Financial Management Exam
Bank
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in effective financial decision-making within organizations. Topics include financial analysis, planning and control, valuation of assets, risk and return, capital budgeting, funding sources, and working capital management. Students will develop an understanding of financial markets and instruments, as well as tools for evaluating investment opportunities and managing the financial resources of a firm. Through real-world case studies and practical exercises, learners will gain the skills needed to support strategic financial objectives and ensure organizational growth and stability.
Recommended Textbook
Practical Financial Management 7th Edition by William
R. Lasher
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Page 2
Chapter 1: Foundations
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Sample Questions
Q1) When valuing a firm's stocks and bonds, finance professionals place equal significance on accounting results and cash flows.
A)True
B)False
Answer: False
Q2) The term "buying a bond" is misleading because:
A) bonds are not available to the general public.
B) a bond can only be bought with assets other than money.
C) bonds represent a debt relationship so a bond buyer is actually lending money.
D) bonds are not owned, only held in trust for a buyer's beneficiaries.
Answer: C
Q3) A loan backed by an asset the lender can sell to pay off the loan if the borrower defaults is called _____.
A) amortized
B) collateralized
C) guaranteed
D) riskless
Answer: B
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3
Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) Which of the following best describes how corporations are taxed on dividend income?
A) Like individuals, corporations are taxed on all dividends received.
B) Fifty percent of dividend income received by corporations is tax exempt.
C) Varying amounts of dividend income received by corporations are tax exempt, depending on the percent of the paying corporation that the receiving corporation owns.
D) In order to avoid triple taxation of earnings, dividend income received by one corporation from another in which it owns twenty percent stock is 100% tax exempt.
Answer: C
Q2) Although depreciation is a noncash expense, the government still allows the deduction on the firm's tax return.
A)True
B)False
Answer: True
Q3) EBIT shows the profitability of operations after considering financing.
A)True
B)False
Answer: False
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) Which of the following is a part of the cash conversion cycle?
A) Bonds
B) Inventory
C) Equity stock
D) Depreciation
Answer: B
Q2) What is the market price per share of Whopie, Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to book value ratio of 1.5?
A) $16.20
B) $10.80
C) $7.20
D) None of the above
Answer: A
Q3) Operating activitieshave to do with running the business on a day-to-day basis.
A)True
B)False
Answer: True
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5
Chapter 4: Financial Planning
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Sample Questions
Q1) Blackstone Inc. has a return on sales of 15%, a total asset turnover of 1.2 and a debt ratio of 30%. If the company is projecting a dividend payout ratio of 80%, calculate the firms' sustainable growth rate.
A) 5.15%
B) 8.25%
C) 10.35%
D) 13.45%
Q2) Large companies tend to do which of the following types of business planning?
A) Strategic planning
B) Operational planning
C) Budgeting and forecasting
D) All of the above
Q3) The dividend payout ratio is defined as the ratio of net income minus retained earnings to net income.
A)True
B)False
Q4) The financial plan is essentially a part of a broader activity known as business planning.
A)True
B)False
Page 6
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Stocks, and bonds are long-term investment vehicles. They are similar in that both have stipulated terms that designate the maturity of the investment.
A)True
B)False
Q2) Marshall Manufacturing has just borrowed money at 13% for 2 years. The pure rate of interest is 2%. Marshall's default risk premium is 4%, its liquidity risk premium is 2%, and its maturity risk premium is 0.5%. Inflation is expected to be 3% during the first year of the loan's life. What does the lender expect the inflation rate to be in the loan's second year?
A) 3%
B) 4%
C) 5%
D) 6%
Q3) Money market securities have maturities ranging from one month to two years. A)True B)False
Q4) Real interest rates have no inflation adjustments.
A)True
B)False
7
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Chapter 6: Time Value of Money
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Sample Questions
Q1) The future and present value factors are reciprocals. Either amount equation can be used to solve any amount problem.
A)True
B)False
Q2) Mary Rodriguez is borrowing $50,000 to buy a home. If she pays equal annual installments for 30 years and 8 percent interest on the outstanding balance, what is the amount of her annual payment?
Q3) Preferred stock dividends are:
A) paid on demand.
B) amortized.
C) a perpetuity.
D) due at the end of an investment.
Q4) The more frequent the compounding the:
A) greater the present value.
B) greater the amount deposited.
C) greater the effective interest rate.
D) lower the future value.
Q5) An annuity is a series of equal payments separated by equal time intervals. A)True B)False
8
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) In valuing bonds, the most important consideration is:
A) the bond's past and future cash flows.
B) the bond's future cash flows.
C) the bond's past cash flows.
D) whether coupon payments are annual or semiannual.
