Financial Management Exam
Bank
Course Introduction
Financial Management is a foundational course that introduces students to the principles and practices of effective financial decision-making within organizations. The course covers key topics such as financial analysis, planning, and control, capital budgeting, risk and return, cost of capital, working capital management, and sources of financing. Students will learn how to analyze financial statements, evaluate investment opportunities, manage resources efficiently, and make strategic decisions to maximize shareholder value. Through real-world case studies and practical exercises, the course equips students with essential skills for careers in corporate finance, banking, investments, and financial consulting.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
A) maximize the stock price per share over the long run, which is the stock's intrinsic value.
B) maximize the firm's expected eps.
C) minimize the chances of losses.
D) maximize the firm's expected total income.
E) maximize the stock price on a specific target date.
Answer: A
Q2) If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.
A)True
B)False
Answer: False
Q3) One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Risk and Return-Part I
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Q1) Which of the following statements is CORRECT
A) if an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.
B) the required return on a firm's common stock is, in theory, determined solely by its market risk. if the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return.
C) portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.
D) a security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.
E) a stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
Answer: D
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Chapter 3: Risk and Return-Part II
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Q1) In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.
A)True
B)False
Answer: True
Q2) Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20. She is in the process of buying 100 shares of Safety Corp. at $10 a share and adding it to her portfolio. Safety has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Safety stock?
Rp bp
A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48
Answer: B
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Page 5
Chapter 4: Bond Valuation
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Q1) Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements is CORRECT?
A) bond a has the most interest rate risk.
B) if the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
C) if the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
D) bond c sells at a premium over its par value.
E) if the yield to maturity on each bond decreases to 6%, bond a will have the largest percentage increase in its price.
Q2) "Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
A)True
B)False
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Chapter 5: Financial Options
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Q1) Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the
A) variability of the stock price.
B) option's time to maturity.
C) strike price.
D) all of the above.
E) none of the above.
Q2) The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binomial model, what is the option's value?(Hint: Use daily compounding.)
A) $2.43
B) $2.70
C) $2.99
D) $3.29
E) $3.62
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Chapter 6: Accounting for Financial Management
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Q1) The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Q2) On its 2014 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2015. Assuming that no earnings restatements were issued, which of the following statements is
CORRECT
A) dividends could have been paid in 2015, but they would have had to equal the earnings for the year.
B) if the company lost money in 2015, they must have paid dividends.
C) the company must have had zero net income in 2015.
D) the company must have paid out half of its earnings as dividends.
E) the company must have paid no dividends in 2015.
Q3) Total net operating capital is equal to net fixed assets.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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Q1) Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP)?
A) 18.49%
B) 19.47%
C) 20.49%
D) 21.52%
E) 22.59%
Q2) Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?
A) 4.36%
B) 4.57%
C) 4.80%
D) 5.04%
E) 5.30%
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Chapter 8: Basic Stock Valuation
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Q1) Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?
A) 6.62%
B) 6.82%
C) 7.03%
D) 7.25%
E) 7.47%
Q2) The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.
A)True
B)False
Q3) The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.
A)True
B)False
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Chapter 9: Corporate Valuation and Financial Planning
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Q1) A firm's AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
Q2) Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital. For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.
A)True
B)False
Q3) Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.
A)True
B)False
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11
Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) personal use of the corporate jet is an example of a nonpecuniary benefit.
B) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
C) an agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
D) an agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
E) a quarter-end bonus is an example of a nonpecuniary benefit.
Q2) Which one of the following statements is TRUE?
A) one tool of corporate governance is monitoring management.
B) one tool of corporate governance is the choice of how much dividends to pay.
C) a company's matching contribution to a retirement plan is a nonpecuniary benefit
D) one tool of corporate governance is stock repurchases.
E) corporate governance is better when directors are also employees of the company so they know the business very well.
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Chapter 11: Determining the Cost of Capital
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Q1) Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
A) 4.35%
B) 4.58%
C) 4.83%
D) 5.08%
E) 5.33%
Q2) If a firm is privately owned, and its stock is not traded in public markets, then we cannot measure its beta for use in the CAPM model, we cannot observe its stock price for use in the dividend growth model, and we don't know what the risk premium is for use in the bond-yield-plus-risk-premium method. All this makes it especially difficult to estimate the cost of equity for a private company.
A)True
B)False
Q3) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Page 13
Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Which of the following statements is CORRECT?
