Financial Management Exam
Preparation Guide
Course Introduction
Financial Management provides a comprehensive overview of the principles and practices crucial to effective financial decision-making within organizations. This course explores key topics such as financial statement analysis, time value of money, risk and return, valuation of stocks and bonds, capital budgeting, cost of capital, and working capital management. By integrating theoretical concepts with practical applications, students gain the skills necessary to analyze financial data, develop strategic investment and financing plans, and understand the impact of financial decisions on organizational performance. This foundational knowledge prepares students for advanced study and careers in finance, investment, and business management.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The division of profits and losses among the members of a partnership is formalized in the:
A)indemnity clause.
B)partnership agreement.
C)statement of purpose.
D)indenture contract.
E)group charter.
Answer: B
Q2) Which one of these is a corporate document that sets forth the intended life of the firm?
A)Federal charter
B)Articles of incorporation
C)Corporate bylaws
D)Indenture contract
E)State charter
Answer: B
Q3) What should be the primary goal of a financial manager of a corporation? Why?
Answer: The primary goal of financial management is to maximize the current market value of the outstanding stock.This goal focuses on enhancing the returns to current stockholders who are the owners of the firm.
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) The income statement:
A)measures a firm's performance as of a specific date.
B)determines the aftertax income of a firm.
C)excludes deferred taxes.
D)includes dividends as an expense.
E)determines the value of a firm to its shareholders.
Answer: B
Q2) Why is depreciation added as a part of the capital spending formula?
Answer: The purpose of the capital spending formula is to determine the net fixed asset purchases,or purchases minus dispositions,for the period.Since depreciation expense lowers the ending net fixed asset balance,depreciation must be added back to offset that decrease.Once the depreciation expense has been offset,then the net fixed asset purchases is just the difference between the ending and beginning account values.
Q3) Identify three cash flows that occur between a firm and its stockholders.Indicate the direction of the cash flow in each case.
Answer: The three cash flows are:
1)Sale of equity securities:Cash inflow to the firm
2)Repurchase of outstanding securities:Cash outflow from the firm
3)Dividends paid:Cash outflow from the firm
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Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) Yesterday,Dai stock sold for $28 a share.Today,the overall market fell and Dai stock is now selling for $22 a share.Which of these ratios for Dai will be affected by this market reaction? Assume all else is held constant.
A)Enterprise value multiple and price-earnings ratio
B)Earnings per share and price-earnings ratio
C)Return on equity and return on assets
D)Return on book equity and market-to-book ratio
E)Price-earnings ratio and return on book equity
Answer: A
Q2) The internal rate of growth is based on the assumption that:
A)the dividend amount is held constant.
B)no external funding of any type is obtained.
C)the return on equity is held constant.
D)the only additional outside capital obtained is long-term debt.
E)the debt-equity ratio is held constant.
Answer: B
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) An annuity stream where the payments occur forever is called a(n):
A)annuity due.
B)indemnity.
C)perpetuity.
D)amortized cash flow stream.
E)ordinary annuity.
Q2) Discounting cash flows involves:
A)taking the cash discount offered on trade merchandise.
B)estimating only the cash flows that occur in the first four years of a project.
C)discounting only those cash flows that occur at least ten years in the future.
D)multiplying expected future cash flows by the cost of capital.
E)adjusting all expected future cash flows to their current value.
Q3) The discount rate assigned to a proposed project is the rate:
A)the firm must expect to earn before committing funding for the project.
B)the firm can earn on a riskless investment,such as U.S.Treasury bills.
C)that will create a zero average accounting rate of return.
D)of return the company desires prior to considering the risks of the project.
E)that exceeds the economic opportunity cost of investing by the required profit margin.
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Chapter 5: Interest Rates and Bond Valuation
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Q1) Which of the following items are generally included in a bond indenture?
I.Sinking fund requirements
II.Security description
III.Bid and asked prices
IV.Total amount of bonds issued
A)I and II only
B)II and IV only
C)II,III,and IV only
D)I,II,and IV only
E)I,II,III,and IV
Q2) You own a fixed-rate bond that has a coupon rate of 6.5 percent and matures in 12 years.You purchased this bond at par value when it was originally issued.If the current market rate for this type and quality of bond is 6.8 percent,then you would expect:
A)the bond issuer to increase the amount of each interest payment.
