Financial Management
Chapter Exam Questions
Course Introduction
Financial Management provides students with a comprehensive understanding of the principles and practices involved in effectively managing an organizations financial resources. The course covers key topics such as financial statement analysis, capital budgeting, risk and return, cost of capital, working capital management, and financial planning. Students will learn to analyze financial data, assess investment opportunities, and make informed decisions to maximize shareholder value. Real-world case studies and practical tools are introduced to ensure that students can apply theoretical concepts to everyday financial challenges in both corporate and personal finance contexts.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
Q2) Which one of the following actions by a financial manager is most apt to create an agency problem?
A) refusing to borrow money when doing so will create losses for the firm
B) refusing to lower selling prices if doing so will reduce the net profits
C) refusing to expand the company if doing so will lower the value of the equity
D) agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales
E) increasing current profits when doing so lowers the value of the firm's equity
Answer: E
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Chapter 2: Financial Statements, Taxes, and Cash Flowpart
Two: Financial Statements and Long-Term Financial Planning
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Sample Questions
Q1) Adelson's Electric had beginning long-term debt of $42,511 and ending long-term debt of $48,919.The beginning and ending total debt balances were $84,652 and $78,613,respectively.The interest paid was $4,767.What is the amount of the cash flow to creditors?
A) -$1,641
B) -$1,272
C) $1,272
D) $7,418
E) $11,175
Answer: A
Q2) Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
A) income statement
B) balance sheet
C) statement of cash flows
D) tax reconciliation statement
E) market value report
Answer: A
4
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Al's Sport Store has sales of $897,400,costs of goods sold of $628,300,inventory of $208,400,and accounts receivable of $74,100.How many days,on average,does it take the firm to sell its inventory assuming that all sales are on credit?
A) 74.19 days
B) 84.76 days
C) 121.07 days
D) 138.46 days
E) 151.21 days
Answer: C
Q2) Al's has a price-earnings ratio of 18.5.Ben's also has a price-earnings ratio of 18.5.Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?
A) Al's has more net income than Ben's.
B) Ben's is increasing its earnings at a faster rate than the Al's.
C) Al's has a higher market value per share than does Ben's.
D) Ben's has a lower market-to-book ratio than Al's.
E) Al's has a higher net income than Ben's.
Answer: B
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Page 5
Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Q1) Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing.The firm maintains a constant debt-equity ratio of .0.55,a total asset turnover ratio of 1.30,and a profit margin of 9.0 percent.What must the dividend payout ratio be?
A) 26.26 percent
B) 38.87 percent
C) 49.29 percent
D) 61.13 percent
E) 73.74 percent
Q2) The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio.What is the internal growth rate?
A) 6.50 percent
B) 6.75 percent
C) 6.97 percent
D) 7.24 percent
E) 7.38 percent
Q3) Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Q1) What is the relationship between present value and future value interest factors?
A) The present value and future value factors are equal to each other.
B) The present value factor is the exponent of the future value factor.
C) The future value factor is the exponent of the present value factor.
D) The factors are reciprocals of each other.
E) There is no relationship between these two factors.
Q2) What is the future value of $6,200 invested for 23 years at 9.25 percent compounded annually?
A) $22,483.60
B) $27,890.87
C) $38,991.07
D) $41,009.13
E) $47,433.47
Q3) At 8 percent interest,how long would it take to quadruple your money?
A) 16.55 years
B) 16.64 years
C) 17.09 years
D) 18.01 years
E) 18.56 years
Page 7
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years.His holdings are now worth $598,100.What is his annual rate of return on this stock?
A) 6.13 percent
B) 6.24 percent
C) 6.29 percent
D) 6.32 percent
E) 6.36 percent
Q2) Which one of the following accurately defines a perpetuity?
A) a limited number of equal payments paid in even time increments
B) payments of equal amounts that are paid irregularly but indefinitely
C) varying amounts that are paid at even intervals forever
D) unending equal payments paid at equal time intervals
E) unending equal payments paid at either equal or unequal time intervals
Q3) What is the effective annual rate of 14.9 percent compounded continuously?
A) 15.59 percent
B) 15.62 percent
C) 15.69 percent
D) 15.84 percent
E) 16.07 percent
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Q1) The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
A) equilibrium.
B) premium.
C) discount.
D) call price.
E) spread.
Q2) Bonds issued by the U.S.government:
A) are considered to be free of interest rate risk.
B) generally have higher coupons than those issued by an individual state.
C) are considered to be free of default risk.
D) pay interest that is exempt from federal income taxes.
E) are called "munis".
Q3) Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.
Q4) Describe the relationships that exist between the coupon rate,the yield to maturity,and the current yield for both a discount bond and a premium bond.
