Financial Management
Chapter Exam Questions
Course Introduction
Financial Management provides an in-depth exploration of the concepts, principles, and techniques necessary for effective corporate financial decision-making. The course covers fundamental topics such as financial analysis and planning, capital budgeting, risk and return, cost of capital, and working capital management. Students learn how to evaluate investment opportunities, manage resources efficiently, and understand the implications of financial decisions on firm value. Emphasis is placed on both theoretical frameworks and practical applications, equipping students with the analytical tools and strategic insights needed to address real-world financial challenges in a dynamic business environment.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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Chapter 1: The Goals and Functions of Financial Management
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Q1) Institutional investors are important in today's business world because A) as large investors they have more say in how businesses are managed.
B) they have a fiduciary responsibility to the workers and investors that they represent to see that the firms they own are managed in an ethical way.
C) as a group they can vote large blocks of stock for the election of board members.
D) all of these.
Answer: D
Q2) Existing securities are traded in the secondary market.
A)True
B)False
Answer: True
Q3) What is the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm
Answer: C
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Chapter 2: Review of Accounting
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Q1) Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the owners of the company.
A)True
B)False
Answer: True
Q2) An increase in accounts receivable results in a cash inflow on the statement of cash flows.
A)True
B)False
Answer: False
Q3) Depreciation tends to
A) increase cash flow and decrease income.
B) decrease cash flow and increase income.
C) affect only cash flow.
D) affect only income.
Answer: A
Q4) An increase in an asset represents a source of funds.
A)True
B)False
Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) A large extraordinary loss has what effect on cost of goods sold?
A) Raises it
B) Lowers it
C) Has no effect
D) Need more information
Answer: C
Q2) Refer to the figure above. The firm's return on equity is
A) 52.8%
B) 55.6%
C) 58.0%
D) 100.0%
Answer: C
Q3) A current ratio of 2 to 1 is always acceptable, for a company in any industry.
A)True
B)False
Answer: False
Q4) Investors are most concerned with the liquidity ratios of a company.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) Lower profit margins resulting from increased competition would mean a lower need for external funds.
A)True
B)False
Q2) If the actual December 31<sup>st</sup> A/R balance was $12,000; projected sales in March are $50,000; 70% of sales are on credit; 60% of credit sales are collected in the month of sale and 40% are collected in the month after the sale, what is the projected A/R balance on the proforma balance sheet for the end of March?
A) $26,000
B) $14,000
C) $20,000
D) $35,000
Q3) Pro forma financial statements are
A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) all of these.
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Chapter 5: Operating and Financial Leverage
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Q1) Cash breakeven analysis eliminates the depreciation expense and other non-cash charges from fixed costs.
A)True
B)False
Q2) The degree of operating leverage is a number indicating the relationship between the percentage change in sales to the percentage change in earnings per share.
A)True
B)False
Q3) Refer to the figure above. This firm's break-even point is
A) 445 units
B) 634 units
C) 714 units
D) 180 units
Q4) In break-even analysis, the contribution margin is defined as
A) price minus variable cost.
B) price minus fixed cost.
C) variable cost minus fixed cost.
D) fixed cost minus variable cost.
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Chapter 6: Working Capital and the Financing Decision
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Q1) The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates.
A)True
B)False
Q2) The term "permanent current assets" implies
A) the same thing as fixed assets.
B) nonmarketable assets.
C) some minimum level of current assets that are not self-liquidating.
D) inventory.
Q3) One of the big benefits of implementing supply chain management, is a reduction in inventory on hand.
A)True
B)False
Q4) An aggressive, risk-oriented firm will likely
A) borrow long-term and carry low levels of liquidity.
B) borrow short-term and carry low levels of liquidity.
C) borrow long-term and carry high levels of liquidity.
D) borrow short-term and carry high levels of liquidity.
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Chapter 7: Current Asset Management
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Q1) Assuming that we can earn a 10% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal?
A) An increase in bank loans that would cost us 8%.
B) A decrease in inventories which are earning a 16% return.
C) A reduction in marketable securities which are earning a return of 14%.
D) An increase in accounts payable that would cost our firm 15%.
Q2) The economic order quantity helps a firm determine the most efficient order size to place.
A)True B)False
Q3) Which of the following are characteristics of money market investments?
A) Money market funds are offered by banks.
B) Money market funds are insured up to $100,000 by federal agencies.
C) The minimum balance for money market deposit accounts is $5,000.
D) None of these
Q4) The 5 C's of credit include character, capital, capacity, conditions, and collateral.
