Finance for Managers
Pre-Test Questions
Course Introduction
Finance for Managers is designed to equip current and aspiring managers with a solid foundation in financial concepts and decision-making tools essential for effective business leadership. This course explores key topics such as financial statement analysis, budgeting, cost control, capital investment decisions, and working capital management. Through real-world examples and practical exercises, students learn how to interpret financial data, assess organizational performance, and make informed decisions that contribute to business growth and sustainability. The curriculum emphasizes the role of finance in strategic planning and day-to-day operations, enabling managers to communicate confidently with financial professionals and contribute to the financial success of their organizations.
Recommended Textbook
Financial Management Concepts and Applications 1st Edition by Stephen Foerster
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Chapter 1: Overview of Financial Management
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Q1) List three forms of business organizations.What are the advantages and disadvantages of each?
Answer: We begin with the most common,the sole proprietorship.This has the advantage of easy start-up and that the owner is his or her "own boss." However,such firms generally have limited capital,unlimited liability,and ends when the owner dies or dissolves the business. Partnerships have greater capital potential,but also suffer from unlimited liability and often alack of expertise in at least one or more functional areas of business. Corporations dominate in the United States due to their ability to raise greater amounts of capital,ease of transition to new owners,and limited liability.They do suffer agency costs and double taxation.
Q2) A corporate financial manager who is trying to create value for its shareholders:
A)is not concerned with ethics but rather with writing iron-clad contracts.
B)can safely ignore ethics as long as no laws are broken.
C)must behave ethically to stay out of jail.
D)is concerned with ethics because unethical behavior destroys trust,and businesses cannot function without a certain degree of trust.
Answer: D
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Chapter 2: Sizing up a Business: a Non-Financial Perspective
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Q1) Some of the factors to consider in the analysis of management are:
A)the experience,skills,and chronological age of the management team.
B)the skills,technical knowledge,and reputations of the management team.
C)the skills,actual track record,and experience of the management team.
D)the capabilities and potential of the management team.
Answer: C
Q2) Describe the four stages of the business cycle.What are the characteristics of each stage and how would a financial manager adjust their strategic and tactical planning for changes in the business cycle?
Answer: Peaks in the business cycle tend to occur when the capacity-to-output gap is smallest,and troughs tend to occur when the gap is largest.When changes in real GDP are positive,the economy is said to be expanding.Conversely,two consecutive quarterly declines in real GDP are generally said to indicate a recession.
Q3) Generally in the short run,a county's actual output of goods and services increases the same rate as the country's capacity.
A)True
B)False
Answer: False
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Chapter 3: Understanding Financial Statements
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Sample Questions
Q1) Under current accounting rules,plant and equipment appear on a firm's balance sheet valued at its replacement value
A)True
B)False
Answer: False
Q2) Which of the following is the least liquid current asset?
A)Accruals
B)Accounts receivable
C)Marketable securities
D)Inventory
Answer: D
Q3) Which of the following is NOT a reason why cash flow may not equal net income?
A)Amortization is added in when calculating income.
B)Changes in inventory will change cash flows but not income.
C)Capital expenditures are not recorded on the income statement.
D)Depreciation is deducted when calculating net income.
Answer: A
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Chapter 4: Measuring Financial Performance
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Sample Questions
Q1) To create a common-size income statement for a firm one would typically divide each time on the income statement by:
A)total assets.
B)total equity.
C)net sales.
D)net income.
Q2) Which of the following questions is more likely to be asked by the firm's financial lenders as opposed to the firm's managers or potential investors?
A)How should we finance firm improvements and investments?
B)Should we continue to lend money to this firm?
C)Should we buy equity in this firm?
D)What are the accounts receivable policies for the firm?
Q3) A firm's age of accounts receivable:
A)measures the average time between credit-based sales and the collection of payments for those sales.
B)is likely to be greater for firms within the same industry with more generous credit terms.
C)is in part a function of the type of industry in which the firm operates.