B)the yield to maturity to remain constant due to the fixed coupon rate.
C)the current yield today to be less than 6.5 percent.
D)today's market price to exceed the face value of the bond.
E)to realize a capital loss if you sold the bond at the market price today.
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Chapter 6: Stock Valuation
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Sample Questions
Q1) NASDAQ has which one of these features?
A)Broker system
B)Trading floor
C)Multiple market maker system
D)Designated market maker system
E)Trading stations called "posts"
Q2) Electronic communications networks (ECNs):
A)have open access to the NYSE but no access to NASDAQ.
B)totally replaced face-to-face trading on the NYSE in 2013.
C)are available only to financial institutional traders.
D)act to increase liquidity in the financial markets.
E)are used solely by market makers to place bid and ask quotes.
Q3) A stock report contains the following information: P/E 21.4,closing price 28.16,dividend
1.10,net chg .06,and an ask of 28.22 × 300.Which one of the following statements is correct given this information?
A)The stock price has increased by 6 percent thus far this year.
B)The closing price on the previous trading day was $28.10.
C)The earnings per share are approximately $2.
D)The dividend yield is 21.4 percent.
E)The bid-ask spread is $.300.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) The net present value of a project is projected at $210.How should this amount be interpreted?
A)The project's cash inflows exceed its outflows by $210.
B)The project will return an accounting profit of $210.
C)The project's discounted cash flows are $210 less than its undiscounted cash flows.
D)The project will increase the firm's cash account by $210 when the project is started.
E)The project is earning $210 in addition to the project's required rate of return.
Q2) Projects A and B require an initial investment of $48,000 and $98,000,respectively.The projects are mutually exclusive and both have positive net present values.Which of these methods is probably the best method to use to determine which project to accept?
A)Payback
B)Modified IRR
C)AAR
D)Incremental IRR
E)IRR
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Sway's Market is considering a project that will require the purchase of $1.4 million in new equipment.The equipment will be depreciated straight-line to zero over the 5-year life of the project.The firm expects to sell the equipment at the end of the project for 20 percent of its original cost.New net working capital equal to 10 percent of sales will be required to support the project.All of the new net working capital will be recouped at the end of the project.Annual sales are estimated at $750,000 with costs of $338,000.The required rate of return is 12 percent and the tax rate is 34 percent. What is the amount of the aftertax salvage value of the equipment?
A)$68,800
B)$74,000
C)$95,200
D)$280,000
E)$184,800
Q2) A pro forma income statement for a cost reduction project:
A)will generally reflect no incremental sales.
B)will reflect a reduction in the sales revenue.
C)will exclude any effects of depreciation.
D)cannot be prepared due to the lack of any project related sales.
E)will always reflect a negative project operating cash flow.
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) A project has an accounting break-even point of 2,239 units.The fixed costs are $4,200 and the projected variable cost per unit is $23.30.The project requires an initial investment in fixed assets of $1,200 that will be depreciated straight-line to zero over the 4-year life of the project.What is the projected sales price?
A)$24.67
B)$21.08
C)$24.82
D)$25.08
E)$25.31
Q2) Conducting scenario analysis helps managers see the:
A)impact an individual variable has on the outcome of a project.
B)possible range of market prices for a firm's stock over the life of a project.
C)potential changes in long-term debt over the course of a proposed project.
D)potential range of outcomes from a proposed project.
E)distribution of funds for capital projects under conditions of hard rationing.
Q3) What type of situations might indicate that sensitivity analysis should be performed on a variable?
Q4) Explain the significance of the financial break-even point.
Page 11
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Chapter 10: Risk and Return Lessons From Market History
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Sample Questions
Q1) Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2012? Rank from highest volatility to lowest volatility.
A)Small-company stocks,large-company stocks,long-term government bonds
B)Large-company stocks,U.S.Treasury bills,long-term government bonds
C)Small-company stocks,long-term government bonds,large-company stocks
D)Long-term corporate bonds,large-company stocks,U.S.Treasury bills
E)Small-company stocks,long-term corporate bonds,large-company stocks
Q2) The average squared difference between the actual return and the average return is called the:
A)excess return.
B)variance.
C)standard deviation.
D)risk premium.
E)volatility return.
Q3) Suppose an investor made this statement: "I will be perfectly happy with my investments if I can just earn a three percent real rate of return each year." Based on this statement,what can you determine about this investor?
