Finance for Managers Solved Exam Questions
Course Introduction
Finance for Managers provides a comprehensive overview of key financial principles relevant to decision-making in managerial roles. The course explores fundamental concepts such as financial statement analysis, budgeting, forecasting, capital structure, and investment evaluation. Emphasizing practical application, it equips students with the tools needed to interpret financial data, assess organizational performance, and make informed strategic choices. By integrating real-world case studies and interactive exercises, the course prepares managers to effectively communicate financial information and contribute to the financial health and growth of their organizations.
Recommended Textbook Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
A) Maximize its expected total corporate income.
B) Maximize its expected EPS.
C) Minimize the chances of losses.
D) Maximize the stock price per share over the long run,which is the stock's intrinsic value.
E) Maximize the stock price on a specific target date. Answer: D
Q2) One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests.
A)True
B)False Answer: False
Q3) Some partners in a partnership may have different rights,privileges,and responsibilities than other partners.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) If you decide to buy 100 shares of Google,you would probably do so by calling your broker and asking him or her to execute the trade for you.This would be defined as a secondary market transaction,not a primary market transaction.
A)True
B)False Answer: True
Q2) The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution)places an order to buy a stock.
A)True
B)False Answer: False
Q3) A simple average of those returns (which gives equal weight to each company in the S&P 500)is then calculated.That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."
A)True
B)False Answer: False
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Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) Hartzell Inc.had the following data for 2017,in millions: Net income = $600;after-tax operating income [EBIT (1-T)] = $700;and Total assets = $2,000.Information for 2018 is as follows: Net income = $825;after-tax operating income [EBIT (1-T)] = $825;and Total assets = $2,500.Assume the firm had no excess cash.How much free cash flow did the firm generate during 2018?
A) $397
B) $286
C) $257
D) $367
E) $325
Answer: E
Q2) Because the U.S.tax system is a progressive tax system,a taxpayer's marginal and average tax rates are the same.
A)True
B)False
Answer: False
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than B's.
A)True
B)False
Q2) Royce Corp's sales last year were $250,000,and its net income was $23,000.What was its profit margin?
A) 9.57%
B) 8.37%
C) 9.20%
D) 11.32%
E) 9.38%
Q3) Other things held constant,the more debt a firm uses,the lower the firm's operating margin will be.
A)True
B)False
Q4) The profit margin measures net income per dollar of sales.
A)True
B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 6.50%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?
A) 7.99%
B) 5.39%
C) 6.73%
D) 6.66%
E) 8.26%
Q2) Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.
A)True
B)False
Q3) Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
A)True
B)False
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Page 7
Chapter 6: Interest Rates
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Sample Questions
Q1) Crockett Corporation's 5-year bonds yield 6.35%,and 5-year T-bonds yield 4.45%.The real risk-free rate is r* = 2.80%,the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds,the liquidity premium on Crockett's bonds is LP = 0.90% versus zero for T-bonds,and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) \(\times\) 0)1%,where t = number of years to maturity.What inflation premium (IP)is built into 5-year bond yields?
A) 1.40%
B) 1.10%
C) 1.11%
D) 1.33%
E) 1.25%
Q2) If the pure expectations theory is correct,a downward sloping yield curve indicates that interest rates are expected to decline in the future.
A)True
B)False
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Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) Under normal conditions,which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
A) Adding additional restrictive covenants that limit management's actions.
B) Adding a call provision.
C) The rating agencies change the bond's rating from Baa to Aaa.
D) Making the bond a first mortgage bond rather than a debenture.
E) Adding a sinking fund.
Q2) 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 price risk if you purchased a 30-day bond than if you bought a 30-year bond.
A)True
B)False
Q3) Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a company with a high beta merges with a low-beta company,the best estimate of the new merged company's beta is 1.0.
B) Logically,it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks,especially if the projects are closely associated with research and development activities.