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9
Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Q1) Hardwoods,Inc.is a mature manufacturing firm.The company just paid a $10 dividend,but management expects to reduce the payout by 9 percent each year,indefinitely.How much are you willing to pay today per share to buy this stock if you require a 15 percent rate of return?
A) $34.79
B) $37.92
C) $38.27
D) $41.33
E) $42.09
Q2) Using the dividend growth model,explain why a firm would be hesitant to reduce the growth rate of its dividends.
Q3) An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:
A) floor trader.
B) exchange customer.
C) specialist.
D) floor broker.
E) market maker.
Q4) What are the primary differences and similarities between NASDAQ and the NYSE?
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) It will cost $6,000 to acquire an ice cream cart.Cart sales are expected to be $3,600 a year for three years.After the three years,the cart is expected to be worthless as the expected life of the refrigeration unit is only three years.What is the payback period?
A) 1.48 years
B) 1.67 years
C) 1.82 years
D) 1.95 years
E) 2.00 years
Q2) There are two distinct discount rates at which a particular project will have a zero net present value.In this situation,the project is said to:
A) have two net present value profiles.
B) have operational ambiguity.
C) create a mutually exclusive investment decision.
D) produce multiple economies of scale.
E) have multiple rates of return.
Q3) The profitability index (PI)of a project is 1.0.What do you know about the project's net present value (NPV)and its internal rate of return (IRR)?
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Chapter 10: Making Capital Investment Decisions
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Q1) Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years,and you've decided to bid on the contract.It will cost you $1,230,000 to install the equipment necessary to start production;you'll depreciate this cost straight-line to zero over the project's life.You estimate that in 7 years,this equipment can be salvaged for $75,000.Your fixed production costs will be $360,000 per year,and your variable production costs should be $13.20 per carton.You also need an initial investment in net working capital of $112,500,all of which will be recovered when the project ends.Your tax rate is 32 percent and you require a 13 percent return on your investment.What bid price per carton should you submit?
Q2) In a single sentence,explain how you can determine which cash flows should be included in the analysis of a project.
Q3) What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.
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Page 12
Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Q1) McGilla Golf has decided to sell a new line of golf clubs.The clubs will sell for $500 per set and have a variable cost of $200 per set.The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years.The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs.The high-priced clubs sell at $700 and have variable costs of $300.The company will also increase sales of its cheap clubs by 9,000 sets.The cheap clubs sell for $200 and have variable costs of $100 per set.The fixed costs each year will be $7,559,000.The company has also spent $1,133,000 on research and development for the new clubs.The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project.The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project.The tax rate is 40 percent,and the cost of capital is 8 percent.What is the IRR? A) 7.51 percent
B) 7.82 percent C) 8.13 percent
D) 8.49 percent
E) 8.62 percent
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Chapter 12: Some Lessons From Capital Market History
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Q1) Your friend is the owner of a stock which had returns of 25 percent,-36 percent,1 percent,and 16 percent for the past four years.Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year.Based on these returns,what is the probability that your friend is correct?
A) less than 0.5 percent
B) greater than 0.5 percent but less than 1.0 percent
C) greater than 1.0 percent but less than 2.5 percent
D) greater than 2.5 percent but less than 16 percent
E) greater than 16.0 percent
Q2) What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?
A) 1.0 percent
B) 2.5 percent
C) 5.0 percent
D) 16 percent
E) 32 percent
Q3) How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?
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Six: Cost of Capital and Long-Term Financial Policy
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Q1) The standard deviation of a portfolio:
A) is a weighted average of the standard deviations of the individual securities held in the portfolio.
B) can never be less than the standard deviation of the most risky security in the portfolio.
C) must be equal to or greater than the lowest standard deviation of any single security held in the portfolio.
D) is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio.
E) can be less than the standard deviation of the least risky security in the portfolio.
Q2) The intercept point of the security market line is the rate of return which corresponds to:
A) the risk-free rate.
B) the market rate.
C) a return of zero.
D) a return of 1.0 percent.
E) the market risk premium.
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15
Chapter 14: Cost of Capital
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Q1) The City Street Corporation's common stock has a beta of 1.2.The risk-free rate is 3.5 percent and the expected return on the market is 13 percent.What is the firm's cost of equity?
A) 11.4 percent
B) 12.8 percent
C) 14.9 percent
D) 17.6 percent
E) 19.1 percent
Q2) Textile Mills borrows money at a rate of 13.5 percent.This interest rate is referred to as the:
A) compound rate.
B) current yield.
C) cost of debt.
D) capital gains yield.
E) cost of capital.
Q3) Give an example of a situation where a firm should adopt the pure play approach for determining the cost of capital for a project.
Q4) What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized?
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Chapter 15: Raising Capital
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Q1) An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:
A) an IPO is substantially oversubscribed than when it is not.
B) the knowledgeable investors feel the issue is underpriced.
C) an IPO is severely underpriced.
