Financial Management
Chapter Exam Questions
Course Introduction
Financial Management is a comprehensive course that introduces students to the principles and practices of managing an organizations financial resources. The course covers key topics such as financial analysis, planning and control, capital budgeting, risk and return, working capital management, and the sources of business financing. Emphasis is placed on decision-making techniques that promote effective allocation of resources to maximize value, including investment appraisal methods and cost of capital considerations. Students will also explore the impact of financial markets, ethical issues, and the global environment on financial decisions, preparing them for practical application in both corporate and personal finance contexts.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Q1) No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to effectively compete, even if those cost-increasing actions yield significant benefits to the firm.
A)True
B)False
Answer: False
Q2) Which of the following statements is correct?
A)The optimal dividend policy is the one that satisfies management, not shareholders.
B)The use of debt financing has no effect on earnings per share (EPS) or stock price.
C)The riskiness of projected EPS can impact the firm's value.
D)Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream.
E)Dividend policy is one aspect of the firm's financial policy that is determined solely by the shareholders.
Answer: C
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Chapter 2: Analysis of Financial Statements
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Q1) Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?
A)$1,425 million
B)$1,325 million
C)$750 million
D)$375 million
E)$275 million
Answer: E
Q2) Noncash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.
A)True
B)False
Answer: True
Q3) The book values of shares of stock are always equal to their market values.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) An arrangement in which the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit, is called a(n) _____.
A)best-efforts arrangement
B)underwritten arrangement
C)guaranteed capital arrangement
D)privately placed arrangement
E)accelerated securities exchange arrangement
Answer: B
Q2) The Securities and Exchange Commission (SEC) cannot exercise control over stock trades by corporate insiders.
A)True
B)False
Answer: False
Q3) The mandatory trade-through rule followed for trading in securities does not work to the benefit of shareholders.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?
A)7.3%
B)8.2%
C)9.5%
D)10.8%
E)11.7%
Q2) An investment carries an interest rate of 8 percent compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.
A)True
B)False
Q3) The present value of an investment increases as the opportunity cost rate increases.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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Q1) You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums:
Inflation premium 5%
Liquidity premium
1%
Maturity risk premium 2%
Default risk premium 2%
Based on these data, the real risk-free rate of return is:
A)0 percent.
B)1 percent.
C)2 percent.
D)3 percent.
E)4 percent.
Q2) The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.
A)True
B)False
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Chapter 6: Bonds Debt Characteristics and Valuation
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Q1) A bond differs from a term loan in that:
A)a bond issue is negotiated between a financial institution and an investor.
B)a bond is sold to a financial institution only.
C)a bond is always offered to the public at a variable coupon rate.
D)a bond has a higher issuance cost.
E)a bond involves minimal formal documentation.
Q2) An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it?
A)$1,122.87
B)$1,003.42
C)$875.38
D)$950.75
E)$877.11
Q3) Floating-rate bonds pay interest based on an inflation index, such as the consumer price index (CPI).
A)True
B)False
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) Scubapro Corporation currently has 500,000 shares of common stock outstanding and plans to issue 200,000 more shares in a seasoned equity offering. The current shareholders have preemptive rights on any new issues of common stock by Scubapro Corporation. How many shares would an investor who currently has 20,000 shares, have the right to buy if she exercises her preemptive right?
A)200,000 shares
B)120,000 shares
C)20,000 shares
D)12,000 shares
E)8,000 shares
Q2) Common stockholders have the right to _____.
A)vote for the changes in a firm's charter
B)convert their stock into bonds
C)receive the cash distributions before preferred stockholders
D)receive the par value of shares on liquidation
E)receive cumulative dividends
Q3) A firm undertakes stock repurchase only if the price of its stock is overvalued.
A)True
B)False
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Page 9
Chapter 8: Risk and Rates of Return
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Q1) For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.
A)85.0%
B)15.0%
C)34.0%
D)17.0%
E)9.0%
Q2) The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.
A)standard deviation of returns
B)variance of returns
C)actual rate of return
D)risk premium
E)risk-adjusted return
Q3) Economic risk is an unsystematic risk that can be diversified by the investors.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Q1) If a capital budgeting project has a negative net present value (NPV),
A)its internal rate of return (IRR) is also negative.
B)its discounted payback period (DPB) is greater than the project's economic life.
C)the firm should invest in the project as long as the initial investment outlay is low.
D)its traditional payback period (PB) is greater than the firm's expected payback period.
E)its internal rate of return (IRR) is greater than the discount rate that would be used to compute the project's NPV.
Q2) The ultimate purpose of a capital budget is to forecast _____.
A)the target payback periods of the projects undertaken by a firm
B)the funds required to purchase fixed assets for future projects
C)the future value of the cash inflows from various projects
D)the terminal value of the cash flows from different projects
E)whether projects have multiple internal rates of return
Q3) The two main purposes of post-audit are to improve forecasts and to improve operations.
