Finance for Managers Practice Exam
Course Introduction
Finance for Managers provides a comprehensive overview of key financial concepts and tools essential for effective decision-making in a managerial role. The course covers topics such as financial statement analysis, budgeting, forecasting, capital investment decisions, risk assessment, and the fundamentals of corporate finance. Students learn how to interpret financial information, assess the financial health of organizations, and apply financial principles to real-world business scenarios. Practical case studies and problem-solving exercises prepare managers to make informed financial decisions that drive organizational growth and sustainability.
Recommended Textbook
Corporate Finance Linking Theory to What Companies Do 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) What is the proper goal for management of a firm?
A) Maximize shareholder wealth
B) Maximize net income or earnings
C) Maximize sales revenue
D) Minimize expenses
Answer: A
Q2) What should be the objective of a focus on stakeholders?
A) Maximize the stakeholders' interests.
B) In situations of conflict pick stakeholders' interests over shareholders' interests.
C) Preserve stakeholders' interests.
D) Disregard shareholders' interests all together.
Answer: C
Q3) You were just hired as the CEO of a company.Your primary objective should be
A) to maximize the company's earnings.
B) to maximize profits.
C) to maximize the company's price of common stock.
D) to eliminate the company's competitors.
Answer: C
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3
Chapter 2: Financial Statement and Cash Flow Analysis
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Q1) Which of the following statements is TRUE?
A) Financial professionals prefer the accrual-based approach as it focuses more attention on cash inflows and outflows
B) Financial managers do not need to make any adjustments to financial statements for decision-making
C) Financial managers must convert cash-based financial statements to accrual-based ones before they can begin analyzing a firm
D) Financial professionals prefer the cash-based approach as it focuses more attention on cash inflows and outflows
Answer: D
Q2) When is the return on assets equal to the return on equity?
A) When the current ratio of the firm equals 1.
B) When the firm issues equal amounts of long term debt and common stock.
C) When the firm issues no dividends for a given time period.
D) When the firm only issues equity to finance its borrowing.
Answer: D
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4
Chapter 3: The Time Value of Money
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Sample Questions
Q1) Prudent Policy Life Insurance Co.offers a 10-year term life insurance policy with a $250,000 benefit and annual premiums of $200,paid at the BEGINNING of each year.If Prudent can earn 8% on invested capital,what is the future value to the firm of the premiums from one policy,assuming the policy holder outlives the policy term?
A) $3,129
B) $2,897
C) $2,720
D) $1,342
Answer: A
Q2) How much do you have to invest today at an annual rate of 8%,if you need to have $5,000 six years from today?
A) $3,150.85
B) $4,236.75
C) $7,934.37
D) $2,938.48
Answer: A
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5
Chapter 4: Valuing Bonds
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Sample Questions
Q1) The real return is 10% and the expected rate of inflation is 4.5%.What is the nominal rate?
A) 4.50%
B) 14.95%
C) 10.00%
D) 8.69%
Q2) You own a bond that pays a 12% annualized SEMIANNUAL coupon rate and has 10 years to maturity.If the discount rate increases from 14% to 16% during the next two years of the bonds life,then what is the dollar increase (decrease)in value for the bond during the two year period?
A) ($69.42)
B) ($71.09)
C) $69.42
D) $71.09
Q3) Bonds issued by US states or local governments are called:
A) Treasury bonds.
B) Municipal bonds.
C) Corporate bonds.
D) Yankee bonds.
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Page 6
Chapter 5: Valuing Stocks
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Q1) ConsGrough,Inc.has increased its annual common dividend by 3% in each of the years that the company has existed.If you believe that the company can continue to do so indefinitely,then what price would you be will to pay for ConsGrough if the required rate of return is 6% and the dividend that it paid yesterday was $5?
A) $85.83
B) $166.67
C) $171.67
D) $200.00
Q2) Bavarian Sausage is expected to pay a $1.57 dividend next year.If the required return on the stock investment is 14%,and the stock currently sells for $34.37,what is the implied dividend growth rate for this company?
A) 6.37%
B) 9.43%
C) 12.68%
D) 15.76%
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Chapter 6: The Trade-Off Between Risk and Return
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Q1) The additional return offered by a more risky investment relative to a safer one is called
A) the risk-free rate.
B) the risky return.
C) the risk premium.
D) the insurance premium.
Q2) A brochure for an investment company reports average nominal returns of 9% per year.If the economy has averaged 3% inflation over these years,what is the average real return for this investment company?
A) 3.00%
B) 5.83%
C) 6.00%
D) 9.00%
Q3) Inflation,recession,and higher interest rates are economic events that are characterized as:
A) Company-specific risk that can be diversified away.
B) Market risk.
C) Systematic risk that can be diversified away.
D) Diversifiable risk
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Page 8
Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Q1) A particular stock has a beta of 1.4 and an expected return of 13%.If the expected risk premium on the market portfolio is 6%,what's the expected return on the market portfolio?
A) 10.6%
B) 4.6%
C) 8.4%
D) 9.3%
Q2) According to the CAPM (capital asset pricing model),what is the single factor that explains differences in returns across securities?
