Financial Management Exam Bank
Course Introduction
Financial Management is a foundational course that introduces students to the principles and practices involved in the effective management of financial resources within an organization. The course covers key topics such as financial analysis, budgeting, forecasting, capital structure, investment decisions, risk management, and dividend policy. Through a blend of theoretical frameworks and practical applications, students learn how to analyze financial statements, assess financial performance, and make informed decisions that support organizational goals. The course also emphasizes ethical considerations and the impact of financial decisions on various stakeholders, preparing students for advanced study or professional roles in corporate finance, banking, and related fields.
Recommended Textbook
Foundations of Finance 9th Edition by Arthur J. Keown
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Q1) Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions.
A)True
B)False
Answer: True
Q2) Which of the following statements about the corporate form of business organization is true?
A) The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
B) The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.
C) Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor.
D) The corporate form has the advantage of unlimited liability.
Answer: A
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Page 3
Chapter 2: The Financial Markets and Interest Rates
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Q1) What was the average annual rate of return on long-term corporate bonds during the period 1926 to 2014?
A) 8.3%
B) 6.5%
C) 6.10%
D) 7.00%
Answer: C
Q2) General Electric (GE)has been a public company for many years with its common stock traded on the New York Stock Exchange.If GE decides to sell 500,000 shares of new common stock,the transaction will be describe as
A) an initial public offering.
B) a secondary market transaction because GE common stock has been trading for years.
C) a seasoned equity offering because GE has sold common stock before.
D) a money-market transaction because GE raises new money to fund its business.
Answer: C
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Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Examples of uses of cash include
A) paying cash dividends to stockholders.
B) borrowing an additional amount using a secured loan.
C) selling machinery.
D) all of the above
Answer: A
Q2) The statement of cash flow explains the changes that took place in the firm's cash balance over the period of interest.
A)True
B)False
Answer: True
Q3) If a company's cash balance increases during the year,and the company also reports positive net income,then the company's retained earnings balance must increase.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Evaluating a Firms Financial Performance
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Q1) A company with a current ratio higher than industry average must also have a quick ratio higher than industry average because both ratios measure liquidity.
A)True
B)False
Q2) In addition to the information contained in Table 4-4,you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010.What is Wes Donnell's retained earnings balance for 2010?
A) $10,000
B) $8,000
C) $19,600
D) $2,600
Q3) Assume that a firm issues a six-month note to purchase inventory.Which of the following is true if the current ratio before the purchase is 1.0?
A) The firm's current ratio must decrease.
B) The firm's quick ratio will stay the same.
C) The firm's current ratio will increase.
D) The firm's quick ratio might decrease.
Q4) How could an analyst determine whether a company's ratio is good or bad?
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Page 6
Chapter 5: The Time Value of Money
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Q1) If you want to have $12,500 in 57 months,how much money must you put in a savings account today? Assume that the savings account pays 4.5% and it is compounded quarterly; round to nearest $1.
A) $8,459
B) $10,106
C) $10,387
D) $11,129
Q2) Your daughter is born today and you want her to be a millionaire by the time she is 35 years old.You open an investment account that promises to pay 12% per year.How much money must you deposit each year,starting on her 1st birthday and ending on her 35th birthday,so your daughter will have $1,000,000 by her 35th birthday?
A) $2,317
B) $3,455
C) $5,777
D) $9,450
Q3) An example of an annuity is the interest received from bonds.
A)True
B)False
Q4) How does compound interest differ from simple interest?
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Chapter 6: The Meaning and Measurement of Risk and Return
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Q1) You are considering an investment in Citizens Bank Corp.The firm has a beta of 1.6.Currently,U.S.Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%.What rate of return should you expect for your investment in Citizens Bank?
A) 11.15%
B) 15.39%
C) 16.75%
D) 20.75%
Q2) What is diversifying among different kinds of assets known as?
