Financial Management
Exam Materials
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices involved in the efficient acquisition, allocation, and control of financial resources within an organization. The course covers fundamental topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Students will also examine financial planning, long-term financing decisions, dividend policies, and the impact of global markets on financial strategy. Through case studies and practical exercises, learners develop the analytical and decision-making skills necessary to optimize the financial performance and value of a business.
Recommended Textbook
Fundamentals of Corporate Finance 2nd Edition by Jonathan Berk
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Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) What are the main differences between the NYSE and NASDAQ stock markets?
Answer: The NYSE has a physical location,a geographical address where traders gather to trade,but NASDAQ is an electronic market.Moreover,while the NYSE has one specialist in each stock,NASDAQ has multiple market makers serving the functions of both matching buyers and sellers and trading on their own account.
Q2) What is the most common way that agency conflict problems are addressed in most corporations?
A)by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders
B)by terminating the employment of employees who are found to have put their own interests above that of the company's
C)by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise
D)by prosecuting managers who have been found to have illegally used company moneys for their own benefit
Answer: A
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Refer to the income statement above.Luther's operating margin for the year ending December 31,2005 is closest to:
A)1.8%
B)2.7%
C)5.4%
D)16.7%
Answer: C
Q2) Company A has current assets of $42 billion and current liabilities of $31 billion.Company B has current assets of $2.7 billion and current liabilities of $1.8 billion.Which of the following statements is correct,based on this information?
A)Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
B)Company A has greater leverage than Company B.
C)Company A has less leverage than Company B.
D)Company A and Company B have roughly equivalent enterprise values.
Answer: A
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Chapter 3: Time Value of Money: An Introduction
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Sample Questions
Q1) A coin collector treasures his 1969-S Lincoln cent with a doubled die obverse because he found it in his pocket change,rather than purchasing it.He can sell it on the open market for $35,000,but would only sell it for at least twice that price,due to its sentimental value to him.It is anticipated that the coin will increase in market value in the foreseeable future.What is the value of the coin?
A)$0.01,since he paid nothing to obtain the coin and it has a face value of one cent.
B)$35,000,since this is the price that the coin would fetch on the open market.
C)At least $35,000,since he could replace the coin for $35,000,but the coin he owns has additional intangible value due to its sentimental value.
D)At least $35,000,since the value of the coin will increase in the future.
Answer: B
Q2) Which of the following statements is FALSE?
A)The process of moving a value or cash flow forward in time is known as compounding.
B)The effect of earning interest on interest is known as compound interest.
C)It is only possible to compare or combine values at the same point in time.
D)A dollar in the future is worth more than a dollar today.
Answer: D
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Sample Questions
Q1) An annuity pays $10 per year for 50 years.What is the future value (FV)of this annuity at the end of that 50 years given that the discount rate is 5%?
A)$182.56
B)$525.00
C)$845.25
D)$2093.48
Q2) You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in ten years.If the bond is currently selling for $485.20,then the internal rate of return (IRR)for investing in this bond is closest to:
A)12%
B)8.0%
C)7.5%
D)10%
Q3) How do you calculate (mathematically)the present value (PV)of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
Q4) Can we apply the growth perpetuity equation for negative growth as well?
Page 6
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Chapter 5: Interest Rates
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Q1) What is the general relationship between the absolute values of APR and EAR for an investment?
Q2) Assuming you do not pay the points and borrow from the mortgage lender at 6.25%,then your monthly mortgage payment (with payments made at the end of the month)will be closest to:
A)$1570
B)$1530
C)$1540
D)$1500
Q3) A 12% APR with bi-monthly compounding is is equivalent to an EAR of:
A)11.98%.
B)12.50%
C)12.00%.
D)12.62%.
Q4) What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
A)inverted;higher
B)normal;higher
C)inverted;lower
D)normal;lower
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Chapter 6: Bonds
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Sample Questions
Q1) A bond is said to mature on the date when the issuer repays its notional value.
A)True
B)False
Q2) The credit spread of the BBB corporate bond is closest to:
A)1.0%
B)5.6%
C)1.6%
D)0.8%
Q3) Assuming the appropriate YTM on the Sisyphean bond is 7.5%,then the price that this bond trades for will be closest to:
A)$1045
B)$691
C)$1000
D)$957
Q4) How much will the coupon payments be of a 30-year $10,000 bond with a 4.5% coupon rate and semiannual payments?
A)$30
B)$225
C)$350
D)$450
Page 8
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Which of the following is NOT a method by which a company can increase its dividend payments?
A)It can issue more shares.
B)It can increase its earnings.
C)It can decrease the number of shares outstanding.
D)It can increase its dividend payout rate.