Q2) Webley Corp. issued a $1,000 bond at a coupon rate of 12%. The bond has 30 years remaining, until maturity. Comparable bonds are yielding 8%. What should Webley's bond sell for today? (Round to nearest $)
A) $878
B) $932
C) $1,147
D) $1,381
E) $1,452
Q3) Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price?
A) $1235.27
B) $2418.58
C) $836.74
D) $1236.44
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Alpha issued a 6% preferred stock 15 years ago (par value $100). What is it selling for today if the relevant rate of return is now 9%?
A) $38.15
B) $100.00
C) $66.67
D) $75.46
Q2) A stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:
A) $1.76.
B) $14.29.
C) $10.43.
D) None of the above
Q3) The considerations associated with stock valuation do not include:
A) the expected future dividend performance of the stock.
B) the estimated selling time and price of the stock.
C) the exchange on which the stock is traded.
D) the market return on stocks of that type.
Q4) Are growth rate models such oversimplifications of reality that they're useless?
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Page 10
Chapter 9: Risk and Return
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Q1) Risk is:
A) the probability that return will be less than expected.
B) the standard deviation of the probability distribution of returns.
C) variability in return.
D) All of the above
Q2) The Security Market Line (SML) relates risk to return, for a given set of market conditions. If risk aversion increases, which of the following would most likely occur?
A) The market risk premium would increase.
B) The risk-free rate would increase.
C) The slope of the SML would increase.
D) Both a & c
E) All of the above
Q3) The required rate of return on a stock:
A) is the risk-free rate plus a premium for the risk associated with the stock.
B) is the return expected based upon currently available information.
C) is the minimum return that generates trading.
D) is entirely determined by the return on an average stock.
Q4) How can a stock have different risk characteristics in and out of a portfolio?
Q5) What is the market risk premium?
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) The MIRR is an interest rate that:
A) equates the present value of outflows with the present value of the future value of all inflows of a project.
B) equates the present value of all cash inflows with the cost of capital of a project.
C) is used to determine the rate of reinvestment of a project with multiple cash outflows. D) is used to determine the net present value of a project.
Q2) If a project's NPV is negative:
A) the project earns less than the cost of capital.
B) the investment will not add value or contribute to shareholder wealth.
C) the present value of expected cash outflows is greater than the present value of expected cash inflows.
D) All of the above
Q3) A project with a negative NPV always has an IRR that's less than the cost of capital. A)True B)False
Q4) When can IRR and NPV give different results? Explain how this can happen.
Q5) What are some of the practical reasons for capital rationing?
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Page 12
Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) The determination of net cash flows should never include:
A) changes in depreciation.
B) changes in operating costs.
C) interest charges.
D) a and b only
Q2) All capital budgeting techniques ignore the time value of money.
A)True
B)False
Q3) Cash flows forecast to continue forever are compressed into finite terminal values using future value formulas.
A)True
B)False
Q4) The most difficult part of the capital budgeting process is:
A) application of evaluation techniques such as NPV or IRR.
B) interpreting the results of the application of NPV or IRR.
C) estimation of the incremental project cash flows.
D) None of the above
Q5) Define sunk costs and explain their role in capital budgeting.
Q6) Define opportunity costs and explain their role in capital budgeting.
Page 13
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) The Basalt Corporation is considering a new venture. Management has made the following cash flow estimates for the project over the next three years under assumptions reflecting best, worst, and most likely scenarios in each year. \(\begin{array}{llll} & \mathrm{C}_{1} & \mathrm{C}_{2} & \mathrm{C}_{3} \\
\text { Worst case } & \$ 200 & \$ 300 & \$ 400 \\
\text { Most likely case } & \$ 300 & \$ 400 & \$ 500 \\
\text { Best case } & \$ 400 & \$ 500 & \$ 600
\end{array}\) The expected initial outlay (C<sub>0</sub>) is $1,000, and the cost of capital is 12%. The following probability distribution for best, worst and most likely conditions is constant from year to year \(\begin{array}{ll}
\text { Best case } & 25 \% \\
\text { Most likely case } & 50 \% \\
\text { Worst case } & 25 \%
\end{array}\) Calculate the NPVs of the overall best, most likely, and worst case scenarios and the probability of each.
Q2) Explain the certainty equivalent approach.
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Chapter 13: Cost of Capital
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Sample Questions
Q1) The capital structure that should be used to plan for next year's capital program is the:
A) book value based capital structure.
B) market value based capital structure.
C) either the book value or the market value capital structure is satisfactory.
D) neither the book value or the market value capital structure is satisfactory.
Q2) Which of the following would increase the WACC?
