Finance for Managers
Pre-Test Questions
Course Introduction
Finance for Managers is designed to provide non-financial managers with a comprehensive understanding of core financial principles and how they impact business decision-making. This course covers essential topics such as financial statement analysis, budgeting, forecasting, capital investment appraisal, and managing working capital, all through the lens of managerial responsibility. Participants will learn to interpret financial data, assess organizational performance, and make informed financial decisions that support strategic objectives, equipping them to effectively collaborate with finance professionals and contribute to their organization's financial success.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene
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Page 2
F. Brigham
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) With which of the following statements would most people in business agree
A) the short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.
B) government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C) although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
D) developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
E) because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.
Answer: C
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Chapter 2: Risk and Return-Part I
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Q1) Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)
A) 8.76%
B) 8.98%
C) 9.21%
D) 9.44%
E) 9.68%
Answer: C
Q2) Someone who is risk averse has a general dislike for risk and a preference for certainty. If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities. Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.
A)True
B)False
Answer: True
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Chapter 3: Risk and Return-Part II
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Q1) Which of the following statements is CORRECT?
A) the characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B) the slope of the characteristic line is the stock's standard deviation.
C) the distance of the plot points from the characteristic line is a measure of the stock's market risk.
D) the distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E) "characteristic line" is another name for the security market line.
Answer: D
Q2) Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.
A)True
B)False
Answer: False
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5
Chapter 4: Bond Valuation
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Q1) Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.
A)True
B)False
Q2) If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.
A)True
B)False
Q3) Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?
A) 5.01%
B) 5.27%
C) 5.54%
D) 5.81%
E) 6.10%
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6
Chapter 5: Financial Options
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Q1) An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.
A)True
B)False
Q2) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
A) put
B) naked
C) covered
D) out-of-the-money
E) in-the-money
Q3) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) The income statement shows the difference between a firm's income and its costs i.e., its profits during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
A)True
B)False
Q2) The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Q3) Total net operating capital is equal to net fixed assets.
A)True
B)False
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Chapter 7: Analysis of Financial Statements
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Q1) Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?
A) heidee would have the higher net income as shown on the income statement.
B) without more information, we cannot tell if heidee or leaudy would have a higher or lower net income.
C) heidee would have the lower equity multiplier for use in the dupont equation.
D) heidee would have to pay more in income taxes.
E) heidee would have the lower net income as shown on the income statement.
Q2) The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.
A)True
B)False
Q3) Refer to the data for Pettijohn Inc.What is the firm's market-to-book ratio?
A) 0.56
B) 0.66
C) 0.78
D) 0.92
E) 1.08
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Page 9
Chapter 8: Basic Stock Valuation
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Q1) Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
A) if one stock has a higher dividend yield, it must also have a lower dividend growth rate.
B) if one stock has a higher dividend yield, it must also have a higher dividend growth rate.
C) the two stocks must have the same dividend growth rate.
D) the two stocks must have the same dividend yield.
E) the two stocks must have the same dividend per share.
Q2) Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million. Justus's free cash flow is expected to grow at a constant rate of 7.00%. What was the last free cash flow, FCF0 in millions?
A) $0.95
B) $1.05
C) $1.16
D) $1.27
E) $1.40
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) Based on the projections, Decker will have
A) a financing surplus of $36
B) a financing deficit of $36
C) a financing surplus of $255
D) a financing deficit of $255
E) zero financing surplus or deficit
Q2) The term "additional funds needed (AFN)" is generally defined as follows:
A) funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
B) the amount of assets required per dollar of sales.
C) the amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
D) a forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E) funds that are obtained automatically from routine business transactions.
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11
Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) an example of asset switching is when a company borrows for a new manufacturing facility but then uses it to repurchase its own stock.
B) an example of an agency cost is when an attorney hires an expert witness for a trial.
C) the commission required by the federal housing agency for a small business loan is an example of an agency cost.
D) an example of an agency cost is the salary of the agent hired to work for the principal.
E) creditors have a claim on a firm's earning stream through the dividend payments they receive.
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) to enable the firm to borrow at a below-market interest rate.
B) to make it easier to grant stock options to employees.
C) to help prevent a hostile takeover.
D) to help retain valued employees.