Q2) Forecasting dividends requires forecasting the firm's future earnings. A)True
B)False
Q3) A stock is bought for $22.00 and sold for $26.00 one year later,immediately after it has paid a dividend of $1.50.What is the capital gain rate for this transaction?
A)0.27%
B)4.00%
C)15.00%
D)18.18%
Q4) What role do dividends play in stock investing?
Q5) What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?
Q6) Can the dividend-discount model handle negative growth rates?
Page 9
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Chapter 8: Investment Decision Rules
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Q1) An investor has the opportunity to invest in four new retail stores.The amount that can be invested in each store,along with the expected cash flow at the end of the first year,the growth rate of the concern,and the cost of capital is shown for each case.It is assumed each investment will operate in perpetuity after the initial investment.Which investment should the investor choose?
A)Initial investment: $100,000;Cash flow in year 1: $12,000;Growth Rate: 1.25%;Cost of Capital: 9.0%
B)Initial investment: $90,000;Cash flow in year 1: $10,000;Growth Rate: 1.50%;Cost of Capital: 9.0%
C)Initial investment: $80,000;Cash flow in year 1: $8000;Growth Rate: 1.75%;Cost of Capital:8.0%
D)Initial investment: $60,000;Cash flow in year 1: $6000;Growth Rate: 2.50%;Cost of Capital: 7.5%
Q2) If your new strip mall will have 15,000 square feet of retail space available to be leased,to which businesses should you lease and why?
Q3) Is there a unique way for calculating the MIRR to resolve the multiple IRR situation?
Q4) What is the general shape of the net present value (NPV)profile?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) An insurance office owns a large building downtown.The sixth floor of this building currently houses its entire Human Resources Department.After carrying out a survey to see whether the sixth floor could be rented and for what price,the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are.Which of the following should NOT be considered when deciding whether to rent out the sixth floor?
A)the amount obtained by renting the sixth floor
B)the cost of refurbishing the new space to be occupied by the Human Resources Department
C)cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces
D)the cost of the research into the feasibility of renting the sixth floor
Q2) The required net working capital in the first year for the Sisyphean Corporation's project is closest to:
A)$3600
B)$3960
C)$2880
D)$5400
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Chapter 10: Stock Valuation: A Second Look
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Sample Questions
Q1) In an efficient market,investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.
A)True
B)False
Q2) Which of the following statements is FALSE?
A)The firm's weighted average cost of capital,denoted r<sub>wacc</sub>,is the cost of capital that reflects the risk of the overall business,which is the combined risk of the firm's equity and debt.
B)Intuitively,the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model.
C)We interpret r<sub>wacc</sub> as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together.
D)When using the discounted free cash flow model we should use the firm's equity cost of capital.
Q3) Which is the best valuation technique when using comparables?
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Page 12
Chapter 11: Risk and Return in Capital Markets
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Sample Questions
Q1) Suppose you invested $56 in the Ishares Dividend Stock Fund (DVY)a month ago.It paid a dividend of $0.37 today and then you sold it for $61.What was your return on the investment?
A)9.01%
B)9.98%
C)9.59%
D)8.80%
Q2) The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 12%,and the standard deviation of returns is 20%.Based on these numbers what is a 95% confidence interval for 2007 returns?
A)-28%,52%
B)-10%,40%
C)-20%,35%
D)-15%,35%
Q3) Which of the following is NOT a systematic risk?
A)the risk that oil prices rise,increasing production costs
B)the risk that the economy slows,reducing demand for your firm's products
C)the risk that your new product will not receive regulatory approval
D)the risk that the Federal Reserve raises interest rates
Q4) Which type of investment has historically had the highest volatility?
Page 13
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) Is it possible for a stock to have high total risk but low systematic risk?
Q2) Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:
A)$21,000
B)$20,000
C)$20,700
D)$21,500
Q3) You expect General Motors (GM)to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM)to be 1.9 over the next year.Also,you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year.Which stock has more systematic risk? Which stock has more total risk?
A)XOM,GM
B)GM,XOM
C)GM,GM
D)XOM,XOM
Q4) Why should an investor invest in a negative-beta stock knowing that it will have an expected return lower than the risk-free rate?
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Page 14
Chapter 13: The Cost of Capital
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Sample Questions
Q1) The after-tax cost of equity is ________ the pretax cost of equity.
A)higher than
B)lower than
C)the same as
D)none of the above
Q2) When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average risk of the firm's investments.
A)diversifiable risk
B)market risk
C)non-systematic risk
D)volatility
Q3) Different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the ________ could be different.
A)optimal volatility
B)optimal current ratio
C)optimal asset mix
D)optimal debt-equity ratio
Q4) Why do we use market values rather than book values in calculation of WACC?