A) the risk-free rate
B) the expected risk premium on the market portfolio
C) the beta of a security
D) the expected return on the market portfolio
E) the volatility of a security
Q3) Given Exhibit 7-5,what is the expected return on the portfolio?
A) 9.81%
B) 9.00%
C) 17.31%
D) Cannot be determined with the data given
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) Refer to NPV Profile.What's the IRR for project 1?
A) 12%
B) 14%
C) 18%
D) Cannot tell from the given information
Q2) Which of the following is not a "con" of the Accounting Rate of Return method?
A) The method makes no adjustment for the time value of money or project risk.
B) The depreciation method used impacts both the numerator and denominator.
C) It focuses on net income rather than a company's ability to generate cash.
D) The choice of the hurdle rate is arbitrary.
E) All of the above are cons of the Accounting Rate of Return method.
Q3) NPV and IRR may give conflicting decisions for mutually exclusive projects because:
A) the risk of the projects may differ.
B) the scale of the projects may differ.
C) the discount rates on the projects may differ.
D) all of the above.
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Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) 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
Q2) Cash Flows that occur if and only if a project is accepted are:
A) sunk costs.
B) terminal costs.
C) incremental cash flows.
D) current cash flows.
Q3) Refer to FAR Corporation.What is the operating cash flow for year 1?
A) $55,470
B) $60,000
C) $48,798
D) $37,686
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11
Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) Assuming no corporate taxes,what is Bavarian Brewhouse's WACC?
A) 16.23%
B) 12.99%
C) 13.44%
D) 5.28%
Q2) A firm's weighted average cost of capital is
A) the cost of capital applicable to all new forms of capital that the firm may raise in the future.
B) the simple weighted average of the current required rates of return on debt and equity.
C) the higher of either equity or debt capital that the firm is currently utilizing in its capital structure.
D) none of the above.
Q3) Which approach estimates NPV by taking a distribution of values for each of the model's assumptions?
A) Forecasting simulation
B) Monte Carlo simulation
C) Sensitivity analysis
D) Scenario analysis
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Page 12
Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) Refer to Bavarian Brewhouse IPO.What are the total costs caused by underpricing?
A) $8 million
B) $40 million
C) $32 million
D) $25 million
Q2) How much will Sea Grove Beach Corporation receive from the offering?
A) $6.30 million
B) $223.20 million
C) $240.50 million
D) $306.90 million
Q3) An example of a share privatization issue would be
A) the public issue of securities representing ownership in the telephone system which is currently owned by the government of a foreign country.
B) the public issue of securities representing ownership in a firm that is currently privately owned by a foreign citizen.
C) the private issue of securities representing ownership in a firm that is currently privately owned by a foreign citizen.
D) none of the above.
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) The Globe Incorporated has EBIT of $20 million for the current year.On the firm balance sheet,there is $80 million of debt outstanding that carries a coupon rate of 8 percent.Investors seek a return of 12 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) $32,000,000
B) $30,000,000
C) $24,000,000
D) $6,400,000
Q2) Assuming no taxes,what is Miller's Drugstore's value?
A) $15,000
B) $125,000
C) $25,000
D) $75,000
Q3) What are Bavarian Brew's earnings per share after the restructuring? Assume corporate taxes of 34%.
A) $1.32
B) $1.35
C) $1.42
D) $1.45
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Page 14
Chapter 13: Long-Term Debt and Leasing
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Q1) Quiz Company has a 12 year lease,with payments of $250,000 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) $416,667
B) $250,000
C) $150,000
D) $100,000
Q2) If a bond issue has a sinking fund provision then
A) the corporation makes payments, based upon a preconceived schedule, to a trustee who uses these funds to retire bonds by purchasing them in the marketplace.
B) the indenture allows the value of the bonds to fall to a pre-identified price before default occurs.
C) a certain portion of the interest payments on the bond are used to retire bonds by purchasing them in the marketplace.
D) none of the above.
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15
Chapter 14: Payout Policy
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Q1) The date on which all the stockholders are determined that are eligible to receive a dividend is called the ...
A) announcement date
B) date of record
C) payment date
D) none of the above
Q2) In order to receive a dividend payment,an investor must own the stock
A) on the announcement date
B) on the date of record
C) on the ex-dividend date
D) on the payment date
Q3) Which type of firm is more likely to follow a low-regular-and-extra-policy of dividend payout?
A) One in a stable industry with stable earnings.
B) One that recently experienced higher-than-normal earnings that are expected to be temporary.
C) One that recently experienced a downswing in earnings that is expected to be temporary.
D) none of the above
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) What are Bavarian Brew's cash disbursements in April?
A) $1,1046.63
B) $729.63
C) $679.63
D) $1,229.63
Q2) What is the value of Bavarian Brew's accounts payable at the end of April?
A) $346.63
B) $500.63
C) $1,000.63
D) $754.63
Q3) The short-term financing strategy where a company relies heavily on short term borrowing to finance a portion of their long term growth is called a(n)
A) conservative strategy
B) aggressive strategy
C) matching strategy
D) growth strategy
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17
Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) Bavarian Brew has an average age of inventory of 35 days,an average collection period of 27 days and a cash conversion cycle of 16 days.What is the company's average payment period?
