 2012?
A) $2,400
B) $2,800
C) $4,000
D) none of the above
Answer: C
Q3) What is Import Inc.'s return on common equity?
A) 7.0%
B) 8.75%
C) 17.5%
D) none of the above
Answer: A
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4
Chapter 3: The Time Value of Money
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Q1) You have the choice between two investments that have the same maturity and the same nominal return.Investment A pays SIMPLE interest,investment B pays compounded interest.Which one should you pick?
A) A,because it has a higher effective annual return.
B) A and B offer the same return,thus they are equally as good.
C) B,because it has higher effective annual return.
D) Not enough information.
Answer: C
Q2) If you invested $2,000 in an account that pays 12% interest,compounded continuously,how much would be in the account in 5 years?
A) $3,524.68
B) $3,644.24
C) $3,581.70
D) $3,200.00
Answer: B
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Chapter 4: Valuing Bonds
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Q1) Emma Bonds will mature in 8 years,the coupon rate of the bond is 6% paid SEMIANNUALLY,if bonds currently sell for $820 what is the bond's yield to maturity?
A) 9.23%
B) 6.00%
C) 4.61%
D) 3.00%
Q2) The relationship between time to maturity and yield to maturity for bonds of equal risk is referred to as
A) the term structure of interest rates.
B) the forward rate.
C) the spot curve.
D) the forward curve.
Q3) Emma Bonds will mature in 8 years,the coupon rate of the bond is 6% paid SEMIANNUALLY,if the appropriate discount rate is 4%; what is the value of the bond?
A) $1,135.78
B) $1,293.02
C) $1,073.25
D) $1,543.11
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Chapter 5: Valuing Stocks
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Sample Questions
Q1) The Perp,Inc.has a preferred stock that will pay its next annual $5 dividend one year from now.The current price of the stock is $110.What is the required rate of return on the stock?
A) 4.55%
B) 4.00%
C) 5.50%
D) 22.00%
Q2) A stock is expected to pay a dividend of $3.00 in one year.To purchase the stock,investors seek a 15% annual return.If the stock is currently trading at $60,what is the implied constant growth rate in dividends for the future?
A) 5%
B) 10%
C) 15%
D) 20%
Q3) The first public sale of company stock to outside investors is called a/an
A) seasoned equity offering.
B) shareholders' meeting.
C) initial public offering.
D) proxy fight.
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Chapter 6: The Trade-Off Between Risk and Return
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Sample Questions
Q1) What is the variance of the return of Hillary Investments?
A) .01072
B) .00268
C) .00214
D) none of the above
Q2) Bavarian Sausage stock has an average historical return of 16.3% and a standard deviation of 5.3%.In which range do you expect the returns of Bavarian Sausage 68% of the time.
A) 5.7%:26.9%
B) 5.3%:16.3%
C) 11.0%:21.6%
D) 6.2%:18.5%
Q3) What is the standard deviation of returns for stock A?
A) 8.09%
B) 8.08%
C) 7.79%
D) 6.53%
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8
Chapter 7: Risk,return,and the Capital Asset Pricing Model
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Sample Questions
Q1) Which type of risk affects just a few securities at a time?
A) return risk
B) variance risk
C) unsystematic risk
D) systematic risk
Q2) Given Exhibit 7-1,what is the expected variance?
A) 957.38%
B) 1058.69%
C) 49.27%
D) 32.54%
Q3) The beta of the risk-free asset is:
A) -1.0
B) 0.0
C) 0.5
D) 1.0
Q4) Given Exhibit 7-5,what is the weight of Security 3?
A) 42.9%
B) 33.3%
C) 23.8%
D) Cannot be determined with the data given
Page 9
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) A problem with the payback method is:
A) it assigns a 0 percent discount rate to cash flows that occur before the cutoff point.
B) it assigns a 10 percent discount rate to cash flows that occur before the cutoff point.
C) it assigns a 20 percent discount rate to cash flows that occur before the cutoff point.
D) it assigns a 30 percent discount rate to cash flows that occur before the cutoff point.
Q2) Refer to Gamma Electronics.What's the payback period for the investment?
A) 1.8 years
B) 2.0 years
C) 2.5 years
D) 2.8 years
Q3) Capital budgeting techniques should:
A) fully account for expected risk and return.
B) recognize the time value of money.
C) lead to higher stock prices when applied.
D) all of the above.
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Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) The percentage of taxes owed on an incremental dollar of income is called:
A) the minimum tax rate.
B) the marginal tax rate.
C) the average tax rate.
D) the maximum tax rate.
Q2) Refer to Exhibit 9-1.Assume the tax rate is 40%,and the cost of capital is 10%.What is the net present value of the project?
A) $2.89m
B) $0.77m
C) -$6.82m
D) -$2.27m
Q3) Refer to DSSS Corporation.What is the initial investment outlay for this project?