D) an IPO is undersubscribed.
E) he or she has a standing order with the underwriter to purchase shares in every IPO handled by that underwriter.
Q2) Which one of the following statements is correct concerning the issuance of long-term debt?
A) A direct long-term loan has to be registered with the SEC.
B) Direct placement debt tends to have more restrictive covenants than publicly issued debt.
C) Distribution costs are lower for public debt than for private debt.
D) It is easier to renegotiate public debt than private debt.
E) Wealthy individuals tend to dominate the private debt market.
Q3) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make.Explain why.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) The capital structure that maximizes the value of a firm also:
A) minimizes financial distress costs.
B) minimizes the cost of capital.
C) maximizes the present value of the tax shield on debt.
D) maximizes the value of the debt.
E) maximizes the value of the unlevered firm.
Q2) North Side,Inc.has no debt outstanding and a total market value of $175,000.Earnings before interest and taxes,EBIT,are projected to be $16,000 if economic conditions are normal.If there is strong expansion in the economy,then EBIT will be 30 percent higher.If there is a recession,then EBIT will be 70 percent lower.North Side is considering a $70,000 debt issue with a 7 percent interest rate.The proceeds will be used to repurchase shares of stock.There are currently 2,500 shares outstanding.North Side has a tax rate of 34 percent.If the economy expands strongly,EPS will change by ____ percent as compared to a normal economy,assuming that the firm recapitalizes.
A) 38.80 percent
B) 41.26 percent
C) 43.24 percent
D) 50.45 percent
E) 53.92 percent
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Page 18
Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Q1) Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?
A) ex-rights date
B) ex-dividend date
C) date of record
D) date of payment
E) declaration date
Q2) Western Mountain Water has 11,000 shares of stock outstanding with a par value of $1 per share.The current market value of the firm is $135,000.The balance sheet shows a capital in excess of par value account balance of $68,000 and retained earnings of $49,000.The company just announced a 2-for-1 stock split.What will the capital in excess of par value account balance be after the split?
A) $45,333
B) $54,667
C) $68,000
D) $86,667
E) $102,000
Q3) Explain how cash dividends affect individual shareholders differently than an equal amount of funds spent on a repurchase.
Page 19
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Chapter 18: Short-Term Finance and Planning
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Q1) If you pay your suppliers five days sooner,then:
A) your payables turnover rate will decrease.
B) you may require additional funds from other sources to fund the cash cycle.
C) the cash cycle will decrease.
D) your operating cycle will increase.
E) the accounts receivable period will decrease.
Q2) The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
Q3) Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future.How does this affect a firm's selection of a financing policy for its current assets?
Q4) List and describe the three basic types of secured inventory loans.Compare the advantages and disadvantages of these loans.
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Page 20
Chapter 19: Cash and Liquidity Management
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Q1) The Miller-Orr model assumes that:
A) the cash balance is depleted at regular intervals.
B) all cash flows are known with certainty.
C) the average change in the daily cash flows is positive.
D) management will set both the lower and the upper desired levels of cash.
E) the cash balance fluctuates in a random manner.
Q2) A money market preferred stock:
A) has a floating dividend.
B) is sold only under a repurchase agreement.
C) is a special form of commercial paper.
D) has more price volatility than an ordinary preferred.
E) has its interest rate reset daily.
Q3) Which of the following statements is correct?
A) A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time.
B) The cost of borrowing affects the target cash balance of a firm.
C) Management's desire to maintain a low cash balance has no effect on the borrowing needs of a firm.
D) The target cash balance increases as the interest rate rises.
E) The target cash balance decreases as the order costs increase.
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Topics in Corporate Finance
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Q1) Which one of the following inventory items is probably the most liquid?
A) a custom made set of kitchen cabinets
B) metal cabinets for dishwashers
C) wheat stored in a grain silo
D) a customized drilling press
E) a partially built modular home
Q2) Each year you sell 950 units of a product at a price of $899 each.The variable cost per unit is $575 and the carrying cost per unit is $16.90.You have been buying 100 units at a time.Your fixed cost of ordering is $60.What is the economic order quantity?
A) 82 units
B) 95 units
C) 105 units
D) 113 units
E) 124 units
Q3) All else equal,firms with (1)excess capacity, (2)low variable costs,and (3)repeat customers are more apt to offer liberal credit terms to their customers than are other firms.Explain why this tendency exists.
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Page 22
Chapter 21: International Corporate Finance
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Q1) Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S.dollar and the British pound?
A) S<sub>0</sub> = P<sub>UK</sub> × P<sub>US</sub>
B) P<sub>US</sub> = F<sub>t</sub> × P<sub>UK</sub>
C) P<sub>UK</sub> = S<sub>0</sub> × P<sub>US</sub>
D) F<sub>t</sub> = P<sub>US</sub> × P<sub>UK</sub>
E) S<sub>0</sub> × F<sub>t</sub> = P<sub>UK</sub> × P<sub>US</sub>
Q2) The home currency approach:
A) discounts all of a project's foreign cash flows using the current spot rate.
