Financial Management Exam Practice
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Course Introduction
Financial Management provides students with a comprehensive understanding of the principles and tools used in effective corporate financial decision-making. The course covers the fundamental concepts of financial analysis, planning, and control, including topics such as time value of money, risk and return, capital budgeting, financial markets, cost of capital, and working capital management. By integrating theory with real-world applications, students learn to evaluate investment opportunities, design optimal capital structures, and formulate strategies to maximize the value of a firm, while also considering ethical and global perspectives in financial decision-making.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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2224 Verified Questions
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) Future financial managers will need to understand
A) international cash flows.
B) computerized funds transfers.
C) international currency hedging strategies.
D) All of the options are true.
Answer: D
Q2) Professor Merton Miller received the Nobel Prize in Economics for his work on A) dividend policy.
B) investment theory.
C) working capital management.
D) capital structure theory.
Answer: D
Q3) Which of the following did not contribute to the financial crisis?
A) Solid credit ratings from the ratings agencies
B) The extension of credit to high-risk borrowers
C) The merger of JPMorgan Chase and Bear Stearns
D) All of the options contributed to the financial crisis
Answer: C
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Chapter 2: Review of Accounting
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Sample Questions
Q1) A firm's purchase of plant and equipment would be considered a
A) use of cash for financing activities.
B) use of cash for operating activities.
C) source of cash for operating activities.
D) use of cash for investment activities.
Answer: D
Q2) Which of the following is not a primary source of raising money or capital for the firm?
A) Assets
B) Common stock
C) Preferred stock
D) Bonds
Answer: A
Q3) An increase in accrued expenses results in a cash outflow on the statement of cash flows.
A)True
B)False
Answer: False
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Chapter 3: Financial Analysis
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89 Flashcards
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Sample Questions
Q1) A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate return on equity.
A) 40%
B) 20%
C) 25%
D) There is not enough information to calculate return on equity.
Answer: C
Q2) In 2015, Bubble Inc. had net income of $500,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000. In 2016, Bubble Inc. had net income of $600,000, assets of $7,000,000, sales of $1,300,000, and debt of 2,000,000. Did Bubble Inc's return on assets improve from 2015 to 2016?
A) No
B) Yes
C) Stayed the same
D) Not enough information to answer
Answer: A
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) In general, a firm with higher amounts of sales on credit has
A) lower needs to borrow.
B) higher needs to borrow.
C) more rapidly collection of credit sales.
D) more ability to buy raw materials on credit.
Q2) Growth in sales volume prevents a shortage of cash funds.
A)True
B)False
Q3) GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, with cash payments of $6,000 and $8,000, respectively. GS Cookie's cash balance at the beginning of January was $5,000, a level that it attempts to maintain. At the beginning of the year, GS Cookie has a $15,000 balance outstanding on its line of credit at the local bank. Based on its cash budget, how much of the line of credit can GS
Cookie repay in January and February combined?
A) $12,000
B) $15,000
C) $4,000
D) $17,000
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.
A)True
B)False
Q2) A conservative financing plan involves
A) heavy reliance on debt.
B) heavy reliance on equity.
C) a high degree of financial leverage.
D) a high degree of combined leverage.
Q3) A factory that relies on highly technical machinery may choose to reduce its overall leverage position by
A) selling its machinery.
B) increasing its accounts receivable.
C) utilizing a higher level of equity.
D) decreasing their variable costs per unit
Q4) The contribution margin is equal to sales price per unit minus total costs per unit.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory.
A)True
B)False
Q2) Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings?
A) Illiquid assets and heavy short-term borrowing
B) Illiquid assets and heavy long-term borrowing
C) Liquid assets and heavy long-term borrowing
D) Liquid assets and heavy short-term borrowing
Q3) Which of the following is a reason for diminishing liquidity in modern corporations?
A) Just-in-time inventory programs.
B) Better utilization of cash via computers.
C) Increased use of point-of-sale terminals.
D) All of the options are reasons for diminishing liquidity.
Q4) Working capital management primarily involves long-term planning.
A)True
B)False
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8
Chapter 7: Current Asset Management
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Sample Questions
Q1) The use of "float" has dramatically increased since the Check Clearing for the 21<sup>st</sup> Century Act was passed.
A)True
B)False
Q2) Modos Company has deposited $3,500 in checks received from customers. It has written $1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its customers' checks have cleared, but only $600 of its own, calculate its float.
