Financial Management
Exam Materials
Course Introduction
Financial Management is a foundational course that introduces students to the principles and techniques used in the effective planning, directing, monitoring, organizing, and controlling of financial resources within an organization. Topics include financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. The course emphasizes both theoretical frameworks and practical tools used by financial managers to make informed decisions that enhance firm value, ensuring alignment with both short-term and long-term strategic objectives.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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20 Chapters
2197 Verified Questions
2197 Flashcards
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Page 2
Chapter 1: Getting Started-Principles of Finance
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87 Verified Questions
87 Flashcards
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Sample Questions
Q1) The true owners of the corporation are the
A)holders of debt issues of the firm.
B)preferred stockholders.
C)board of directors of the firm.
D)common stockholders.
Answer: D
Q2) Why do investors prefer receiving cash sooner rather than later,according to finance theory?
A)Incremental profits are greater than accounting profits.
B)Money received earlier can be reinvested and returns can be increased.
C)Tax considerations are important when investing.
D)Diversification leads to increased value.
Answer: B
Q3) How could you compensate an investor for taking on a significant amount of risk?
A)Increase the expected rate of return
B)Raise more debt capital
C)Offer stock at a higher price
D)Increase sales
Answer: A
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Page 3
Chapter 2: Firms and the Financial Market
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47 Flashcards
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Sample Questions
Q1) Private equity firms are financial intermediaries that are not traded on public capital markets.
A)True
B)False
Answer: True
Q2) Primary markets are always larger than secondary markets.
A)True
B)False Answer: False
Q3) Individuals are often savers because they wish to save for things such as a down payment on a home or graduate school.
A)True
B)False Answer: True
Q4) Colin,a private individual,sold one thousand shares of stock in DEF Corporation to Colleen,also a private individual.This represents a secondary market transaction.
A)True
B)False Answer: True
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) The company's gross profit margin is EBIT divided by net sales.
A)True
B)False
Answer: False
Q2) Which of the basic financial statements is best used to answer questions about changes in owner's equity that are not explained by the income statement?
A)Balance sheet
B)Statement of shareholder's equity
C)Income statement
D)Cash flow statement
Answer: B
Q3) Which of the following would NOT be included as equity in a corporate balance sheet?
A)Cash
B)Paid in capital
C)Retained earnings
D)Common stock
Answer: A
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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127 Verified Questions
127 Flashcards
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Sample Questions
Q1) Consolidated Industries has total interest charges of $20,000 per year.Sales of $2 million generated an operating income of $220,000 and an after-tax profit of 6% of sales.The firm has a marginal tax rate of 40%.What is the firm's times-interest-earned ratio?
A)10
B)11
C)12
D)13
Q2) GAAP,Inc.has total assets of $2,575,000,sales of $5,950,000,total liabilities of $1,855,062,and a net profit margin of 2.9%.What is GAAP's return on equity? Round to the nearest 0.1%.
A)8.6%
B)24.0%
C)16.4%
D)4.4%
Q3) Which of the following will increase return on equity?
A)An increase in sales with a proportionate increase in costs and expenses
B)An increase in sales relative to the asset base
C)A decrease in leverage
D)Both A and C
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation.
A)True
B)False
Q2) If you invest $450 today and it increases to $6,185 at the end of 20 years,what rate of return have you earned?
Q3) When using EXCEL to find the future value of $2,000 invested in an account that would earn interest of 7.5% for 18 years,the correct entry would be
A)=FV(7.5,18,0,-1,000)
B)=PV(.075,18,0,-1,000)
C)=FV(7.5,18,0,1,000)
D)=FV(.075,18,0,-1,000)
Q4) You just purchased a parcel of land for $10,000.If you expect a 12% annual rate of return on your investment,how much will you sell the land for in 10 years?
A)$25,000
B)$31,060
C)$38,720
D)$34,310
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) How much must you deposit at the end of each of the next 10 years in a savings account paying 5% annually in order to have $10,000 saved by the end of the 10th year?
A)$1,000
B)$1,638
C)$1,500
D)$795
Q2) What is the present value of an annuity of $100 received at the end of each year for seven years? The first payment will be received one year from today (round to nearest $10).The discount rate is 13%.To solve this problem with a financial calculator,the correct choice is
A)N=7,i=13,PMT= 100,FV=0,solve for PV
B)N=7,i=13,PV= 100,FV=0,solve for FV
C)N=7,i=13,PMT= 100,FV=100,solve for PV
D)N=7,i=.13,PMT= 100,FV=0,solve for PV
Q3) A perpetuity is an investment that continues forever but pays a different dollar amount each year.
A)True
B)False
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Which of the following sequences is arranged in the correct order,from highest long-term returns to lowest?