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Once a company goes public,it must satisfy all of the requirements of public companies.
B)Organizations such as the Securities and Exchange Commission (SEC),the securities exchanges (including the NYSE and the NASDAQ),and Congress (through the Sarbanes-Oxley Act of 2002)adopted new standards that focused on more thorough financial disclosure,greater accountability,and more stringent requirements for the board of directors.
C)The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings,the equity holders of the corporation become more concentrated.
D)Several high profile corporate scandals during the early part of the twenty-first century prompted tougher regulations designed to address corporate abuses.
Q2) What is the difference between preferred stocks issued by a private company and a mature company?
Q3) What are some of the disadvantages of going public?
Q4) What is the general long run performance of an IPO?
Q5) How does IPO pricing puzzle financial economists?
Q6) What are some of the highlights of Google's IPO process?
Page 16
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Chapter 15: Debt Financing
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Q1) Which of the following statements concerning the use of sinking funds to repurchase a bond issue is NOT true?
A)The firm makes regular payments into a sinking fund administered by a trustee over the life of the bond.
B)The firm can reduce the amount of outstanding debt without affecting the cash flows of the remaining bonds.
C)Payments from the sinking fund are used to repurchase bonds.
D)Bonds can be issued with a sinking fund provision or a call provision,but not both.
Q2) A company issues a callable (at par)20-year,5% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $102 per $100 of face value.What is the yield to maturity of this bond when it is released?
A)2.40%
B)4.84%
C)5.60%
D)6.66%
Q3) What is yield to worst?
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Page 17
Chapter 16: Capital Structure
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Q1) Which of the following statements is FALSE?
A)The unlevered beta measures the market risk of the firm's business activities,ignoring any additional risk due to leverage.
B)If a firm holds $1 in cash and has $1 of risk-free debt,then the interest earned on the cash will equal the interest paid on the debt.The cash flows from each source cancel each other,just as if the firm held no cash and no debt.
C)The unlevered beta measures the market risk of the firm without leverage,which is equivalent to the beta of the firm's assets.
D)When a firm changes its capital structure without changing its investments,its levered beta will remain unaltered,however,its asset beta will change to reflect the effect of the capital structure change on its risk.
Q2) The market value of Luther's non-cash assets is closest to:
A)$20 billion
B)$19 billion
C)$25 billion
D)$24 billion
Q3) What is the capital structure of a firm?
Q4) What are the issues in determining the optimal leverage for a firm?
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Page 18
Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:
A)8.8 million
B)1.2 million
C)9.0 million
D)8.9 million
Q2) When a firm repurchases shares the supply of shares is ________ but at the same time the firm's assets ________.
A)reduced,declines
B)increased,declines
C)reduced,increase
D)increased,increase
Q3) Firms can change dividends at any time,and in practice they vary the sizes of their dividends very frequently.
A)True
B)False
Q4) What are the ways in which a firm can retain its free cash flow?
Q5) What are the ways in which a firm can pay out its free cash flow?
Q6) What are the different ways a firm can repurchase shares?
Page 19
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation enterprise value of Ideko in 2015 is closest to:
A)$181.7 million
B)$152.8 million
C)$272.8 million
D)$301.7 million
Q2) With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2012 is closest to:
A)$14,525
B)$16,970
C)$22,710
D)$19,690
Q3) A firm has $40 million in equity and $20 million of debt,it pays dividends of 20% of net income,and has a net income of $10 million.What is the firm's internal growth rate?
A)12.2%
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Page 20
Chapter 19: Working Capital Management
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Sample Questions
Q1) What is collection float?
Q2) Which of the following is NOT a benefit of holding inventory?
A)minimizes the risk that the firm will not be able to obtain an input it needs for production
B)seasonality of demand,meaning that customer purchases often do not match the most efficient production cycle,leading to a buildup of inventory in off-peak periods
C)minimizes order cost from placing multiple orders throughout the year
D)minimizes risks involved in spoilage and obsolescence
Q3) The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as a(n)
A)speculative balance.
B)compensating balance.
C)operating balance
D)precautionary balance.
Q4) Collection float is made up of all of the following EXCEPT:
A)disbursement float.
B)processing float.
C)mail float.
D)availability float.
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Chapter 20: Short-Term Financial Planning
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Q1) Which of the following is not a specific financing option for temporary working capital?
A)secured financing
B)commercial paper
C)bank loans
D)repurchase agreements
Q2) Which of the following statements is FALSE?
A)Financing part or all of the permanent working capital with short-term debt is known as an aggressive financing policy.
B)When the yield curve is downward sloping,the interest rate on short-term debt is lower than the rate on long-term debt.In that case,short-term debt may appear cheaper than long-term debt.