A) $1,200
B) $1,100
C) $300
D) $700
Q3) The "SWIFT" transfer system was developed to aid regional bank fund transfers within the United States.
A)True
B)False
Q4) Electronic funds transfer will likely increase the use of float.
A)True
B)False
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9
Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) A blanket inventory lien is where items are not identified or tagged, and there is no physical transfer of control of the inventory from the borrower.
A)True
B)False
Q2) Friedman Roses Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?
A) $16,000
B) $81,250
C) $100,000
D) $78,000
Q3) Hedging refers to
A) avoiding high-risk investment opportunities.
B) a transaction that reduces risk exposure.
C) the same thing as asset diversification.
D) avoiding the financial futures market.
Q4) All commercial paper involves the physical transfer of actual paper certificates.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table.
A)True
B)False
Q2) Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son's education 10 years from now. He calculates that he will need $21,598 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal? Choose the closest answer.
A) 10%
B) 8%
C) 4%
D) 1%
Q3) Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?
A) 2%
B) Between 3% and 4%
C) 10%
D) Less than 1%
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Two years ago, Maple Enterprises issued 4%, 20-year bonds, and Temple Corp issued 4%, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm's bond prices in the market, assuming they have equal risk?
A) Maple's decreased more than Temple's.
B) Temple's decreased more than Maple's.
C) Maple's increased more than Temple's.
D) They are both priced the same.
Q2) The total required real rate of return is equal to the real rate of return plus the inflation premium.
A)True
B)False
Q3) An issue of common stock is expected to pay a dividend of $3 at the end of the year. Its growth rate is equal to 3%, and the current share price is $40. What is the required rate of return on the stock?
A) Between 7% and 10%
B) Between 10% and 12%
C) Between 12% and 14%
D) Between 14% and 17%
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Page 12
Chapter 11: Cost of Capital
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Sample Questions
Q1) Using the constant growth model, a firm's expected dividend yield (D<sub>1</sub>) is 4% of the stock price, and its growth rate is 5%. If the tax rate is 35%, what is the firm's cost of equity?
A) 10%
B) 6.65%
C) 9.0%
D) 5.85%
Q2) A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%?
A) 1.2%
B) 1.58%
C) 3.20%
D) 5.26%
Q3) The cost of debt needs to consider tax, while the cost of stock does not need to consider tax.
A)True
B)False
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) Capital rationing
A) is a way of preserving the assets of the firm over the long term.
B) is a less than optimal way to arrive at capital budgeting decisions.
C) assures stockholder wealth maximization.
D) assures maximum potential profitability.
Q2) A firm purchases an asset falling into the 3-year MACRS category for $48,000. The second year's depreciation expense for this asset would be ________.
A) $34,710
B) $21,360
C) $16,000
D) The answer cannot be determined without knowing second-year earnings before depreciation and taxes.
Q3) Possibly the most overlooked part of the capital budgeting process is the search for new opportunities through innovation and creative thinking.
A)True
B)False
Q4) The payback method is not really a theoretically correct approach.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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85 Flashcards
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Sample Questions
Q1) A "what if" simulation using a computer helps to
A) reduce the risk associated with a particular investment.
B) determine the effects of changes in certain variables.
C) increase the accuracy of the inputs.
D) make data entry more complicated.
Q2) The coefficient of correlation
A) takes on values anywhere from 0 to +1.
B) takes on values anywhere from -1 to 0.
C) takes on values anywhere from -1 to +1
D) takes on values of 0 or larger.
Q3) The firm's highest risk-adjusted discount should be applied to A) the repair of old machinery.
B) a new product in a related field.
C) a new product in a foreign market.
D) the purchase of new equipment
Q4) In considering the share price effect on risk-return trade-offs, our goal should always be to earn the highest return possible.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) Municipal securities are called "tax-exempt" because no federal taxes must be paid on interest received.
A)True
B)False
Q2) The European Central Bank issues bonds, notes, and bills denominated in the Euro currency.
A)True
B)False
Q3) The efficient market hypothesis deals primarily with
A) random speculation in securities.
B) the degree to which prices adjust to new information.
C) the degrees to which price movements are the result of past trends.
D) how an investor can significantly outperform the market in general.
Q4) The "capital structure" of the firm consists of long-term debt and equity.
A)True
B)False
Q5) The largest net supplier of funds is the U.S. Treasury and other agencies of the government.