A) 46 days
B) 62 days
C) 16 days
D) 19 days
Q2) The length of time from the receipt of inventory until it is sold is
A) the average age of inventory
B) the cash conversion cycle
C) the average collection period
D) the operating cycle
Q3) A firm that moves from traditional inventory stocking methods to a just-in-time (JIT)system should expect to see
A) reduced inventory levels.
B) funds released for alternative uses.
C) potentials for production halts.
D) all of the above.
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Chapter 17: Cash, payables, and Liquidity Management
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Q1) Coyote Valley's bank,Grand Lake National,proposes a lock-box collection and processing arrangement that will reduce collection float by 2 days.If the system will cost Coyote Valley $115,000 per year,what is the minimum opportunity cost of funds that would make the system beneficial?
A) 23.0%
B) 15.6%
C) 19.8%
D) 11.5%
Q2) Roxy is evaluating a lock-box system that will reduce float by 6 days.The firm has annual sales of $180 million and an opportunity cost of 12%.If the lock-box system is adopted,what is the amount of funds released?
A) $ 355,068.49
B) $ 493,150.68
C) $ 59,178.08
D) $ 2,958,904.11
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19
Chapter 18: International Financial Management
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Q1) Refer to Smith Enterprises International Investment.What is the cost of the manufacturing plant in U.S.dollars?
A) $20,415,000
B) $25,760,000
C) $30,615,000
D) $32,340,000
Q2) The European Union adopted a continent-wide medium of exchange,the Euro,as their common currency.How many of the member countries of the EU are using the Euro as their current currency?
A) 10
B) 11
C) 12
D) 13
Q3) Which of the following is not a strategy that corporations can use to transfer exchange rate risk?
A) Forward Contracts
B) Option Contracts
C) Currency Swaps
D) operate and sell in only one country
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Page 20
Chapter 19: Options
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Q1) Drewfus Corp.is currently trading at $30.Call options with a strike price of $25 and 6 months to expiration are trading at $7 and call options with a strike price of $35 and 6 months to expiration are trading at $2.If Investor Andy Reutter buys a $25 call and simultaneously sells a $35 call what is his maximum gain on the position.
A) $10
B) unlimited
C) $3
D) $5
Q2) You need to immediately purchase 100 shares of Stock X and you own a call option with a strike price of $32.The current price of Stock X is $25.Your best course of action is A) to exercise your call option at price of $32.
B) to purchase a new call option with a strike price of $25 and exercise it.
C) to purchase the stock in the market at a price of $25.
D) none of the above.
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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 European country is noted for having the largest amount of venture capital invested in its firms?
A) Germany
B) France
C) Italy
D) Britain
Q3) Which type of public market is good for the future of entrepreneurial firms as they mature into potential IPOs?
A) a healthy capital market for small stocks
B) a healthy capital market for large stocks
C) a weak small capital market
D) neither as these firms are not publicly traded yet
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22
Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) For Smith and Miller,what is the value of the post merger firm if cash is used?
A) $-5,000
B) $725,000
C) $720,000
D) $250,000
Q2) If a deli meat distributor were to acquire a meat processing plant,that would be an example of
A) a forward integration merger.
B) a backward integration merger.
C) a horizontal merger.
D) none of the above.
Q3) A change in corporate control brought about by the creation of new shares with special voting rights is a(n)
A) management buyout.
B) employee stock ownership plan.
C) dual-class recapitalization.
D) Florida.
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Chapter 22: Bankruptcy and Financial Distress
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Q1) A creditor that has a specific asset pledged as collateral are called
A) secured creditors
B) unsecured creditors
C) general creditors
D) shareholders
Q2) Bavarian Sausages has a working capital/total assets ratio of 0.3,a retained earnings/total assets ratio of 0.4,an earnings before interest and taxes/total assets ratio of 0.24,a market value of equity/book value of equity ratio of 0.4,and a sales/total assets ratio of 0.55.What is the company's Z score?
A) 2.50
B) 1.75
C) 3.25
D) 2.85
Q3) If the company has $4,152,000 in funds to distribute to unsecured creditors,how much do the owners of the firm receive in Case I?
A) $0
B) $98,000
C) $128,000
D) $253,000
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Page 24
Chapter 23: Risk Management
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Q1) Roxy plans to buy four-month Treasury Bills in eight months.Currently the price on twelve-month Treasury Bills is $962,456 per million.The risk-free rate is 5.2%.What is the fair forward price per $1 million?
A) $983,193
B) $995,538
C) $1,012,504
D) $1,012,504.0
Q2) Consider a forward contract to buy a ten-year bond in one year; currently the eleven-year bond has a coupon rate of 6%,paid semi-annually with a price of $980.The current and effective risk-free rate of interest is 5%.What is the fair forward price?
A) $1,029.05
B) $969.05
C) $933.33
D) $968.26
Q3) A call option on interest rates is called an
A) interest rate collar
B) interest rate floor
C) interest rate cap
D) interest rate swap
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Page 25