A) portfolio funding
B) capital asset classification
C) asset allocation
D) multi-diversification
Q3) A typical measure for the risk-free rate of return is the
A) U.S. Treasury bill rate.
B) prime lending rate.
C) money-market rate.
D) short-term AAA-rated bond rate.
Q4) How is risk defined?
Q5) What are the two components of the investor's required rate of return?
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Chapter 7: The Valuation and Characteristics of Bonds
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Q1) Which of the following is NOT a definition of yield to maturity?
A) discount rate that equates present value of future cash flows with a bond's price.
B) investors' required rate of return on a bond investment.
C) return that an investor will earn if they buy the bond for its market price and hold it until maturity.
D) discount rate that equates present value of future cash flows with a bond's face value.
Q2) Federal regulations make it impossible for rating agencies to drop a company's credit rating more than two notches at a time in order to prevent panic in bond markets.
A)True
B)False
Q3) If a bond has a market value that is higher than its par value,then the required return on the bond must be less than the bond's coupon rate.
A)True
B)False
Q4) What are the three important elements of asset valuation?
Q5) Explain the different types of value.
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Chapter 8: The Valuation and Characteristics of Stock
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Q1) ABC Corp.5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.
A)True
B)False
Q2) Shasta Co.just paid a dividend of $1.65 (D0)on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value per share of Shasta stock.
A) $20.63
B) $21.24
C) $15.00
D) $55.00
Q3) In general,common stock and preferred stock are both valued by calculating the present value of all expected future cash flows,using the required return as the discount rate.
A)True
B)False
Q4) U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.What is the expected rate of return?
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Page 10
Chapter 9: The Cost of Capital
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Q1) A company's cost of capital is equal to a weighted average of its investors' required returns.
A)True
B)False
Q2) The risk-free rate of return is 2.5% and the market risk premium is 8%.Rogue Transport has a beta of 2.2 and a standard deviation of returns of 28%.Rogue Transport's marginal tax rate is 35%.Analysts expect Rogue Transport's dividends to grow by 6% per year for the foreseeable future.Using the capital asset pricing model,what is Rogue Transport's cost of retained earnings?
A) 16.4%
B) 17.7%
C) 19.6%
D) 20.1%
Q3) In order to create value,a corporation must earn a rate of return on its invested capital that is higher than the market's required rate of return on that invested capital.
A)True B)False
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Chapter 10: Capital-Budgeting Techniques and Practice
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Q1) DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the internal rate of return of this project?
A) 10.87%
B) 11.57%
C) 13.68%
D) 15.13%
Q2) When reviewing the net present profile for a project,
A) the higher the discount rate, the higher the NPV.
B) the higher the discount rate, the higher the IRR.
C) the IRR will always be a point on the horizontal axis line where NPV = 0.
D) the IRR will always be a point on the horizontal axis equal to the required return.
Q3) Which of the following statements about the net present value is true?
A) It produces a percentage result that is easy to describe.
B) It has an inadequate reinvestment assumption.
C) It is likely that there will be more than one NPV for a project.
D) It may be used to select among projects of different sizes.
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Page 12
Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Q1) Using simulation provides the financial manager with a probability distribution of an investment's net present value or internal rate of return.
A)True
B)False
Q2) Increases in inventory and accounts receivable expected to occur if a proposed advertising campaign is undertaken are examples of sunk costs. A)True
B)False
Q3) An opportunity cost is a relevant incremental cost for capital budgeting decisions. A)True B)False
Q4) The initial outlay includes the immediate cash outflow necessary to purchase the asset and put it in operating order. A)True B)False
Q5) Give an example of an option to expand a project.Why might this be of value?
Q6) Give an example of an option to delay a project.Why might this be of value?
Page 13
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Chapter 12: Determining the Financing Mix
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Q1) A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.
