Financial Analysis for Managers
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Course Introduction
Financial Analysis for Managers provides students with the essential tools and techniques necessary to interpret and analyze financial statements for informed managerial decision-making. The course covers fundamental concepts such as ratio analysis, cash flow analysis, trend analysis, and benchmarking, enabling managers to evaluate organizational performance, assess financial health, and make strategic recommendations. Emphasis is placed on practical applications in areas including budgeting, forecasting, investment decisions, and risk assessment, ensuring that participants can apply financial data effectively to support business objectives and drive value creation.
Recommended Textbook
Principles of Managerial Finance Brief 6th Edition by Lawrence
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Page 2
J. Gitman
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The financial manager places primary emphasis on cash flows, the inflow and outflow of cash.
A)True
B)False
Answer: True
Q2) Under which of the following legal forms of organization, is ownership readily transferable?
A) Sole proprietorships.
B) Partnerships.
C) Limited partnership.
D) Corporation.
Answer: D
Q3) The sole proprietor has unlimited liability; his or her total investment in the business, but not his or her personal assets, can be taken to satisfy creditors.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Securitization made it harder for banks to lend money because they could not pass the risk on to other investors.
A)True
B)False
Answer: False
Q2) Most money market transactions are made in A) common stock.
B) marketable securities.
C) stocks and bonds.
D) preferred stock.
Answer: B
Q3) All of the following are functions of security exchanges EXCEPT
A) allocating scarce capital.
B) aiding in new financing.
C) creating continuous markets.
D) holding demand deposits.
Answer: D
Q4) Meese Paper Distributors, Inc. has before-tax earnings of $1,900,000. Calculate the amount of the total tax liability.
Answer: Meese Paper Distributors 11ea8000_f9fc_f072_846e_e7b964b43c3e_TB2928_00
Page 4
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) Notes payable for CEE in 2010 was ________. (See Table 3.1)
A) $113,466
B) $ 52,372
C) $ 41,372
D) $ 10,609
Answer: D
Q2) The statement of cash flows may also be called the
A) income statement.
B) statement of retained earnings.
C) bank statement.
D) funds statement.
Answer: A
Q3) Net fixed assets represent the difference between gross fixed assets and the total expense recorded for the depreciation over then entire lives of the firm's fixed assets.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) The firm's cash flow from operating activities is ________. (See Table 4.1)
A) $50
B) $350
C) $150
D) $200
Q2) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. The ending cash balance for August totals
A) $1,500.
B) $5,500.
C) $2,500.
D) $3,500.
Q3) If a pro forma balance sheet dated at the end of May was prepared from the information presented, the marketable securities would total ________. (See Table 4.3)
A) $9,000
B) $9,500
C) $12,000
D) $16,750
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Chapter 5: Time Value of Money
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Sample Questions
Q1) A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be?
A) $2,314,814
B) $2,000,000
C) $3,125,000
D) $3,000,000
Q2) Thelma is planning for her son's college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year degree. How much must Thelma deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college?
A) $20,000
B) $13,620
C) $39,520
D) $11,277
Q3) Ken borrows $15,000 from a bank at 10 percent annually compounded interest to be repaid in six equal installments. Calculate the interest paid in the second year.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) (a) Calculate the current value of Bond L. (See Table 6.2)
(b) What will happen to the value/price as the bond approaches maturity?
Q2) The less certain a cash flow, the ________ the risk, and the ________ the present value of the cash flow.
A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher
Q3) All of the following are examples of restrictive debt covenants EXCEPT
A) prohibition on selling accounts receivable.
B) supplying the creditor with audited financial statements.
C) constraint on subsequent borrowing.
D) prohibition on entering certain types of lease arrangements.
Q4) A debenture is
A) a lengthy legal document stating the conditions under which a bond has been issued.
B) a secured bond that is secured by unspecified assets.
C) a bond secured by specific asset.
D) an unsecured bond that only creditworthy firms can issue.
Q5) Calculate the current value of Bond M. (See Table 6.2)
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Karina's Caribbean Foods had total assets as recorded on its balance sheet are $1,500,000. What is the value of the Karina's common stock if it has $950,000 in liabilities, and 7,500 shares of common stock outstanding?
Q2) Another term sometimes applied to a common shareholder is a
A) fundamental or basic owner of the firm.
B) residual owner of the firm.
C) net owner of the firm.
D) reciprocal owner of the firm.
Q3) If the expected return were above the required return, investors would buy the asset, driving its price up and its expected return down.