A) the discounted payback method eliminates all of the problems associated with the payback method.
B) when evaluating independent projects, the npv and irr methods often yield conflicting results regarding a project's acceptability.
C) to find the mirr, we discount the tv at the irr.
D) a project's npv profile must intersect the x-axis at the project's cost of capital.
E) the irr method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the npv method provides.
Q2) A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.
A)True
B)False
Q3) Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
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Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following statements is CORRECT?
A) in a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to a downward bias in the npv.
B) the existence of any type of "externality" will reduce the calculated npv versus the npv that would exist without the externality.
C) if one of the assets to be used by a potential project is already owned by the firm, and if that asset could be sold or leased to another firm if the new project were not undertaken, then the net after-tax proceeds that could be obtained should be charged as a cost to the project under consideration.
D) if one of the assets to be used by a potential project is already owned by the firm but is not being used, then any costs associated with that asset is a sunk cost and should be ignored.
E) in a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to an upward bias in the npv.
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Page 15
Chapter 14: Real Options
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Q1) Refer to the data for Garner-Wagner Incorporated. If Garner-Wagner goes ahead with this project today, it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether or not it wants to pursue these additional opportunities. Based on the best information available today, there is a 35% probability that the outlook will be favorable, in which case the future investment opportunity will have a net present value of $6 million at t = 5. There is a 65% probability that the outlook will be unfavorable, in which case the future investment opportunity will have a net present value of $6 million at t = 5. Garner-Wagner does not have to decide today whether it wants to pursue the additional opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the future opportunity unless it makes the $3 million investment today. What is the estimated net present value of the project, after consideration of the potential future opportunity?
A)$1,104,607
B) $875,203
C) $199,328
D) $561,947
E) $898,205
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Page 16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following statements is correct?
A) if a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
B) if a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
C) if congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
D) despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
E) one advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
Q2) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Chapter 16: Capital Structure Decisions
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Q1) Refer to the data for VanMannen Foundations, Inc. (VF). Now assume that VF is considering changing from its original zero debt capital structure to a new capital structure with even more debt. This results in changes in the cost of debt and equity, and thus to a new WACC and a new value of operations. Assume VF raises the amount of new debt indicated below and uses the funds to purchase and hold T-bills until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?
\(\begin{array} { l l r }
\text { Debt/Value } = & 40 \% \text { Value of new debt } = & \$ 213,333 \\ \text { Equity } / \text { alue } = & 60 \% \text { New WACC } = & 9.0 \% \end{array}\)
A) $50.67
B) $53.33
C) $56.00
D) $58.80
E) $61.74
Q2) The MM model is the same as the Miller model, but with zero corporate taxes.
A)True
B)False
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Page 18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the after-tax cost of debt.
A)True
B)False
Q2) Using the data for Sallie's Sandwiches and the compressed adjusted present value model, what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
A) 12.0%
B) 13.9%
C) 14.4%
D) 16.0%
E) 16.9%
Q3) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the unlevered cost of equity.
A)True
B)False
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Q1) Which of the following is generally NOT true and an advantage of going public?
A) increases the liquidity of the firm's stock.
B) makes it easier to obtain new equity capital.
C) establishes a market value for the firm.
D) makes it easier for owner-managers to engage in profitable self-dealings.
E) facilitates stockholder diversification.
Q2) Which of the following statements about listing on a stock exchange is most CORRECT?
A) any firm can be listed on the nyse as long as it pays the listing fee.
B) listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
C) listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the sec.
D) the otc is the second largest market for listed stock, and it is exceeded only by the nyse.
E) listing is a decision of more significance to a firm than going public.
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Page 20
Chapter 19: Lease Financing
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Q1) A sale and leaseback arrangement is a type of financial, or capital, lease.
A)True
B)False
Q2) In the lease versus buy decision, leasing is often preferable
A) because, generally, no down payment is required, and there are no indirect interest costs.
B) because lease obligations do not affect the firm's risk as seen by investors.
C) because the lessee owns the property at the end of the least term.
D) because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
E) because it has no effect on the firm's ability to borrow to make other investments.
Q3) Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.
A)True
B)False
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Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?
A) 6.66%
B) 6.99%
C) 7.34%
D) 7.71%
E) 8.09%
Q2) The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.
A)True
B)False
Q3) A convertible debenture can never sell for more than its conversion value or less than its bond value.
A)True
B)False
Page 22
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Which of the following statements is CORRECT?