C) The beta of an "average stock," which is also "the market beta," can change over time,sometimes drastically.
D) If a newly issued stock does not have a past history that can be used for calculating beta,then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm.
E) During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects,the calculated historical beta may be drastically different from the beta that will exist in the future.
Q2) The slope of the SML is determined by the value of beta.
A)True B)False
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Page 10
Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Carter's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $57.50,what is its nominal (not effective)annual rate of return?
A) 7.03%
B) 8.56%
C) 6.75%
D) 5.84%
E) 6.96%
Q2) The preemptive right gives current stockholders the right to purchase,on a pro rata basis,any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.
A)True
B)False
Q3) If a firm's stockholders are given the preemptive right,then they can call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders have to seek a change in management through a proxy fight.
A)True B)False
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Chapter 10: The Cost of Capital
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Sample Questions
Q1) The cost of capital used in capital budgeting should reflect the average cost of the various sources of investor-supplied funds a firm uses to acquire assets.
A)True
B)False
Q2) The cost of perpetual preferred stock is found as the preferred's annual dividend divided by the market price of the preferred stock.No adjustment is needed for taxes because preferred dividends,unlike interest on debt,are not deductible by the issuing firm.
A)True
B)False
Q3) The higher the firm's flotation cost for new common equity,the more likely the firm is to use preferred stock,which has no flotation cost,and retained earnings,whose cost is the average return on the assets that are acquired.
A)True
B)False
Q4) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) In theory,capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital.The decision criterion should not be affected by managers' tastes,choice of accounting method,or the profitability of other independent projects.
A)True
B)False
Q2) McCall Manufacturing has a WACC of 10%.The firm is considering two normal,equally risky,mutually exclusive,but not repeatable projects.The two projects have the same investment costs,but Project A has an IRR of 15%,while Project B has an IRR of 20%.Assuming the projects' NPV profiles cross in the upper right quadrant,which of the following statements is CORRECT?
A) Each project must have a negative NPV.
B) Since the projects are mutually exclusive,the firm should always select Project B.
C) If the crossover rate is 8%,Project B will have the higher NPV.
D) Only one project has a positive NPV.
E) If the crossover rate is 8%,Project A will have the higher NPV.
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13
Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.
A)True
B)False
Q2) Wilson Co.is considering two mutually exclusive projects.Both require an initial investment of $9,100 at t = 0.Project X has an expected life of 2 years with after-tax cash inflows of $5,500 and $8,200 at the end of Years 1 and 2,respectively.In addition,Project X can be repeated at the end of Year 2 with no changes in its cash flows.Project Y has an expected life of 4 years with after-tax cash inflows of $4,800 at the end of each of the next 4 years.Each project has a WACC of 11%.What is the equivalent annual annuity of the most profitable project? Do not round intermediate calculations.
A) $2,502
B) $1,885.50
C) $1,553.77
D) $1,680.15
E) $1,465.82
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Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Q1) The true expected value of a project with a growth option is the expected NPV of the project (including the value of the option)less the cost of obtaining that option.
A)True
B)False
Q2) Which one of the following statements best describes the most likely impact that a profitable abandonment option would have on a project's expected cash flow and risk?
A) No impact on the PV of expected cash flows,but risk will increase.
B) The PV of expected cash flows increases and risk decreases.
C) The PV of expected cash flows increases and risk increases.
D) The PV of expected cash flows decreases and risk decreases.
E) The PV of expected cash flows decreases and risk increases.