A) $10,000
B) $135,000
C) $145,000
D) $155,000
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Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) Jupitor Surf Boards has annual fixed costs of $5,000 with a variable cost of $10 per unit and a sales price of $20 per unit.Jupitor expects to sell 1,000 units this year without much trouble.However,Jupitor is concerned about the scenario that all costs will increase 10% this year.If that happens,what will be Jupitor's earnings before interest and taxes?
A) $6,000
B) $5000
C) $4,000
D) $3,500
Q2) Find the break even point given the following information: sale price per unit = $50,variable cost per unit = $35; fixed costs = $50,000.
A) 2,298
B) 3,000
C) 3,333
D) 4,000
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Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) A bond sold by foreign corporations to U.S.investors is called a(n)
A) Eurobond
B) foreign bond
C) Yankee bond
D) none of the above
Q2) Emma International recently conducted an IPO,Emma received $52 per share and the offer price was $54 per share and the stock price rose to $59 per share.What was the underwriter discount?
A) 3.39%
B) 3.85%
C) 8.47%
D) 3.70%
Q3) Refer to "Flip" shares 2.What was the return on this investment at the end of the first day? (Ignore any tax implications for this question)
A) 11.38%
B) 11.61%
C) 11.88%
D) 12.33%
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) Refer to ABC Corporation.The company is considering the issue of $10 million in new debt at a rate of 10%.The funds from the new debt will be used to retire $10 million in equity.Currently,there are 1 million shares outstanding trading at $40 per share.Assuming the stock price will remain the same,what is the expected earnings per share in the next year if the company goes through with the re-capitalization?
A) $1.32
B) $1.56
C) $1.68
D) $1.76
Q2) Roxy Incorporated has EBIT of $2 million for the current year.The firm has $5 million of debt outstanding with a coupon rate of 8 percent.Investors require a return of 15 percent on the firm,and the firm has a corporate tax rate of 40%.What is the present value of the firm's tax shields?
A) $2,000,000
B) $ 400,000
C) $ 800,000
D) $ 750,000
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Page 14
Chapter 13: Long-Term Debt and Leasing
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Q1) Louis International has a lease with payments of $750,000 made at the beginning of each year.If no purchase option exists,and the company is in the 40% tax bracket,what is the annual after-tax cash outflow on the lease?
A) $ 60,000
B) $130,000
C) $ 70,000
D) $200,000
Q2) What are the basic type of leases available to businesses?
A) operating leases
B) financial leases
C) capital leases
D) all of the above
Q3) If a borrower violates a covenant the lender may:
A) demand immediate repayment
B) waive the violation and continue the loan
C) waive the violation but alter the terms of the original debt agreement
D) any of the above are possible
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Chapter 14: Payout Policy
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Sample Questions
Q1) A firm may be legally prevented from paying dividends if
A) it has a debt obligation due within the next month.
B) its assets are greater than its liabilities.
C) it is legally insolvent.
D) it needs to save cash for projects.
Q2) Smith Enterprises declares a 4-1 stock spilt.If you own 600 shares of Smith stock,how many share do you own after the split?
A) 600
B) 150
C) 2400
D) 1200
Q3) Old Balance common stock has a par value totaling $12,000,000,additional paid-in-capital totaling $30,000,000 as well as retained earnings of $40,000,000.If Old Balance is located in a state where the most stringent capital-impairment restrictions exist,what is the maximum dividend that Old Balance could pay to its shareholders?
A) $82,000,000
B) $70,000,000
C) $40,000,000
D) $30,000,000
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) Consider the following information for Smart Products: total assets=$1000; sales=$1540; net profit margin=12%; dividend payout ratio=40%; accounts payable=$308.If sales are forecast to increase 30%,what is the "short cut" estimate of external funds required (EFR)?
A) $64
B) $208
C) $300
D) $462
Q2) What is the value of the Bavarian Brew's accounts payable at the end of February? Assume the company had sales of $490 in December.
A) $688.50
B) $738.50
C) $638.50
D) $869.00
Q3) Increases in assets must be accompanied by
A) an increase in liabilities.
B) an increase in owners equity.
C) equal amounts of a)and b).
D) some combination of a)and b).
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Page 17
Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) The terms of sale for customers are called the A) credit terms
B) collection policy
C) cash discounts
D) none of the above
Q2) Emma International is considering easing credit standards to increase sales,and potentially profits.Currently the firm sells 500,000 units at a sales price of $22 per unit and variable cost of $13 per unit.Currently the average collection period is 25 days and the bad debt expense is 2% of sales.The required return on investment is 12%.If credit standards are eased,the sales will increase to 600,000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3% All else will remain the same.What is the cost associated with the increased investment in accounts receivable?