A)True
B)False
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Page 11
Chapter 10: Project Cash Flows and Risk
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Q1) Zinc Corp. is planning to purchase a new machine. The initial investment outlay is expected to be $40,000, and the annual supplemental operating cash flows that the machine is expected to generate during its three-year life are $11,000, $15,000, and $18,000, respectively. The company's required rate of return is 9 percent. Which of the following statements is correct about the machine's net present value (NPV) and the decision of Zinc Corp. should make?
A)Accept the project because NPV = $4,000
B)Reject the project because NPV = -$3,384
C)Accept the project because NPV = -$4,382
D)Reject the project because NPV = $16,981
E)Accept the project because NPV = $76,616
Q2) A key difference between a replacement project analysis and an expansion project analysis is that the net present value (NPV) technique that is used to evaluate capital budgeting projects should only be used to evaluate expansion projects, whereas either the NPV technique or the internal rate of return (IRR) technique can be used to evaluate replacement projects.
A)True
B)False
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Page 12
Chapter 11: The Cost of Capital
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Q1) Under normal circumstances, the weighted average cost of capital (WACC) is used as the firm's required rate of return because:
A)as long as the firm's investments earn returns greater than its WACC, the value of the firm will not decrease.
B)any returns less than the WACC will cover the fixed costs associated with the capital and provide excess returns to the firm's stockholders.
C)it is the average of all the interest rates on the firm's existing debt.
D)it is an indication of the returns the firm expects to earn in the future from investing in capital budgeting projects.
E)it represents the average return the firm currently earns on the funds it has invested in assets.
Q2) A firm's cost of capital (WACC) represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm does not decrease.
A)True
B)False
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Chapter 12: Capital Structure
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Q1) According to the following information, what is the firm's optimal capital structure? \(\begin{array}{ccc}
\text { Proportion } & \text { Earnings Per } & \text { Weighted Average Cost } \\
\text { of Debt } & \text { Share (EPS) } & \text { of Capital (WACC) } \\
\hline 30 \% & \$ 2.50 & 13.2 \% \\
40 & 3.80 & 12.7 \\
50 & 4.75 & 12.4 \\
60 & 5.25 & 12.8
\end{array}\)
A)30%
B)40%
C)50%
D)60%
E)To determine the optimal capital structure, the market value of the stock must be known.
Q2) The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.
A)True
B)False
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Page 14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) Which of the following hypotheses/theories suggests that investors regard a change in dividend payments as a signal that the firm's management expects future earnings to also change?
A)Information content hypothesis
B)Clientele effect theory
C)Constant payout ratio hypothesis
D)Dividend modification hypothesis
E)Projected earnings hypothesis
Q2) American Generation Ecology (AGE) expects to grow at a constant rate of 4 percent forever. Its target debt/asset ratio is 60 percent and it expects to have profitable investments of $300,000 this year. AGE plans to continue paying the same dividend that has been paid the past 20 years, $1.50 per share, long into the future. The firm has 400,000 shares of stock outstanding. If net income is expected to be $800,000, what should be AGE's dividend payout ratio this year?
A)15.4%
B)25.0%
C)75.0%
D)46.2%
E)60.0%
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Chapter 14: Managing Short-Term Financing Liabilities
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Q1) A(n) ______ is a type of legal claim (lien) against a firm's inventory when it is used as collateral for a loan and the goods are relatively low priced, fast moving, and difficult to identify individually.
A)recourse order
B)bond indenture
C)trust receipt
D)warehouse receipt
E)blanket lien
Q2) A(n) ______ is a type of legal claim (lien) against a firm's inventory when it is used as collateral for a loan and the goods are relatively high priced, slow moving, and easy to identify individually using serial numbers or other distinguishing characteristics.
A)note payable
B)trust receipt
C)blanket lien
D)bond indenture
E)recourse inventories order
Q3) Commercial paper is a discount interest loan.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Q1) Given the following information, what is the economic ordering quantity (EOQ) for Shinebird Textiles?
Ordering costs = $40 per order
Carrying costs = 20% of purchase price
Purchase price (cost) = $10 per unit
Total sales for year = 1,000 units
A)142 units
B)200 units
C)50 units
D)90 units
E)283 units
Q2) A(n) ______ is a report that shows how long accounts receivable have been outstanding; it divides receivables into specified periods that provide information regarding the proportions of receivables that are due for specific periods of time.
A)payables time line
B)collection float schedule
C)aging schedule
D)accounts payable tracker
E)credit indenture
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Chapter 16: Financial Planning and Control
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Q1) The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.
A)financial
B)total
C)operating
D)combined
E)equity
Q2) By performing a cost-volume-profit analysis, EZ Rentals discovered that its operating breakeven point, QOpBEP, is at sales equal to $180,000. If EZ wants to decrease its operating breakeven point, which of the following actions should be taken? Assume everything else is equal.
A)Increase fixed operating costs.
B)Decrease sales.
C)Increase the variable operating cost ratio.
D)Decrease fixed financial costs.
E)Increase the product's contribution margin.
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