A)True B)False
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Chapter 8: Sources of Short-Term Financing
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Q1) The London Interbank offered rate is used to set a base lending rate for some US domestic corporate loans.
A)True
B)False
Q2) The Magic Pumpkin Limousine Company wants to purchase a car entertainment system for one of its automobiles. The entertainment system vendor has offered to finance the $2,000 purchase over one year in 12 installments, with a total of $200 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finance the purchase with an installment loan, where $155 in interest will be repaid and payments on the loan must be made quarterly. What are the effective interest rates on these loans? Which loan should they select?
Q3) Which of the following is not a method for lenders to control pledged inventory?
A) Blanket inventory liens
B) Trust receipts
C) Warehousing
D) Factoring
Q4) Larger firms tend to be net users of trade credit.
A)True
B)False
Q5) What is the effective rate of interest if the bank uses a discounted loan?
Page 10
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Chapter 9: The Time Value of Money
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Q1) Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $1,000 today. Which should she choose?
A) the $1 million dollars in 50 years.
B) $2,000 today.
C) she should be indifferent.
D) need more information.
Q2) The future value of an annuity assumes that the payments are received at the end of the year and that the last payment does not compound.
A)True
B)False
Q3) Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?
A) 2%
B) Between 3% and 5%
C) 10%
D) None of these
Q4) Kimberly Ford invested $10,000 10 years ago at 16 percent, compounded quarterly. How much has she accumulated?
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Chapter 10: Valuation and Rates of Return
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Q1) A 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently yielding 5%, what is the market value of the bond? Use annual analysis.
A) Over $1,100
B) Under $1,000
C) Under $900
D) Not enough information given to tell
Q2) The variable growth model is useful for firms in emerging industries. ownership.
A)True
B)False
Q3) The longer the maturity of a bond, the greater the impact on price to changes in market interest rates.
A)True
B)False
Q4) When a bond trades at a discount to par, the yield to maturity on the bond will exceed the required return.
A)True
B)False
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Chapter 11: Cost of Capital
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Q1) A firm should always be at a single optimum debt to equity ratio to minimize its cost of capital.
A)True
B)False
Q2) A firm's cost of financing, in an overall sense, is equal to its
A) weighted average cost of capital.
B) required yield that investors seek for various kinds of securities.
C) required rate of return that investors seek for various kinds of securities.
D) all of these.
Q3) The cost of retained earnings is equal to the required rate of return on a firm's outstanding common stock.
A)True
B)False
Q4) Each project should be judged against
A) the specific means of financing used to support its implementation.
B) the going interest rate at that point in time.
C) the cost of new common stock equity.
D) none of these.
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Chapter 12: The Capital Budgeting Decision
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Q1) We add depreciation to net income to arrive at a true earnings picture.
A)True
B)False
Q2) The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method
A) assumes that cash flows are reinvested at the project's internal rate of return.
B) concentrates on the liquidity aspects of investment projects.
C) assumes that cash flows are reinvested at the firm's weighted average cost of capital.
D) none of these.
Q3) The internal rate of return is the interest rate that equates the cash outflows of an investment with the subsequent inflows.
A)True
B)False
Q4) The first administrative consideration in any capital budgeting process is collection of data.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Q1) Which investment has the least amount of risk?
A) Coefficient of variation = 8%, expected return = $800
B) Coefficient of variation = 8%, Standard deviation = $200
C) Standard deviation = $300, expected return = $5,000
D) Standard deviation = $100, expected return = $80
Q2) A "what if" simulation using a computer helps to:
A) reduce the risk associated with a particular investment.
B) determine the effects of changes in certain variables.
C) increase the accuracy of the inputs.
D) more than one of the above are true.
Q3) The cost of capital is assumed to contain no risk for the firm.
A)True
B)False
Q4) In determining the appropriate discount rate for an individual project, the financial manager will be most influenced by the A) expected value.
B) internal rate of return.
C) standard deviation.
D) coefficient of variation.
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Chapter 14: Capital Markets
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Q1) During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from
A) Russia's difficulty in transforming its economy into a capitalistic one.
B) Japan's prolonged recession and banking crisis.
C) The Euro-zone countries comprising the European Monetary Union and a single currency.
D) The huge Chinese economy and its billion plus people.
Q2) Commission rates for stock transactions are fixed as a result of the Securities Act Amendments of 1975.
A)True
B)False
Q3) Which of the following is not a money market instrument?