A) $ 53,424.66
B) $ 36,328.77
C) $ 89,753.42
D) $1,584,000.00
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Chapter 17: Cash, payables, and Liquidity Management
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Q1) Roxy is evaluating a Treasury Bill.It is a $1 million face value with a discount of 2.75% and maturing in 182 days.What is the money market yield?
A) 2.789%
B) 2.828%
C) 2.750%
D) 2.788%
Q2) Extending payment beyond the due date in order to reduce the cash conversion cycle
A) is an accepted "stretching" of credit terms.
B) is an unethical cash management practice.
C) is an unethical cash management practice,but can be viewed as acceptable. D) is backwards; this actually increases the cash conversion cycle.
Q3) Currently,a $1 million,91-day T-bill sells for a 2.5% discount.What is the bond equivalent yield?
A) 2.500%
B) 2.516%
C) 2.551%
D) 2.532%
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19
Chapter 18: International Financial Management
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Q1) You checked the /$ exchange rate today and you found that one Dollar cost you 0.8214.When you checked the one year /$ forward exchange rate one dollar was trading at 0.8026.What is the forward premium (discount)for the dollar?
A) 2.29%
B) -2.29%
C) 3.67%
D) -3.67%
Q2) The risk that a firm's value will fluctuate due to exchange price movements
A) Transactions exposure
B) Translation exposure
C) Economic exposure
D) Political Risk
Q3) Refer to Smith Enterprises International Investment.What is the NPV of the investment in US dollars when evaluating the denominated cash-flows? Assume a required return of 15%.
A) $4.347 million
B) $2.899 million
C) $7.852 million
D) $9.514 million
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Page 20
Chapter 19: Options
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Q1) You own 100 shares of a stock with a current price of $50 and you also own a put option of 100 shares of the stock with a strike price of $45.What is the minimum value of your portfolio at expiration? Ignore the original cost of the put option for your calculation.
A) $50
B) $45
C) $5
D) $0
Q2) Which of the following would affect the premium of a call option?
A) interest rates
B) dividend yield
C) stock price volatility
D) all of the above
Q3) You notice that you can purchase an option for $5.The price of the underlying stock is currently $42.What is the option premium for this option?
A) $5
B) $37
C) $42
D) $47
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21
Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Among the possible exit strategies employed by venture capitalists,which of the following describes the redemption option?
A) exit through an initial public offering
B) exit through a sale of the company directly to another company
C) exit through selling the company back to the founders
D) none of the above
Q2) Which type of venture capital firms dominate the industry?
A) small business investment companies
B) financial venture capital funds
C) corporate venture capital funds
D) venture capital limited partnerships
Q3) What is the annual (compounded)return on Pickswinners' investment?
A) 13%
B) 31%
C) 131%
D) 231%
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) A transaction in which two or more business organizations combine into a single entity is called a(n)
A) acquisition
B) merger
C) consolidation
D) none of the above
Q2) How many shares will Bavarian Brew issue in exchange for Bavarian Sausage's shares.
A) 75 million
B) 60 million
C) 100 million
D) 50 million
Q3) The transformation of a public corporation into a private company by the employees of the corporation itself is called a(n)
A) management buyout
B) employee stock ownership plan
C) reverse LBO
D) reverse merger
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23
Chapter 22: Bankruptcy and Financial Distress
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Q1) Gizmo Co.has the following financial measures: working capital to total assets ratio of 0.05,retained earnings to total assets ratio of 0.10,EBIT to total assets ratio of 0.3,market value of equity to book value of equity ratio of 1.1,and sales to total assets ratio of 0.4.What is Gizmo's Z-score?
A) 2.40
B) 2.35
C) 2.30
D) 2.25
Q2) Bankruptcy filings before The Bankruptcy Act of 2005 took effect
A) Did not change
B) Increased
C) Decreased
D) Went to zero
Q3) A cramdown procedure is used when
A) a reorganization plan fails to meet the standard for approval by all classes under the unanimous consent procedure.
B) the firm is clearly insolvent and the existing equity has no value.
C) either a or b
D) none of the above
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Page 24
Chapter 23: Risk Management
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Q1) Suppose Snooty Wine Importers has an order of Chateau de Snoot wines arriving from France in October,and the order will be paid in euros.If Snooty enters a contract today with a forward rate of 0.9 euros per U.S.dollar for October delivery,and the spot rate in October turns out to be euro 0.85 per U.S.dollar,what is the effect of the forward contract on Snooty?
A) Snooty Importers made $37,500
B) Snooty Importers lost $37,500
C) Snooty Importers made $637,55
D) There is no effect.
Q2) The spot rate exchange rate for Andromedan Pixels (ANP)is 3.00ANP/$.If the risk-free rate of return in Andromeda is 20% per annum while that in the U.S.is 3%,then what amount of U.S.dollars should you be able to convert 3,000,000 ANP into 1-year from now if you choose to begin hedging today?
A) $1,165,049
B) $1,000,000
C) $858,333
D) $833,333
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