A) an increase in flotation costs
B) a decrease in tax rates
C) a decrease in preferred dividends
D) Both a & b
E) All of the above
Q3) The customary information needed to determine the firm's weighted average cost of capital (WACC) is:
A) the cost of each component and the target capital structure of the firm.
B) the book value capital components and the cost of each component.
C) the market value of the capital components and cost of each component.
D) Any of the above
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Chapter 14: Capital Structure and Leverage
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Q1) If a firm has no debt and EBIT increases by 10%, then one can expect ____.
A) EPS to increase by more than 10%
B) ROE to increase by less than 10%
C) net income to increase by 10%
D) ROCE to be less than ROE
Q2) Which of the following is accepted wisdom regarding the optimal capital structure?
A) For most firms, the optimal capital structure is somewhere between 30% and 50% debt.
B) A firm with good profit prospects and little to no debt is probably missing an opportunity by not using borrowed money if interest rates are reasonable.
C) Debt levels above 60% create excessive risk and should be avoided.
D) All of the above
Q3) The degree of operating leverage is the ratio of the relative change in EBIT brought about by a relative change in fixed costs.
A)True
B)False
Q4) Explain the breakeven analysis.
Q5) What are the two different types of risk in the context of leverage?
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Chapter 15: Dividends
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Q1) Taxes play a subtle role in the irrelevance theory because dividends and capital gains are taxed at different rates.
A)True
B)False
Q2) Which of the following is not one of the most common dividend policies?
A) Stable dividends
B) Target payout ratio
C) Discretionary dividend
D) Small regular dividend with extras when earnings permit
Q3) Last year Quality's earnings per share were $2.34 and it paid a dividend of $1.10. What was Quality's dividend payout ratio?
A) 21.2%
B) 42.7%
C) 47%
D) 53%
Q4) A target payout ratio policy involves choosing a ratio with which the firm is comfortable and thereafter paying exactly that percentage of earnings every year.
A)True
B)False
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Chapter 16: The Management of Working Capital Multiple
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Sample Questions
Q1) Mattingly, Inc. uses 40,000 weberwalls per year. On average, weberwalls cost $12, and the annual cost of carrying one in inventory is $1.50. The cost to place an order is $50.
Based on this information, what is Mattingly's annual ordering cost for purchasing weberwalls if they observe the EOQ model?
A) $1,155
B) $1,225
C) $1,633
D) $1,731
E) $2,450
Q2) Short-term liabilities:
A) represent claims on a firm's income and assets.
B) are sources of funds for the firm.
C) can arise spontaneously from a firm's operations.
D) All of the above
Q3) Short-term loans are generally used to:
A) finance permanent additions to working capital.
B) finance additions to fixed assets.
C) finance seasonal working-capital requirements.
D) retire equity, thus changing a firm's capital structure.
Page 18
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Chapter 17: The Management of Working Capital
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Q1) Commercial paper is an example of marketable securities.
A)True
B)False
Q2) Under just-in-time (JIT) inventory systems, manufacturers shifts the task of maintaining inventory to their suppliers, who in turn shift it to their own suppliers.
A)True
B)False
Q3) A bank line of credit usually requires both interest payments and a commitment fee.
A)True
B)False
Q4) A lockbox system can eliminate processing float.
A)True
B)False
Q5) Under a pledging agreement, the borrower offers its receivables as collateral for a loan.
A)True
B)False
Q6) Explain the economic reasons for holding cash.
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Chapter 18: Corporate Restructuring
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Q1) Holding companies enable a parent to control a subsidiary without owning all of its stock. As a general rule, 25% ownership of a widely held company virtually guarantees control.
A)True
B)False
Q2) Congeneric mergers do not generally have major anticompetitive effects as the merging firms don't directly compete.
A)True
B)False
Q3) Which of the following is not a factor that makes valuing a target's stock difficult and imprecise?
A) It's hard for an acquirer to get an accurate forecast of the target's future cash flows.
B) Terminal values vary dramatically in response to small changes in assumptions.
C) The acquirer's management generally doesn't know anything about the target's line of business.
D) Estimating a risk adjusted discount rate for the analysis is inherently imprecise.
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Chapter 19: International Finance
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Sample Questions
Q1) The forward exchange rate between two currencies:
A) depends on the date of delivery of one of the currencies.
B) can fluctuate over time.
C) is always stated in terms of US dollars.
D) a and b
E) All of the above
Q2) The currencies of ____ have traditionally not been convertible.
A) China
B) Great Britain
C) Russia
D) a and c
E) All of the above
Q3) Honda could sell bonds denominated in Japanese yen to Americans in the United States.
A)True
B)False
Q4) Why do governments influence exchange rates from time to time? How do they do it?
Q5) Why don't firms avoid exchange rate risk by purchasing a supply of foreign currency and simply holding it until it's needed?
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