A) Treasury bills
B) Commercial paper
C) Negotiable certificates of deposit
D) Treasury bonds
Q4) Brokers actually own the securities they buy and sell on the floor of the exchange.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Q1) Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22 to the public. Maxwell will receive $19 per share. The firm has 1 million shares outstanding and earnings of $6 million. What is the amount of dilution in earnings per share?
A) $1.86
B) $1.38
C) $1.77
D) No dilution occurs since new money is received by Maxwell.
Q2) The investment banker is someone who buys large new issues of stocks and then sells them to the public after their price has risen.
A)True
B)False
Q3) Because there is more uncertainty involved in the initial market reaction to common stock, a larger underwriting spread often exists for stocks, compared to other types of offerings.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Q1) The underwriting cost on a new bond issue
A) is an immediate outflow and immediate tax write-off.
B) is an immediate tax write-off with a deferred outflow.
C) is a deferred outflow and deferred tax write-off.
D) is an immediate outflow and deferred tax write-off.
Q2) In an inflationary economy, debt must be paid back with "more expensive dollars."
A)True
B)False
Q3) Which of the following is the lowest in priority of claims against a bankrupt firm?
A) A junior mortgage bond
B) A senior debenture
C) Common stock
D) A subordinated debenture
Q4) Aa2 bond is rated lower than a _____ bond.
A) Aa1
B) Aa3
C) A1
D) A2
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Chapter 17: Common and Preferred Stock Financing
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Q1) If a preferred stock is of the cumulative type
A) dividends must be paid on an equal basis with common, so long as earnings permit.
B) dividends cannot be passed if they are earned.
C) the cumulative voting rule applies in the exercise of the voting privilege.
D) unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common stockholders.
Q2) The after-tax cost of debt is cheaper than preferred stock to the issuing corporation.
A)True
B)False
Q3) Which of the following actions will provide the shareholders with the most total wealth when a company conducts a rights offering?
A) Exercise the rights for new shares.
B) Sell the rights themselves and hold existing shares and cash.
C) Exercise the rights and sell the shares.
D) None of these.
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) Stockholders may prefer dividends to reinvestment by the firm
A) because dividends resolve some uncertainty.
B) because dividend payments have an information content.
C) because investors may prefer current cash to future cash.
D) all of these
Q2) The repurchase of a corporation's own stock will generally have a negative impact on its price.
A)True
B)False
Q3) A major desire of stockholders regarding dividend policy is A) frequent stock dividends.
B) dividend stability.
C) high payouts when earnings are up and lower payouts when earnings are down. D) payment of dividends at frequent intervals.
Q4) The 2003 Tax Act created equal taxation of short-term and long-term capital gains. A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Q1) If the price of common stock associated with a convertible bond is less than the conversion price
A) the bond will sell at its pure bond value.
B) the bond will sell at its par value.
C) the bond will sell at its conversion value.
D) there is not enough information to tell what the bond price will be.
Q2) One advantage to the corporation in selling a convertible bond is:
A) the interest rate on a convertible is lower than a straight debt issue of equal risk.
B) the bond may never get converted into common stock and create dilution.
C) if interest rates fall the bond is likely to be refunded.
D) all of these.
Q3) A warrant loses some of its financial leverage when the stock rises far above the exercise price.
A)True
B)False
Q4) A convertible bond has two separate sources of value, the bond investment value and the bond conversion value.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Q1) The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a nondiscounted basis) the sum of ______________ for the carryforward alone.
A) $108,000
B) $52,000
C) $63,000
D) $1,200,000
Q2) White Knights
A) advise companies on ways to avoid being taken over.
B) offer a higher purchase price and more friendly offer in the event of an unsolicited and unfriendly takeover attempt.
C) attempt to make money in the stock market on stocks that are likely merger candidates.
D) buy depressed stock of quality companies when merger talks are discontinued.
Q3) It is possible to merge with a company which results in the same earnings per share but still lowers the new firm's cost of capital.
A)True
B)False
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Chapter 21: International Financial Management
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Q1) The most widely used currency in the Eurobond market is the euro.
A)True
B)False
Q2) The Eurobond market has which of the following characteristics?
A) Eurobond issues are denominated in the currency where the bond issue is sold.
B) Disclosure requirement in the Eurobond market are much less stringent than those required by the U.S. Securities and Exchange Commission.
C) Eurobond issues are underwritten by the European Central Bank.
D) Eurobond issues are denominated in euros.
Q3) All of the following groups are subject to foreign exchange risk except:
A) Importers and exporters
B) Investors
C) MNCs
D) All of these are subject to foreign exchange risk
Q4) The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.
A)True
B)False
Q5) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
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