Q4) How does the payment of a dividend affect the total return on a stock?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Sample Questions
Q1) What is the first step an investor takes when making an investment decision according to the separation principle?
A)Determining the mix of risky and risk-free assets he/she will hold
B)Quantifying the amount of risk he/she is willing to accept
C)Estimating future inflation and risk-free rates
D)Determining the portfolio of risky assets that he/she will hold
E)Specifying a desired rate of return
Q2) There is a 10 percent probability the economy will boom,a 65 percent probability it will be normal,and a 25 percent probability it will be recessionary.For these economic states,Stock A has deviations from its expected returns of .07,.02,and -.12,respectively.Stock B has deviations from its expected returns of .05,.01,and -.04,for the three economic states,respectively.What is the covariance of the two stocks?
A).02049
B).02143
C).00168
D).00116
E).01054
Q3) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Page 13
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) NuPress Valet has a proposed investment with an initial cost of $62 million and cash flows of $12.5 million for five years.Debt represents 50 percent of the capital structure.The cost of equity is 12 percent,the pretax cost of debt is 8.5 percent,and the tax rate is 34 percent.What is the firm's WACC?
A)6.15%
B)9.12%
C)8.81%
D)10.25%
E)9.75%
Q2) A firm has net income of $37,300,depreciation of $4,600,interest of $1,200,and taxes of $400.The EBITDA multiple is 9.4.What is the value of the firm?
A)$378,820
B)$408,900
C)$292,340
D)$393,860
E)$341,214
Q3) Explain how leverage affects the relationship between the asset beta and the equity beta.
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Q1) Which of these help prevent arbitrage from totally correcting market mispricings?
I.Trading costs
II.Market domination by rational professionals
III.Number of amateur investors
IV.Near-term risk
A)I only
B)I and II only
C)III and IV only
D)I,III,and IV only
E)I,II,III,and IV
Q2) Individuals that continually monitor the financial markets seeking mispriced securities:
A)tend to make substantial profits on a daily basis.
B)tend to make the markets more efficient.
C)are never able to find a security that is temporarily mispriced.
D)are always quite successful using only well-known public information as their basis of evaluation.
E)are always quite successful using only historical price information as their basis of evaluation.
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Chapter 14: Capital Structure: Basic Concepts
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Q1) The Pizza Shoppe has debt with both a face and a market value of $3,000.This debt has a coupon rate of 7 percent and pays interest annually.The expected earnings before interest and taxes are $1,200,the tax rate is 34 percent,and the unlevered cost of capital is 12 percent.What is the firm's cost of equity?
A)13.25%
B)13.89%
C)13.92%
D)14.14%
E)14.25%
Q2) Travel Express has a debt-to-equity ratio of .65.The pretax cost of debt is 8 percent while the unlevered cost of capital is 14 percent.What is the cost of equity if the tax rate is 34 percent?
A)7.52%
B)10.78%
C)16.57%
D)17.83%
E)18.30%
Q3) Explain homemade leverage and why it matters.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Q1) The Sawmill plans on closing its doors after one more year.During its last year in business the firm expects to generate a cash flow of $74,000 if the economy booms and $57,000 if it does not.The probability of a boom is 15 percent.The firm has debt of $60,000 that is due in one year.That debt has a market value of $58,000 today.Ignore taxes.The current promised return on debt is ____ percent and the expected return on debt is ______ percent.
A)3.78;-1.16
B)3.45;-.95
C)2.02;3.78
D)3.45;2.67
E)2.67;3.45
Q2) The free cash flow hypothesis supports:
A)decreasing stockholder dividends to retain more cash within the firm.
B)reducing a firm's level of debt to save the cash currently being spent on interest payments.
C)increasing the debt portion of a firm's capital structure.
D)hiring managers with little or no stock ownership in the firm.
E)the idea that firms with high levels of free cash flow are more apt to make good acquisitions than firms with low levels.
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Chapter 16: Dividends and Other Payouts
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Q1) You currently own 200 shares of Hanover Co.The stock closed at a price of $22.38 a share today.Tomorrow morning a 10 percent stock dividend will occur.What will be the change in the value of your investment tomorrow assuming there are no other factors affecting the market price of the stock?
A)$0
B)-$447.60
C)$447.60
D)-$2.24
E)$2.24
Q2) Which of the following tend to keep dividends low?