A)True
B)False
Q4) All of the following are characteristics of preferred stock EXCEPT
A) it is often considered quasi-debt due to fixed payment obligation.
B) it has less restrictive covenants than debt.
C) it gives the holder voting rights which permit selection of the firm's directors.
D) its holders have priority over common stockholders in the liquidation of assets.
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Chapter 8: Risk and Return
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Sample Questions
Q1) Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?
Q2) A beta coefficient of -1 represents an asset that A) is more responsive than the market portfolio. B) has the same response as the market portfolio but in opposite direction C) is less responsive than the market portfolio. D) is unaffected by market movement.
Q3) The more certain the return from an asset, the less variability and therefore the less risk.
A)True
B)False
Q4) Changes in risk aversion, and therefore shifts in the SML, result from changing tastes and preferences of investors, which generally result from various economic, political, and social events.
A)True
B)False
Q5) Unsystematic risk can be eliminated through diversification.
A)True
B)False
Page 10
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) A tax adjustment must be made in determining the cost of ________.
A) long-term debt
B) common stock
C) preferred stock
D) retained earnings
Q2) Since preferred stock is a form of ownership, it has no maturity date.
A)True
B)False
Q3) If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is
A) 3.6 percent.
B) 4.8 percent.
C) 6 percent.
D) 8 percent.
Q4) The cost of capital is a dynamic concept; it is affected by economic and firm-specific factors such as business risk and financial risk.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If a firm has unlimited funds to invest in capital assets, all independent projects that meet its minimum investment criteria should be implemented.
A)True B)False
Q2) The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.
A)True B)False
Q3) On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.
A)True
B)False
Q4) If the NPV is greater than the cost of capital, a project should be accepted. A)True B)False
Q5) Use the NPV approach to select the best group of projects. (See Table 10.7)
Q6) Use the IRR approach to select the best group of projects. (See Table 10.7)
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) Which of the following statements is most correct?
A) Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintain a diversified portfolio of investments in order to reduce firm diversifiable risk.
B) Firm's are rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock values.
C) Firms generally are not rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock prices.
D) Two of the above are true.
Q2) Despite their focus on total risk, RADRs are often used in practice.
A)True
B)False
Q3) All projects should always use the WACC as the required return for capital budgeting purposes.
A)True
B)False
Q4) Please explain the difference between a sunk cost and an opportunity cost and give an example of each type of cost
13
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) The cost of equity is greater than the cost of debt and increases with increasing financial leverage, but generally less rapidly than the cost of debt.
A)True
B)False
Q2) Total leverage measures the effect of fixed costs on the relationship between
A) Sales and EBIT.
B) Sales and EPS.
C) EBIT and EPS.
D) none of the above.
Q3) Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists.
A)True
B)False
Q4) Sales commission may be considered as a semivariable cost because it may be fixed for a certain volume of sales and then increase to higher levels for higher volumes.
A)True
B)False
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Chapter 13: Payout Policy
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Sample Questions
Q1) Since lenders are generally reluctant to make loans to a firm to pay dividends, the firm's ability to pay cash dividends is generally constrained by the amount of excess cash available.
A)True
B)False
Q2) Which type of dividend payment policy has the advantage that if the firm's earnings drop, dividends will still be maintained at a relatively constant level?
A) Constant-payout-ratio policy
B) Regular dividend policy
C) Low-regular-and-extra dividend policy
D) None of the above
Q3) According to the residual theory of dividends, if the firm's equity need exceeds the amount of retained earnings, the firm would
A) borrow to pay the cash dividend.
B) sell additional stock to pay the cash dividend.
C) pay no cash dividends.
D) not need to consider its dividend policy.
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would ________, the annual profits on total assets would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 14.2)
A) increase; decrease; increase
B) decrease; increase; decrease
C) increase; decrease; decrease
D) decrease; increase; increase
Q2) An evaluation of the firm's collection efforts based on the aging schedule would suggest ________. (See Table 14.6)
A) poor credit management
B) satisfactory credit management
C) superior credit management
D) overzealous collection efforts
Q3) A firm is said to be technically insolvent when its total assets is less than its total liabilities and stockholders' equity.
A)True
B)False
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in the firm's financial condition or operations.
A)True
B)False
Q2) A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should A) give up the cash discount, financing the purchase with the line of credit.
B) take the cash discount and pay on the 45th day after the date of sale.
C) take the cash discount and pay on the first day of the cash discount period.
D) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds.
Q3) In doing business in foreign countries, financing operations in the local market not only improves the company's business ties to the host community but also minimizes exchange rate risk.
A)True
B)False
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