A) if a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's dso will probably increase.
B) if a firm sells on terms of 2/10 net 30, and its dso is 30 days, then the firm probably has some past-due accounts.
C) if a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in december, then its dso as it is typically calculated (with sales per day = sales for past 12 months/365) would probably be lower in january than in july.
D) if a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the dso.
E) other things held constant, the higher a firm's days sales outstanding (dso), the better its credit department.
Q2) Changes in a firm's collection policy can affect sales, working capital, and profits.
A)True B)False
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Page 23
Chapter 22: Providing and Obtaining Credit
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Q1) Danby Design Inc. has approached the bank with its plan to borrow $12,000. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?
A) 5.10%
B) 10.19%
C) 12.00%
D) 20.38%
E) 30.57%
Q2) Refer to Exhibit Van Doren. What are the incremental pre-tax profits from this proposal?
A) $283,750
B) $250,500
C) $303,250
D) $493,750
E) $288,250
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24
Chapter 23: Other Topics in Working Capital Management
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Q1) Refer to Exhibit Palmer Pens. What is Palmer's minimum costs of ordering and holding inventory?
A) $6,254
B) $10,733
C) $11,560
D) $13,563
E) $19,825
Q2) Refer to Exhibit Palmer Pens. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?
A) yes; it will save $827 if it takes the discount.
B) no; it will lose $827 if it takes the discount.
C) yes; it will save $14,400 if it takes the discount.
D) yes; it will save $13,573 if it takes the discount.
E) no; it will lose $13,573 if it takes the discount.
Q3) If a company increases its safety stock, then its EOQ will go up.
A)True
B)False
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25
Chapter 24: Enterprise Risk Management
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Q1) A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?
A) entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
B) purchase principal only (po) strips that decline in value whenever interest rates rise.
C) enter into a short hedge where the bank agrees to sell interest rate futures.
D) sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
E) buying inverse floaters.
Q2) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
Q3) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True B)False
Q2) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True B)False
Q3) Bankruptcy laws have been used to help reach settlements in major product liability lawsuits. By using financial projections to show that contingent claims against the company jeopardize its existence, agreements are reached, partially satisfying claimants, and allowing the firm to continue operating.
A)True B)False
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Chapter 26: Mergers and Corporate Control
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Q1) Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.
A)True B)False
Q2) Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.
A)True B)False
Q3) Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.
A)True
B)False
Q4) Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.
A)True B)False
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Chapter 27: Multinational Financial Management
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Q1) If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will
A) depreciate against the u.s. dollar.
B) remain unchanged against the u.s. dollar.
C) appreciate against other major currencies.
D) appreciate against the dollar and other major currencies.
E) appreciate against the u.s. dollar.
Q2) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
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 28: Time Value of Money
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Sample Questions
Q1) Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) if cf0 is positive and all the other cfs are negative, then you cannot solve for i.
B) if you have a series of cash flows, each of which is positive, you can solve for i, where the solution value of i causes the pv of the cash flows to equal the cash flow at time 0.
C) if you have a series of cash flows, and cf0 is negative but each of the following cfs is positive, you can solve for i, but only if the sum of the undiscounted cash flows exceeds the cost.
D) to solve for i, one must identify the value of i that causes the pv of the positive cfs to equal the absolute value of the pv of the negative cfs. this is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
E) if you solve for i and get a negative number, then you must have made a mistake.
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Chapter 29: Basic Financial Tools: A review
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Sample Questions
Q1) The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?
A) 12.31% B) 12.96% C) 13.64%
Q2) Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?
A) 6.77%
B) 7.13%
C) 7.50%
D) 7.88% E) 8.27%
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Chapter 30: Pension Plan Management
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Q1) Kumar Consulting operates several stock investment portfolios that are used by firms for investment of pension plan assets. Last year, one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15. The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent. What was the portfolio's alpha?
A) $0.75%
B) $0.15%
C) 0%
D) 0.15%
E) 0.75%
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
Q3) Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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Q1) Which of the following statements about a not-for-profit firm's cost of capital estimate is most correct?
A) the capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
B) the cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 t in the wacc estimate to reflect the fact that such firms do not pay taxes.
C) equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
D) not-for-profit firms have a zero cost of capital.
E) since a not-for-profit firm has no shareholders, its wacc estimate does not include a cost of equity (fund capital) estimate.
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects. A)True B)False
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