A)Small stocks,government bonds,large stocks
B)Large stocks,treasury bills,small stocks
C)Small stocks,large stocks,treasury bills
D)Government bonds,large stocks,treasury bills
Q2) Michael Lynch invested $10,000 in the Rearguard Fund four years ago.All earnings were reinvested in the fund.If his compound annual rate of return was 7%,what is his investment worth today?
A)$1,310.80
B)$10,700
C)$12,800
D)$762.89
Q3) Jayden spends a lot of time studying charts of stocks past performance,but his investment return are only average.This outcome supports
A)the weak-form efficient market hypothesis.
B)the semi-strong form efficient market hypothesis.
C)the strong form efficient market hypothesis.
D)all of the above.
Page 9
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Chapter 8: Risk and Return-Capital Market Theory
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103 Flashcards
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Sample Questions
Q1) You are considering investing in U.S.Steel.Which of the following is an example of nondiversifiable risk?
A)Risk resulting from foreign expropriation of U.S.Steel property
B)Risk resulting from oil exploration by Marathon Oil (a U.S.Steel subsidy)
C)Risk resulting from a strike against U.S.Steel
D)None of the above
Q2) U.S.Treasury bills can be used to approximate the risk-free rate.
A)True
B)False
Q3) Investment risk is
A)the probability of achieving a return that is greater than what was expected.
B)the probability of achieving a beta coefficient that is less than what was expected.
C)the probability of achieving a return that is less than what was expected.
D)the probability of achieving a standard deviation that is less than what was expected.
Q4) Beta is a measurement of the relationship between a security's returns and the general market's returns.
A)True
B)False
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) If current market interest rates fall,what will happen to the value of outstanding bonds?
A)It will rise.
B)It will fall.
C)It will remain unchanged.
D)There is no connection between current market interest rates and the value of outstanding bonds.
Q2) Advantages to borrowing in the private market include
A)less restrictive covenants.
B)reduced initial costs.
C)lower interest costs.
D)avoiding future SEC registration.
Q3) The current yield of a bond will equal its coupon rate when the bond is selling at par value.
A)True
B)False
Q4) The longer the time to maturity,the more sensitive a bond's price to changes in market interest rates.
A)True
B)False
Page 11
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Chapter 10: Stock Valuation
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Sample Questions
Q1) A share of common stock just paid a dividend of $3.25 per share.The expected long-run growth rate for this stock is 18%.If investors require a rate of return of 24%,what should the price of the stock be?
A)$57.51
B)$62.25
C)$71.86
D)$63.92
Q2) What is the value of a preferred stock that pays a $2.10 dividend to an investor with a required rate of return of 6% (round your answer to the nearest $1)?
A)$35
B)$23
C)$17
D)$21
Q3) Is the following common stock priced correctly? If no,what is the correct price?
Price = $26.25
Required rate of return = 13%
Dividend year 0 = $2.00
Dividend year 1 = $2.10
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).
A)All possible IRR's for this project are negative.
B)It is not possible to compute an IRR for this project.
C)The project is unacceptable at any required rate of return.
D)This project might have more than one IRR.
Q2) The director of capital budgeting of South Park Development Corporation is evaluating a project that will cost $200,000;it is expected to last for 10 years and produce after-tax cash flows,including depreciation,of $44,503 per year.If the firm's cost of capital is 14% and its tax rate is 40%,what is the project's IRR?
A)8%
B)14%
C)18%
D)-5%
Q3) Some capital budgeting decisions may be mandated by government regulations.
A)True
B)False
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Page 13
Chapter 12: Analyzing Project Cash Flows
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122 Flashcards
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Sample Questions
Q1) Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?
A)Training expense
B)Working capital investments
C)Installation costs of an asset
D)Before-tax selling price of old machine
Q2) Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting decisions.
A)True
B)False
Q3) Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
A)True
B)False
Q4) To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.
A)True
B)False
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) The NPV break-even point means that a company has covered its cost of capital.
A)True
B)False
Q2) The end result of a simulation analysis is
A)a probability distribution of project cash flows.
B)a clear decision on whether or not a project should be accepted.
C)a probability distribution of possible NPV's.
D)a list of value drivers and their probabilities.
Q3) Jeffrey believes that if he can make a good case for opening a new store in the chain for which he works,he will be promoted to manager.Can we be confident that Jeffrey's sales forecasts are accurate?
Q4) What is the expected net operating profit after tax (NOPAT)for the best case scenario?
A)$493,500
B)$330,000
C)$394,500
D)$124,500
Q5) Most of the variables used in forecasting cash flows are known with certainty.