Q3) Traditional discounted cash flow (DCF)analysis--where a project's cash flows are estimated and then discounted to obtain an expected NPV--has been the cornerstone of capital budgeting since the 1950s.However,in recent years,it has been demonstrated that DCF techniques do not always lead to proper capital budgeting decisions due to the existence of real options.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) You have been hired by a new firm that is just being started.The CFO wants to finance with 60% debt,but the president thinks it would be better to hold the percentage of debt in the capital structure (w<sub>d</sub>)to only 10%.Other things held constant,and based on the data below,if the firm uses more debt,by how much would the ROE change,i.e. ,what is ROE<sub>Higher</sub> - ROE<sub>Lower</sub>? Do not round your intermediate calculations. \(\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\\
\text { Capital } & \$ 4,000 & \text { Higher wd } & 60 \% \\ \text { ROIC = EBIT }(1-\mathrm{T}) / \text { Capital } & 17.00 \% & \text { Higher interest rate } & 13 \% \\
\text { Tax rate } & 35 \% & \text { Lower wd } & 10 \% \\ & & \text { Lower interest rate } & 9 \% \end{array}\)
?
A) 10.31%
B) 11.59%
C) 10.43%
D) 9.15%
E) 10.54%
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?
A) $35.71
B) $28.57
C) $28.86
D) $26.29
E) $25.43
Q2) Other things held constant,the higher a firm's target payout ratio,the higher its expected growth rate should be.
A)True
B)False
Q3) Which of the following actions will best enable a company to raise additional equity capital,other things held constant?
A) Refund long-term debt with lower cost short-term debt.
B) Declare a stock split.
C) Begin an open-market purchase dividend reinvestment plan.
D) Initiate a stock repurchase program.
E) Begin a new-stock dividend reinvestment plan.
Page 17
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Chapter 16: Working Capital Management
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Sample Questions
Q1) The target cash balance is typically (and logically)set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.
A)True
B)False
Q2) If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.
A)True
B)False
Q3) The calculated cost of trade credit can be reduced by paying late. A)True
B)False
Q4) The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.
A)True
B)False
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18
Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) Which of the following assumptions is embodied in the AFN equation?
A) All balance sheet accounts are tied directly to sales.
B) Accounts payable and accruals are tied directly to sales.
C) Common stock and long-term debt are tied directly to sales.
D) Fixed assets,but not current assets,are tied directly to sales.
E) Last year's total assets were not optimal for last year's sales.
Q2) Which of the following is NOT a key element in strategic planning as it is described in the text?
A) The mission statement.
B) The statement of the corporate scope.
C) The statement of cash flows.
D) The statement of corporate objectives.
E) The operating plan.
Q3) If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.
A)True
B)False
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Which of the following is NOT an example of a derivative security?
A) Futures.
B) Options.
C) Swaps.
D) Forward contracts.
E) Preferred stock.
Q2) The value of a stock option depends on all of the following EXCEPT:
A) Exercise price.
B) Variability of the stock price.
C) Length of time until option expiration.
D) Risk-free rate of interest.
E) Bond price.
Q3) A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)
A) Straddle option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
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Page 20
Chapter 19: Multinational Financial Management
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Q1) Suppose a foreign investor who holds tax-exempt Eurobonds paying 10.50% is considering investing in an equivalent-risk domestic bond in a country with a 28.00% withholding tax on interest paid to foreigners.If 10.50% after-tax is the investor's required return,what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
A) 15.46%
B) 16.33%
C) 16.92%
D) 12.83%
E) 14.58%
Q2) Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.
A)True
B)False
Q3) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred
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Q1) Which of the following is CORRECT?
A) Firms that use "off-balance-sheet" financing,such as leasing,would show lower debt ratios if the effects of their leases were reflected in their financial statements.
B) Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure,in an amount sufficient to support the lease payment obligation.
C) The fixed charges associated with a lease can be as high as,but never greater than,the fixed payments associated with a loan.
D) Capital,or financial,leases generally provide for maintenance by the lessor.
E) A key difference between a capital lease and an operating lease is that with a capital lease,the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds,whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.
Q2) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True B)False
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Chapter 21: Mergers and Acquisitions
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Q1) The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
A)True
B)False
Q2) A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.
A)True
B)False
Q3) In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.
A)True
B)False
Q4) Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.
A)True
B)False
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