D)All of the above.
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Chapter 5: Managing Day-To-Day Cash Flow
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Q1) One RISK of a line-of credit is that the borrower is only charged on the amount of the credit that is actually utilized.
A)True
B)False
Q2) "The Holiday Store" is a retail firm that is only open in the weeks prior to major American holidays.The rest of the year the store is closed to the public for in-store and on line sales.The store is well-managed and manages to sell a very high percentage of its inventory each holiday season.The store's working capital gap is likely:
A)to be the same at any particular date during the year.
B)lowest in the weeks leading up to times when it opens its doors to the public.
C)highest in the weeks leading up to times when it opens its doors to the public.
D)highest when they close their doors following a holiday season.
Q3) The simple accounting equation may be written as:
A)liabilities = assets + equity.
B)assets = liabilities + equity.
C)equity = liabilities + assets.
D)assets = liabilities - equity.
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Chapter 6: Projecting Financial Requirements and Managing Growth
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Q1) Gaston Grooming Inc.,has a sustainable growth rate of 17.28%.If the retention ratio is .60,the leverage ratio is 1.2 and the asset turnover ratio is 1.6,what was the firm's profit margin?
A)15.0%
B)13.6%
C)12.1%
D)11.4%
Q2) An alternative method of projecting a firm's future financial needs (such as bank loans )involves creation of a pro forma cash budget.Would you consider a cash budget to be more appropriate for short-term or long-term projections? Why? How do monthly cash budgets aid in the development of an annual cash budget? Is a cash budget more helpful for firms with seasonal needs or for those with constant cash flow needs?
Q3) Use the information provided to complete the pro forma income statement and balance sheet for J.W.Bracken Inc.
Q4) A pro forma balance sheet typically begins with the assets and then we estimate the liabilites and equity.
A)True B)False
Page 8
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Chapter 7: Time Value of Money Basics and Applications
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Q1) What is the present value of $3,500 received 3 years from today if the prevailing interest rate is 6.10%?
A)$2,732.98
B)$2,930.37
C)$3,625.14
D)$4,192.20
Q2) Michael received a professional baseball contract paying $7,000,000 per year for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.Who's contract has a greater present value if we assume a discount rate of 6%?
A)Bert = $29,334,283
B)Michael = $29,486,547
C)Bert = $39,459651
D)Michael = $39,743,196
Q3) If we are simply interested in determining whether the market as a whole,such as the S&P 500,is over- or undervalued,then the perpetual constant growth model is reasonable.
A)True
B)False
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Chapter 8: Making Investment Decisions
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Q1) The value of real option analysis comes from the value of time (to wait and make a decision)and from the riskiness of the project.
A)True
B)False
Q2) The ________ measure is similar to the yield to maturity measure for bonds.
A)NPV
B)IRR
C)MIRR
D)payback
Q3) Any project with a profitability index below 1.0 should be accepted as this implies that the benefits exceed the costs.
A)True
B)False
Q4) The IRR method of capital budgeting tells us what particular discount rate will result in a ________ NPV project.
A)positive
B)negative
C)zero
D)none of the above
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Chapter 9: Overview of Capital Markets: Long-Term
Financing
Instruments
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Q1) Despite relatively high first-day returns for U.S.IPOs,on average IPOs tend to underperform relative to the market in the first three to five years following their issuance.
A)True
B)False
Q2) Bond covenants place some restrictions on the firm in such a way as to improve the odds that the bondholders will be repaid.
A)True
B)False
Q3) ________ are the residual claimants of a firm's cash flows.
A)Preferred shareholders
B)Common shareholders
C)Bondholders
D)Bankers
Q4) The mandate of the board of directors is to ensure that management makes decisions that are consistent with maximizing the value of PREFERRED shares.
A)True
B)False
Q5) List and describe the three methods used to distribute shares in an IPO.