E) to increase worker productivity.
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Chapter 11: Determining the Cost of Capital
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Q1) Which of the following statements is CORRECT?
A) if the calculated beta underestimates the firm's true investment risk i.e., if the forward-looking beta that investors think exists exceeds the historical beta then the capm method based on the historical beta will produce an estimate of rs and thus wacc that is too high.
B) beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. this is true even if not all of the firm's stockholders are well diversified.
C) an advantage shared by both the dividend growth model and capm methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
D) the specific risk premium used in the capm is the same as the risk premium used in the bond-yield-plus-risk-premium approach.
E) the discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate, g, is expected to be constant forever.
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Murray Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise Murray on the best procedure. If the wrong decision criterion is used, how much potential value would Murray lose? \(\begin{array}{cccccc}
r&{1: 6.00 \%} & & & & \\ \text { Year } & 0 & 1 & 2 & 3 & 4 \\ \mathrm{CF}_{\mathrm{S}} & -\$ 1,025 & \$ 380 & \$ 380 & \$ 380 & \$ 380 \\ \mathrm{CF}_{\mathrm{L}} & -\$ 2,150 & \$ 765 & \$ 765 & \$ 765 & \$ 765 \end{array}\)
A) $188.68
B) $198.61
C) $209.07
D) $219.52
E) $230.49
Q2) Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
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Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater.
A)True
B)False
Q2) Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation. This is because the total cash flows over the project's life will be higher if accelerated depreciation is used, other things held constant.
A)True
B)False
Q3) The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant.
A)True
B)False
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Page 15
Chapter 14: Real Options
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Q1) The option to abandon a project is a real option, but a call option on a stock is not a real option.
A)True B)False
Q2) Refer to the data for Garner-Wagner Incorporated.Based on the above data, what is the project's net present value?
A)$1,312,456
B) $1,104,607
C)$875,203
D) $105,999
E) $321,788
Q3) Which of the following is NOT a real option?
A) the option to buy shares of stock if its price goes up.
B) the option to expand into a new geographic region.
C) the option to abandon a project.
D) the option to switch the type of fuel used in an industrial furnace.
E) the option to expand production if the product is successful.
Q4) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
Page 16
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Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following statements is NOT correct?
A) after a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
B) investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued.
C) companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends.
D) stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
E) stock repurchases can be used by a firm as part of a plan to change its capital structure.
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
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Chapter 16: Capital Structure Decisions
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Q1) Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ____.
A) stock price.
B) cost of equity.
C) cost of debt.
D) cost of preferred stock.
E) earnings per share (eps).
Q2) Which of the following statements is CORRECT?
A) the capital structure that minimizes the interest rate on debt also maximizes the expected eps.
B) the capital structure that minimizes the required return on equity also maximizes the stock price.
C) the capital structure that minimizes the wacc also maximizes the price per share of common stock.
D) the capital structure that gives the firm the best credit rating also maximizes the stock price.
E) the capital structure that maximizes expected eps also maximizes the price per share of common stock.
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Epsilon Consultants has the following projected free cash flows to equity and other information. It has no non-operating assets. Calculate Epsilon's intrinsic value of equity using the FCFE model. \(\begin{array} { l c c c } & \text { Year 1 } & \text { Year 2 } & \text { Year } 3 \\ \text { FCFE } & 1,000 & 1,200 & 1,260\\ \text { Long-term FCFE growth }&5\%\\ \text { Required return on equity }&9\%
\end{array}\)
A) $28,440
B) $31,284
C) $34,413
D) $37,854
E) $41,640
Q2) The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
A)True
B)False
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Chapter 18: Initial Public Offerings-Investment Banking: and Financial Restructuring
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Q1) To finance its ongoing construction project, Bowen-Roth Inc. will need $5,000,000 of new capital during each of the next 3 years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40% debt and 60% equity, and it wants to be at that structure in 3 years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds. Yearly flotation costs for 3 separate issues of debt would be 3.0% of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues?
A) $79,425
B) $83,606
C) $88,006
D) $92,406
E) $97,027
Q2) Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
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Chapter 19: Lease Financing
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Q1) A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased
A) is financed with long-term debt.
B) is financed with debt whose maturity matches the term of the lease.