A)True
B)False
Page 16
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Chapter 15: Investment Banking
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Sample Questions
Q1) The risk function of investment banking is categorized mainly under A) underwriting function.
B) market-maker function.
C) advisor function.
D) agent function.
Q2) An investment banker most commonly makes money from A) commissions from buyers.
B) fees from other investment bankers in the syndicate.
C) the spread between the issue price and proceeds to the issuer.
D) artificially supporting the stock price during and after the offering.
Q3) Because there is more uncertainty involved in the initial market reaction to common stock, a larger "underwriting spread" often exists for stocks, compared to other types of offerings.
A)True
B)False
Q4) When stock is exchanged in the NYSE that is considered secondary offerings, while when stock is exchanged during an initial public offering that is considered primary offerings.
A)True
B)False
Page 17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Floating rate bonds provide which one of the following advantages?
A) A lower risk for the issuing corporation
B) A higher initial rate received by the investor
C) Higher tax advantages for the investor than a conventional bond
D) A fixed market value for the investor
Q2) A floating rate bond has a reasonably stable price, but actual interest payments received change often over the life of the bond.
A)True
B)False
Q3) The "yield to maturity" is the internal rate of return on a bond.
A)True
B)False
Q4) Which of the following statements regarding the June 2009 bankruptcy of General Motors (GM) is false?
A) The government provided more than $50 billion in the bailout.
B) The common stockholders received no cash.
C) The U.S. government still owns some of the common stock of GMas of 2014.
D) The secured debtholders were paid off in full.
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Page 18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Which of the following is NOT true about preferred stock?
A) 70% of dividends are non taxable to other corporations that hold preferred stock.
B) The after-tax cost is higher than debt with the same yield.
C) Dividends are legal obligations of the firm.
D) Preferred stocks are typically cumulative with respect to dividends.
Q2) Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income.
A)True
B)False
Q3) Participating preferred stock gives its owners voting rights.
A)True
B)False
Q4) American Depository Receipts
A) have annual reports and financial statements presented in English.
B) pay dividends in dollars.
C) are more liquid and less expensive to buy than foreign stock.
D) all of these answers are true.
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19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) A stock split involves a reduction in the firm's retained earnings account.
A)True
B)False
Q2) A stock dividend will
A) increase the total value of stockholders' equity.
B) decrease the total value of stockholders' equity.
C) not affect the total value of stockholders' equity.
D) change the total value of stockholders' equity but the direction cannot be determined unless the market price and par value is known.
Q3) Stock dividends usually enhance the overall wealth of the company's stockholders.
A)True
B)False
Q4) The primary argument against the "marginal principle of retained earnings" is
A) the uncertainty surrounding capital investment projects.
B) the lack of ability to adequately measure corporate investment returns.
C) the diversity of stockholders and their potential investment returns.
D) its failure to consider stockholder preferences.
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20
Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The face value of a convertible bond divided by the conversion price equals the number of shares a bondholder will receive upon conversion.
A)True
B)False
Q2) If market rates of interest change, the "floor value" of a convertible bond can change.
A)True
B)False
Q3) The conversion premium is equal to the market price minus the conversion value.
A)True
B)False
Q4) The conversion price divided into the market value of a convertible bond provides the conversion ratio.
Face value is used, rather than market price.
A)True
B)False
Q5) Basic earnings per share includes all convertible bonds outstanding. A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Leveraged buyouts are restricted to "outside" tender offers.
A)True
B)False
Q2) A "takeover tender offer" describes the attempted purchase of a firm with the consent of that firm's management.
A)True
B)False
Q3) The direct financial motives for merger activity include all of the following EXCEPT:
A) The portfolio effect
B) An improved financial posture and greater debt
C) The utilization of tax loss carry forwards
D) Vertical integration
Q4) Which of the following type of merger decreases competition?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchanges
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22
Chapter 21: International Financial Management
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Sample Questions
Q1) An example of comparing cross rates for countries is like comparing the U.S. dollar to the Japanese yen.
A)True
B)False
Q2) "Balance of payments" is a method of keeping the foreign exchange market in equilibrium.
A)True
B)False
Q3) Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings?
A) Hedging in the forward exchange market
B) Hedging in the money market
C) Hedging in the stock market
D) Hedging in the currency futures market
Q4) Translation exposure occurs because of changes in foreign exchange rates.
A)True
B)False
Q5) The most widely used currency in the Eurobond market is the euro.
A)True
B)False
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