A)True
B)False
Page 15
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) The investor's required rate of return differs from the firm's cost of capital due to the A)firm's beta.
B)tax deductibility of interest.
C)CAPM.
D)time value of money.
Q2) As the size of a financing issue increases,the ________ usually decreases on a percentage basis.
A)cost of equity
B)flotation cost of the issue
C)effective tax rate
D)both A and B
Q3) Cost of capital is
A)the coupon rate of debt.
B)a minimum rate of return set by the board of directors.
C)the rate of return that must be earned on additional investment if firm value is to remain unchanged.
D)the average cost of the firm's assets.
Q4) Discuss the primary advantages of the CAPM approach in determining the cost of common equity.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Tremont Inc.'s Total Assets =$25 million.The balance sheet shows Accounts payable and accruals totaling $7 million,common stock and retained earnings total $10 million.There is no preferred stock.What is the book value of interest bearing debt?
A)$15 million
B)$7 million
C)$18 million
D)$8 million
Q2) High coverage ratios,compared with a standard,imply unused debt capacity.
A)True
B)False
Q3) A firm's financial structure is defined by the Debt Ratio,while its capital structure is defined by the Debt to Value ratio.
A)True
B)False
Q4) Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.
A)True
B)False
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Assume that as the result of a firm announcing a large unexpected increase in its dividend payment,the price of the firm's common stock rises.This event would be consistent with which of the following?
A)The dividend irrelevance theory
B)The tax preference theory
C)The information effect
D)The beta effect
Q2) If a firm were to unexpectedly omit payment of its quarterly dividend,that firm's stock price would probably drop.
A)True
B)False
Q3) Compare management's motives for preferring either stock repurchases or cash dividends.
Q4) When a firm makes the decision to pay dividends,it also makes the decision not to reinvest the cash in the firm.
A)True
B)False
Q5) Under what conditions would the Modigliani and Miller dividend indifference theorem be literally true.
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) It is common practice to develop optimistic and pessimistic scenarios when projecting financial statements.
A)True
B)False
Q2) What is meant by spontaneous financing?
Q3) Based on the information in Table 1,what are Dorian Industries' total cash receipts (collections)for April 2014?
A)$400,000
B)$300,000
C)$100,000
D)($60,000)
Q4) Assume that Calamar Corp.has sales of $7.5 million and accounts payable of $450,000.The corporation utilizes the percent-of-sales method of financial forecasting.If Calamar is expected to generate sales of $9 million next year,what will the firm's accounts payable be?
A)$540,000
B)$450,000
C)$405,000
D)None of the above
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Which of the following is considered to be a spontaneous source of financing?
A)Operating leases
B)Accounts receivable
C)Inventory
D)Accounts payable
Q2) Trade credit is a source of spontaneous financing.
A)True
B)False
Q3) Spontaneous sources of financing include
A)marketable securities.
B)accruals.
C)bonds.
D)commercial paper.
Q4) What is the annual percentage cost of the loan,to the nearest .01%?
A)5.00%
B)4.50%
C)5.56%
D)2.5%
Q5) Briefly describe at least three useful tools for maintaining control over accounts receivable.
20
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Chapter 19: International Business Finance
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Sample Questions
Q1) What is meant by interest rate parity?
Q2) To buy one Indian Rupee you would need
A)1.818 cents.
B)55.0155 cents.
C)18.18 cents.
D).01818 cents.
Q3) A narrow spread indicates efficiency in the spot exchange market.
A)True
B)False
Q4) Assume that a buyer of Italian wine saw the following quotes: spot rate of .75 euros to the U.S.dollar;30-day forward rate of .747 euros to the U.S.dollar;90-day forward rate of .744 euros to the U.S.dollar.What does this information imply?
A)The forward euro is selling at a premium as compared with the spot euro.
B)The dollar is expected to maintain the same value in the near future relative to the euro.
C)The forward euro is selling at a discount as compared with the spot euro.
D)None of the above.
Q5) What is the law of one price? How does it apply to foreign exchange rates?
Q6) What is the difference between and "ask" quote and a "bid" quote.
Page 21
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?
A)The U.S.company should sell the foreign currency using futures contracts.
B)The U.S.company should buy more foreign currency futures contracts than it should sell.
C)The U.S.company should buy the foreign currency using futures contracts.
D)This is a standard business situation that would be favorable if it were to happen,so no hedge is needed.
Q2) What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?
Q3) Which of the following is a consequence of transferring risk to an insurance company?
A)An increase in stock value because risk has been reduced.
B)A guaranteed small loss in exchange for protection against large losses.
C)Higher rates of return because the firm is now free to pursue high-risk projects.
D)Protection against losses at no significant cost to the firm.
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Page 22