C) is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the wacc.
D) is financed with retained earnings.
E) is financed with short-term debt.
Q2) In a synthetic lease a special purpose entity (SPE) is set up by a corporation that wants to acquire the use of an asset. The SPE borrows up to 97% of its capital, uses its funds to buy the asset, and then leases it to the sponsoring corporation on a short-term basis. This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
Q3) A sale and leaseback arrangement is a type of financial, or capital, lease.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Which of the following statements concerning warrants is correct?
A) warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
B) warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
C) a firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
D) a drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
E) bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. however, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm believes this new lockbox system would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?
A) $29,160
B) $32,400
C) $36,000
D) $40,000
E) $44,000
Q2) Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales are expected to grow at a stable, steady rate of 10% annually in the future. Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.
A)True
B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) The primary reason to monitor aggregate accounts receivable is to see if customers, on average, are paying more slowly.
A)True
B)False
Q2) Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?
A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%
Q3) DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.
A)True
B)False
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24
Chapter 23: Other Topics in Working Capital Management
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Q1) Refer to Exhibit Palmer Pens. What is the firm's EOQ?
A) 26,833
B) 30,040
C) 43,987
D) 13,563
E) 21,456
Q2) Refer to Exhibit Duckett Group. According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?
A) $7,071
B) $38,357
C) $70,711
D) $102,956
E) $87,000
Q3) The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together. A)True
B)False
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25
Chapter 24: Enterprise Risk Management
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Q1) Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09. What is the implied annual interest rate inherent in this futures contract?
A) 6.32%
B) 6.65%
C) 7.00%
D) 7.35%
E) 7.72%
Q2) The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.
A)True
B)False
Q3) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Which of the following statements is most CORRECT?
A) the primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
B) the basic doctrine of fairness states that all debtholders must be treated equally.
C) since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
D) while a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
E) to a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.
Q2) Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.
A)True
B)False
Q2) Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.
A)True
B)False
Q3) Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.
A)True
B)False
Q4) The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.
A)True B)False
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Chapter 27: Multinational Financial Management
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Q1) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
Q2) When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.
A)True
B)False
Q3) Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?
A) 1 pound = $1.8000
B) 1 pound = $1.6582
C) 1 pound = $1.0000
D) 1 pound = $0.8500
E) 1 pound = $0.6031
Q4) A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
A)True
B)False
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Chapter 28: Time Value of Money
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168 Verified Questions
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Sample Questions
Q1) The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
A)True
B)False
Q2) What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?
A) $3,089
B) $3,251
C) $3,422
D) $3,602
E) $3,782
Q3) Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
A)True
B)False
Q4) A "growing annuity" is any cash flow stream that grows over time.
A)True
B)False
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Chapter 29: Basic Financial Tools: A review
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249 Verified Questions
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Sample Questions
Q1) If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
A)True
B)False
Q2) Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
A) banks a and b offer the same nominal annual rate of interest, but a pays interest quarterly and b pays semiannually. deposits in bank b will provide the higher future value if you leave your funds on deposit.
B) the present value of a 5-year, $250 annuity due will be lower than the pv of a similar ordinary annuity.
C) a 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
D) a bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
E) if an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
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Page 31
Chapter 30: Pension Plan Management
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Sample Questions
Q1) From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
Q2) Kumar Consulting operates several stock investment portfolios that are used by firms for investment of pension plan assets. Last year, one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15. The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent. What was the portfolio's alpha?
A) $0.75%
B) $0.15%
C) 0%
D) 0.15%
E) 0.75%
Q3) Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.
A)True B)False
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32
Chapter 31: Financial Management in Not for Profit
Businesses
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Q1) Which of the following statements about municipal bond financing is most correct?
A) whereas the vast majority of treasury and corporate bonds are held by institutions, no municipal bonds are held by individual investors.
B) the primary attraction of municipal bonds to individual investors is their high before-tax yields.
C) municipal bonds usually pay higher coupon rates than corporate bonds with similar ratings.
D) municipal bonds are risk-free.
E) in contrast to corporate bonds, municipal bond issues are not required to be registered with the securities and exchange commission.
Q2) Not-for-profit firms have fund capital in place of equity capital. Since fund capital does not have to provide a return to stockholders, the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
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