I.Corporate shareholders
II.Terms contained in bond indenture agreements
III.Manager's desire to maintain constant dividends over time
IV.Flotation costs
A)II and III only
B)I and IV only
C)II,III,and IV only
D)I,II,and III only
E)I,II,III,and IV
Q3) Identify at least four pros of paying dividends.
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Chapter 17: Options and Corporate Finance
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Q1) Which one of these combinations is a protection put?
A)Writing identical puts and calls on the same asset
B)Buying a put and buying the underlying asset
C)Selling a call and buying the underlying asset
D)Buying a call and selling the underlying asset
E)Selling a put and buying the underlying asset
Q2) Given an exercise price,E,time to maturity,t,and European put-call parity,the present value of the strike price plus the value of the call option on the stock is equal to:
A)the price of the stock plus the price of the put option.
B)the present value of the stock minus the put option.
C)the price of the put option minus the market value of the stock.
D)the value of risk-free security,such as a U.S.Treasury bill.
E)the current market value of the stock.
Q3) What is a protective put and what does it protect?
Q4) What is the difference between an American and a European option? All else equal,which type of option will have more value and why?
Q5) Explain the rationale behind the statement that equity is a call option on a firm's assets.When would a shareholder allow the call to expire?
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Chapter 18: Short-Term Finance and Planning
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Q1) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of financing are there that the firm could use as an alternative?
Q2) Dixie's has a net cash inflow for the quarter of -$136.The beginning cash balance is $74.Company policy is to maintain a minimum cash balance of $50 and borrow only the amount that is necessary to maintain that balance.How much does the firm need to borrow to have a zero cumulative surplus?
A)$22
B)$72
C)$82
D)$132
E)$112
Q3) Countrywide Machine Parts is considering a proposal whereby customers who pay their bills on time will receive a 2 percent rebate on their purchases.Those who pay cash will receive a 5 percent rebate.All rebates will be applied to the next order placed by the customer.Explain the impact of this proposal on the firm.
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Chapter 19: Raising Capital
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Q1) What was the average first-day return on IPOs for the period 1975-2012 in the U.S.?
A)28.7 percent
B)21.7 percent
C)9.2 percent
D)11.4 percent
E)18.6 percent
Q2) Which one of the following best fits the description of a private placement?
A)5-year commercial bank loan
B)10-year loan from an insurance company
C)2-year direct business loan
D)3-year loan to a firm by its original founder
E)20-year bonds sold in the public markets
Q3) The Golden Nickel just arranged a 2-year direct business loan.Which one of the following terms matches this loan arrangement?
A)Seasoned offer
B)Rights offer
C)Private placement
D)Shelf loan
E)Term loan
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Chapter 20: International Corporate Finance
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Sample Questions
Q1) You want to invest in a riskless project in London.The project has an initial cost of £50,000 and is expected to produce cash inflows of £28,000 a year for two years.The project will be worthless after two years.The expected inflation rate in the U.K.is 2.2 percent while it is 2.6 percent in the U.S.A risk-free security is paying 3.9 percent in the U.S.The current spot rate is $1 = £.63.What is the net present value of this project in U.S.dollars? Use the foreign currency approach.
A)$5,065.78
B)$3,587.74
C)$2,010.61
D)$5,211.18
E)$6,998.04
Q2) A sweater you desire costs C$95.What will the same sweater cost in the U.S.if the direct quote is1.013?
A)C$96.24
B)C$94.09
C)C$93.78
D)C$96.01
E)C$95.27
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) XYZ has a market value of $287,400.ABC has a market value of $611,900.ABC believes it can create $57,000 of synergy if it acquires XYZ for $300,000 in cash.What is the value of ABC following the merger? Assume both firms are all-equity financed.
A)$656,300
B)$998,900
C)$956,300
D)$668,900
E)$368,900
Q2) Which one of these is the best justification for acquiring a firm?
A)Increasing the bidder firm's sphere of political influence
B)Managing a larger firm to justify higher management salaries
C)Desire to control more employees
D)Creating financial value by combining the bidder and target firms
E)Creating accounting goodwill
Q3) Explain the pros and cons of a cash acquisition over a stock acquisition.
Q4) Explain a golden parachute and justify why a firm's shareholders may be willing to agree to such an arrangement.
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