C)The value of short-term debt is less sensitive to the firm's credit quality than long-term debt;therefore,its value will be less affected by management's actions or information.
D)Permanent working capital is the amount that a firm must keep invested in its short-term assets to support its continuing operations.
Q3) What is single,end-of-period payment loan?
Q4) What are commitment fees and what effect does it have on the loan?
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Page 22
Chapter 21: Option Applications and Corporate Finance
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Q1) How many of the January 2009 call options are in-the-money?
A)2
B)4
C)1
D)3
Q2) When is an option in-the-money?
Q3) Which of the following is not used in the Black-Scholes option pricing formula?
A)Stock price
B)Dividend yield
C)Strike price
D)Risk-free rate
Q4) A ________ in the volatility of assets of the firm benefits ________ at a cost to debt holders.
A)decrease,equity holders
B)increase,equity holders
C)decrease,directors
D)increase,directors
Q5) What is a put option?
Q6) What is the short position of an options contract?
Q7) When is an option at-the-money?
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Chapter 22: Mergers and Acquisitions
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Q1) Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre and post merger.
Q2) Which of the following questions is false?
A)The method of payment (cash or stock)affects how the value of the target's assets is recorded for tax purposes and it affects the combined firm's financial statements for financial reporting.
B)The combined firm must mark up the value assigned to the target's assets on the financial statements by allocating the purchase price to target assets according to their fair market value.
C)Any goodwill created in a merger deal can be amortized for tax purposes over 15 years.
D)Many transactions are carried out as acquisitive reorganizations under the tax code.These structures allow the target shareholders to defer their tax liability on the part of the payment made in acquirer stock but they do not allow the acquirer to step up the book value of the target assets.
Q3) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
Q4) What is a white knight?
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Page 24
Chapter 23: International Corporate Finance
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Q1) IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.
A)$200,000
B)$225,000
C)$400,000
D)$300,000
Q2) Firms must consider the impact of exchange rate risk if ________ of the project are affected by exchange rate changes
A)cash flows
B)32revenues
C)costs
D)capital costs
Q3) If the cash flows generated by a foreign investment are ________ with ________ we do not need to consider the impact of exchange rate risk.
A)uncorrelated,costs
B)negatively correlated,revenues
C)uncorrelated,cash flows
D)none of the above
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25
Chapter 24: Leasing
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Q1) Which of the following is considered an unfair comparison?
A)FMV lease versus $1.00-out lease
B)$1.00-out lease versus true tax lease
C)Lease versus buy
D)Lease versus borrow
Q2) A lease will be treated as a non tax lease if it satisfies any of the following conditions except:
A)The property may be acquired at the fair market value of the asset at the time when the option may be exercised.
B)Some portion of the lease payments is specifically designated as interest or its equivalent.
C)The lessee receives ownership of the asset on completion of all lease payments.
D)The total amount that the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total value of the asset.
Q3) If St.Martin purchases the CT scanner,what is the amount of the lease-equivalent loan?
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Chapter 25: Insurance and Risk Management
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Q1) A manufacturer of breakfast cereal is concerned about corn prices.The firm anticipates needing 1 million bushels of corn in one month.The current price of corn is $6.50 per bushel and the futures price for delivery in one month is $7.00 per bushel.The cost to store the corn for 1 month is $100,000.What should the firm do?
A)Hedge with futures for a total cost of $7,000,000.
B)Hedge with futures for a total cost of $6,900,000.
C)Buy the corn now and store for 1 month,for a total cost of $6,500,000.
D)Buy the corn now and store for 1 month,for a total cost of $6,600,000.
Q2) Which of the following statements is false?
A)Interest rate swaps are an alternative means of modifying the firm's interest rate risk exposure without buying or selling assets.
B)A portfolio with a negative duration is called a duration-neutral portfolio or an immunized portfolio,which means that for small interest rate fluctuations,the value of equity should remain unchanged.
C)Maintaining a duration-neutral portfolio will require constant adjustment as interest rates change.
D)A duration-neutral portfolio is only protected against interest rate changes that affect all yields identically.
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Chapter 26: Corporate Governance
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Q1) Which of the following statements is false?
A)When the CEO is also chairman of the board,the nominating letter offering a seat to a new director comes from her.This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders.
B)Over time,most of the independent directors will have been nominated by the CEO.Even though they have no business ties to the firm,they are still likely to be friends or at least acquaintances of the CEO.
C)Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance.
D)The CEO can be expected to stack the board with directors who are less likely to challenge her.
Q2) Tammy is a member of the Board of Directors of Moon Corporation.Her husband is the manager of a large division.What type of director is Tammy?
A)Inside director.
B)Outside director.
C)Gray director.
D)Resident director.
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