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Chapter 10: Assessing the Cost of Capital: What Return
Investors Require
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Q1) The author describes three interpretations of the cost of capital; one as a value driver,one from the investor's view point,and one from the viewpoint of the entrepreneur.Explain these three different interpretations,provide an example of each,and confirm why each is an appropriate interpretation of the cost of capital.
Q2) Using the author's suggested process of ignoring short term capital,what are the book value weights for the component costs of capital for Bacon Signs?
A)LTD = 36.4% and Equity = 63.6%
B)LTD = 56.7% and Equity = 43.3%
C)LTD = 50.4% and Equity = 49.6%
D)LTD = 41.0% and Equity = 59.0%
Q3) It is possible for a firm to generate an after-tax profit on an investment but to still consider the project unacceptable due to insufficient return.
A)True
B)False
Q4) Standard deviation is the practice of combining assets or investments in order to reduce risk.
A)True
B)False
Page 12
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Chapter 11: Understanding Financing and Payout Decisions
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Q1) When two groups have different access to information,there is then symmetric information for these two groups.
A)True
B)False
Q2) Miller and Modigliani also studied dividend policy and determined that in their world of perfect capital markets (no taxes,no bankruptcy costs,no asymmetric information)that dividend policy DOES matter.
A)True
B)False
Q3) What are the Earnings after tax for the Equity and Debt firm?
A)$240,000
B)$300,000
C)$560,000
D)$0
Q4) Which of the following is NOT one of M&M's perfect capital market assumptions?
A)There are no taxes.
B)Individuals must borrow (or lend)at the same rate at which a firm can borrow.
C)There is no asymmetric information in the market place.
D)There are no costs of bankruptcy.
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Chapter 12: Designing an Optimal Capital Structure
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Q1) If a firm has a positive debt-equity ratio,and a positive tax rate,then then levered beta for the firm must be ________ the unlevered beta for the firm.
A)less than
B)greater than
C)equal to
D)Can not definitively answer this question.
Q2) ________ and operating risk are one in the same and are reflected in the projected variability of the earnings of the firm regardless of how the firm is financed.
A)Business risk
B)Financial risk
C)Exchange rate risk
D)Risk of equity
Q3) If a firm has an unlevered beta equal to 1.0 a debt-equity ratio of .50 and a tax rate of .30,calculate the value of the firm's levered beta.
A)0.65
B)1.00
C)1.35
D)1.73
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Chapter 13: Measuring and Creating Value
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Q1) The weighted average cost of capital is estimated as K<sub>c</sub> = w<sub>d</sub>K<sub>d</sub> + w<sub>p</sub>K<sub>p</sub> + w<sub>e</sub>K<sub>e</sub>,where the w's represent the weights.The weights must sum to more than one so that the manager can then subtract taxes from the equation.
A)True
B)False
Q2) EVA is a multi-period rather than a one-period measure of true economic performance
A)True
B)False
Q3) Which of the following statements about Economic Value Added (EVA)is NOT true?
A)EVA is a measure of value creation.
B)EVA is a process for attempting to create value.
C)If a firm generates positive EVA then it increases shareholder value.
D)All of the above are true.
Q4) The Enterprise Value-to-EBITDA model of valuation is a RELATIVE valuation approach.
A)True
B)False
Q5) Use the information from Figure 13-2 and complete the missing information.
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Chapter 14: Comprehensive Case Study: Wal-Mart
Stores,inc
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Q1) Generating reasonable assumptions is one of the most critical aspects of pro forma analysis.
A)True
B)False
Q2) As of 2012,the greatest threat to Walmart appeared to be in the ________ segment.
A)online business
B)grocery
C)drug retailing
D)general merchandise
Q3) On the pro forma income statement,"property and equipment" should include any change in management's anticipated capital expenditures.
A)True
B)False
Q4) In 2012,Walmart bought back over 100 million shares of stock.
A)True
B)False
Q5) A firm cannot buy back stock AND increase dividends at the same time. A)True
B)False
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