B) employs uncovered interest parity to project future exchange rates.
C) computes the net present value (NPV)of a project in the foreign currency and then converts that NPV into U.S.dollars.
D) utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency.
E) utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars.
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Which one of the following refers to the fact that an individual may reply differently if a question is asked in a different manner?
A) loss aversion
B) gambler's fallacy
C) frame dependence
D) overconfidence
E) format reference
Q2) The tendency for a decision maker to search for confirmation that a recent decision he or she made was a good decision represents which one of the following characteristics?
A) overconfidence
B) overoptimism
C) affect heuristic
D) confirmation bias
E) representativeness heuristic
Q3) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
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Page 24
Chapter 23: Enterprise Risk Management
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Q1) The buyer of an option contract:
A) receives the option premium in exchange for an obligation to either buy or sell an underlying asset.
B) pays an option premium in exchange for a right to buy or sell an underlying asset during a specified period of time.
C) pays the strike price at the time the option is purchased and in exchange receives the right to exercise the option at any time during the option period.
D) receives the option premium in exchange for guaranteeing the purchase or sale of an underlying asset if called upon to do so.
E) pays the option premium in exchange for receiving the strike price at a later date.
Q2) Explain why a swap is effectively a series of forward contracts.
Q3) A swap dealer in the U.S.:
A) acts solely as a seller of swap contracts.
B) matches buyers to sellers.
C) only deals if its book is matched.
D) is frequently a commercial bank.
E) trades electronically via NASDAQ.
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Chapter 24: Options and Corporate Finance
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Q1) Josh opted to exercise his January option at the end of December and paid $3,250 at that time to acquire 100 shares of stock.Which one of the following did Josh own?
A) American call
B) American put
C) European call
D) European put
E) European convertible bond
Q2) Which one of the following describes the maximum value of a call option?
A) strike price minus the initial cost of the option
B) exercise price plus the price of the underlying stock
C) strike price
D) market price of the underlying stock
E) purchase price
Q3) Which one of the following statements related to warrants is correct?
A) Warrants are generally issued as an attachment to publicly-issued bonds.
B) Warrants are excluded from trading on an organized exchange.
C) Warrants are structured as long-term put options.
D) Warrants are issued by individual investors.
E) Warrants are generally added as an incentive to a private debt issue.
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Page 26
Chapter 25: Option Valuation
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Q1) Which one of the following statements is correct?
A) The price of an American put is equal to the stock price minus the exercise price.
B) The value of a European call is greater than the value of a comparable American call.
C) The value of a put is equal to one minus the value of an equivalent call.
D) The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price.
E) The value of an American put will equal or exceed the value of a comparable European put.
Q2) Today,you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46.What is the most you can lose on these purchases over the next year?
A) -$1.85
B) -$0.31
C) $0
D) $0.42
E) $1.54
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Page 27
Chapter 26: Mergers and Acquisitions
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Q1) For financial statement purposes,goodwill created by an acquisition:
A) must be amortized on a straight-line basis over 10 years.
B) must be reviewed each year and amortized to the extent that it has lost value.
C) is expensed evenly over a 20-year period.
D) never affects the profits of the acquiring firm.
E) is recorded in an amount equal to the fair market value of the assets of the target firm.
Q2) Taylor's Hardware is acquiring The Corner Store for $25,000 in cash.Taylor's has 1,500 shares of stock outstanding at a market value of $46 a share.The Corner Store has 2,200 shares of stock outstanding at a market price of $8 a share.Neither firm has any debt.The incremental value of the acquisition is $3,500.What is the value of Taylor's Hardware after the acquisition?
A) $49,000
B) $50,300
C) $57,300
D) $65,100
E) $72,400
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Chapter 27: Leasing
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Sample Questions
Q1) Cross Town Express is contemplating the acquisition of some new equipment.The purchase price is $74,000.The equipment would be depreciated using MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment would be worthless after that time.The equipment can be leased for $19,100 a year for 4 years.The firm can borrow money at 9.5 percent and has a 28 percent tax rate.What is the incremental annual cash flow for year 3 if the company decides to lease the equipment rather than purchase it?
A) -$16,823
B) -$15,797
C) $14,312
D) $15,797
E) $16,823
Q2) Which one of the following statements is correct concerning taxes and leasing?
A) Tax-deferral is a legitimate reason for leasing.
B) The lessee should be the party with the higher tax bracket.
C) Generally speaking,lessors tend to benefit from leases while lessees do not.
D) If a firm has significant net operating losses,it should be the lessor in a lease.
E) You should only lease an asset if the lease will be fully amortized.
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