A)True
B)False
Q2) Voellers Upholstery Co.produces inexpensive leather chairs.The average selling price for one of the chairs is $400.The variable cost per chair is $250.Voellers has average fixed costs per year of $450,000.
a.What is the break-even point in units?
b.What is the break-even point in dollar sales?
c.What would be the operating profit or loss associated with the production and sale of (1)3,000 chairs,(2)4,000 chairs?
Q3) Business risk refers to
A) the risk associated with financing a firm with debt.
B) the variability of a firm's expected earnings before interest and taxes.
C) the uncertainty associated with a firm's CAPM.
D) the variability of a firm's stock price.
Q4) Identify several factors that influence the decision to issue debt.
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Page 14
Chapter 13: Dividend Policy and Internal Financing
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Q1) AFB,Inc.'s dividend policy is to maintain a constant payout ratio.This year AFB,Inc.paid out a total of $2 million in dividends.Next year,AFB,Inc.'s sales and earnings per share are expected to increase.Dividend payments are expected to
A) remain at $2 million.
B) increase above $2 million.
C) decrease below $2 million.
D) increase above $2 million only if the company issues additional shares of common stock.
Q2) Conceptually,stock dividends and stock splits may be expected to increase the shareholder's value.
A)True
B)False
Q3) The ex-dividend date occurs prior to the declaration date. A)True
B)False
Q4) When Firm X makes the decision to pay dividends,they also make the decision not to reinvest the cash in the firm.
A)True
B)False
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Chapter 14: Short-Term Financial Planning
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Q1) A discretionary form of financing would be
A) notes payable.
B) accounts payable.
C) accrued expenses.
D) A and B
Q2) The first step involved in predicting financing needs is
A) forecasting the firm's sales revenues and expenses over the planning period.
B) estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C) determining the firm's financing needs throughout the planning period.
D) estimating the cost of debt.
Q3) The key ingredient in a firm's financial planning is an accurate sales forecast.
A)True
B)False
Q4) Which of the following will most likely result in an increase in discretionary funding needed?
A) The company's profit margin increases.
B) The company's dividend payout ratio increases.
C) The company's assets are only operating at 50% of capacity.
D) The company pays its accounts payable in 50 days, up from 45 days.
Page 16
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Chapter 15: Working-Capital Management
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Q1) Which of the following is an advantage of utilizing short-term debt to finance the acquisition of short-term assets?
A) Interest rates on short-term debt are usually lower than interest-rates on long-term debt.
B) It exposes the firm to less risk than if the firm were to use long-term debt.
C) It improves the firm's debt ratio.
D) It increases the firm's sustainable growth rate.
Q2) Trade credit is an example of which of the following sources of financing?
A) spontaneous
B) temporary
C) permanent
D) discretionary
Q3) A bank is legally obligated to provide credit under a revolving credit agreement,but not under a line of credit.
A)True
B)False
Q4) Commercial paper is an unsecured form of credit.
A)True
B)False
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Chapter 16: International Business Finance
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Q1) Forward contracts are usually quoted for periods greater than 1 year.
A)True
B)False
Q2) The U.S.dollar is the most frequently traded currency in foreign currency markets,accounting for over 40% of total trading.
A)True
B)False
Q3) The difference between the asked price and the bid price is known as the spread.
A)True
B)False
Q4) Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.
A)True
B)False
Q5) What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?
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Chapter 17: Cash,receivables,and Inventory Management
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Q1) Available yields on financial securities depend on their financial risk,interest rate risk,liquidity,and taxability.
A)True
B)False
Q2) The PMI,Inc.processes an estimated 200,000 checks per year from its customers.Total revenue collected by check is $40,000,000.The average float time until the funds are credited to PMI's checking account is 6 days.For an extra cost of $ .06/check,PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days.If PMI earns 3.5% on its checking account,how much per check will PMI make if it uses the lock-box system?
A) $.005
B) $.006
C) $.007
D) $.008
Q3) Which of the following is the least liquid?
A) U.S. Treasury bills
B) commercial paper
C) money-market mutual funds
D) federal agency securities
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