Financial Management Exam Preparation
Guide
Course Introduction
Financial Management is an essential course that introduces students to the fundamental concepts, theories, and techniques used to make informed financial decisions within organizations. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students will also explore the principles of investment, financing, and dividend decisions, understanding how these impact a companys value. Throughout the course, practical applications and case studies are used to develop critical analytical and problem-solving skills essential for effective financial planning and control in diverse business environments.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Ediiton by Stephen A. Ross
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21 Chapters
1629 Verified Questions
1629 Flashcards
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Chapter 1: Introduction to Corporate Finance
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57 Verified Questions
57 Flashcards
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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 terms refers to a conflict of interest between the stockholders and managers of a corporation?
A)Stakeholder claim
B)Corporate activism
C)Legal liability
D)Breach of indemnity
E)Agency problem
Answer: E
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Page 3
Chapter 2: Financial Statements and Cash Flow
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85 Verified Questions
85 Flashcards
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Sample Questions
Q1) When making financial decisions related to assets,you should
A)place primary emphasis on historical costs.
B)place more emphasis on book values than on market values.
C)rely primarily on the value of assets as shown on the balance sheet.
D)always consider market values.
E)only consider market values if they are less than book values.
Answer: D
Q2) Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?
A)Change in net working capital
B)Depreciation expense
C)Interest expense
D)Deferred taxes
E)Dividends paid
Answer: C
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4
Chapter 3: Financial Statements Analysis and Financial Models
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88 Flashcards
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Sample Questions
Q1) From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?
A)Times interest earned ratio
B)Cash coverage ratio
C)Cash ratio
D)Quick ratio
E)Debt-equity ratio
Answer: B
Q2) Jessica's Boutique has cash of $687,accounts receivable of $1,419,accounts payable of $1,308,and inventory of $2,609.What is the value of the quick ratio?
A).53 times
B)3.60 times
C).48 times
D)1.84 times
E)1.61 times
Answer: E
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Chapter 4: Discounted Cash Flow Valuation
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) Theo just won a prize that will pay him $10,000 a year for 10 years,starting at the end of Year 10.What is the current value of this prize if the discount rate is 7 percent,compounded annually?
A)$37,982.98
B)$35,704.33
C)$38,203.63
D)$36,191.91
E)$35,928.70
Q2) Texas Foods has a loan that requires one lump sum payment at the end of 12 years in the amount of $139,000.The interest rate is 5.8 percent,compounded monthly.What amount did the firm borrow?
A)$75,209.79
B)$69,418.30
C)$82,706.63
D)$84,613.03
E)$72,461.16
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Chapter 5: Interest Rates and Bond Valuation
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91 Flashcards
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Sample Questions
Q1) The written,legally binding agreement between a corporate borrower and its lenders detailing all of the terms of a bond issue is called the A)indenture.
B)covenant.
C)terms of trade.
D)put provision.
E)call provision.
Q2) The parts of an indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called
A)deferred call provisions.
B)sinking funds provisions.
C)protective covenants.
D)trustee relationships.
E)bond ratings.
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Chapter 6: Stock Valuation
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86 Flashcards
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Sample Questions
Q1) According to finance professionals,which one of these factors has the biggest impact on a firm's PE ratio?
A)Accounting practices of the firm
B)Risk-level of the firm
C)Size of the firm
D)Growth opportunities
E)Age of the firm
Q2) Based on the dividend growth model,an increase in investors' overall level of required returns will
A)cause the market values of all stocks to decrease,all else held constant.
B)not affect overall stock market prices.
C)cause dividend growth rates to increase to offset this change.
D)cause non-dividend-paying stocks to decrease in price while dividend-paying stock prices remain constant.
E)cause some stock prices to rise while others fall.
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8
Chapter 7: Net Present Value and Other Investment Rules
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) You are considering two independent projects.The required rate of return is 13.75 percent for Project A and 14.25 percent for Project B.Project A has an initial cost of $51,400 and cash inflows of $21,400,$24,900,and $22,200 for Years 1 to 3,respectively.Project B has an initial cost of $38,300 and cash inflows of $23,000 a year for 2 years.Which project(s),if either,should you accept?
A)Accept both A and B
B)Reject both A and B
C)Accept A and reject B
D)Accept B and reject A
E)Accept either A or B but not both A and B
Q2) A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?
A)14.66%
B)13.22%
C)12.73%
D)18.67%
E)15.70%
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9
Chapter 8: Making Capital Investment Decisions
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81 Flashcards
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Sample Questions
Q1) Which one of these statements related to MACRS depreciation is correct?
A)The MACRS percentages in the IRS tables are applied annually to the then current book value of an asset.
B)The MACRS system of depreciation was eliminated by the IRS in 2012.
C)An asset will be depreciated faster using MACRS rather than the straight-line method.
D)An asset classified as 3-year MACRS property will be fully depreciated at the end of Year 3.
E)All newly acquired property is considered to be placed in service at the start of the year for MACRS purposes.
Q2) The sale of an asset creates an aftertax cash flow in an amount equal to the
A)Sale price - Book value.
B)Sale price - Tax rate × (Book value - Sale price).
C)Sale price - Tax rate × (Sale price - Book value).
D)Sale price + Tax rate × (Sale price - Book value).
E)Sale price × (1 - Tax rate).
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10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) All else constant,the accounting profit breakeven level of sales will decrease when the
A)fixed costs increase.
B)contribution margin decreases.
C)depreciation expense decreases.
D)variable costs per unit increase.
E)selling price per unit decreases.
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 to various independent capital projects.
Q3) In scenario analysis,which one of the following items is least apt to be assigned a range of values?
A)Sales price per unit
B)Variable cost per unit
C)Fixed cost
D)Initial cost
E)Sales quantity
Page 11
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Chapter 10: Risk and Return: Lessons From Market History
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) Winslow stock is currently selling for $39 a share.The stock has a dividend yield of 2.3 percent.How much dividend income will you receive per year if you purchase 400 shares of this stock?
A)$248.80
B)$390.47
C)358.80
D)$239.50
E)$360.00
Q2) Suppose you own a risky asset with an expected return of 18.2 percent and a standard deviation of 27.2 percent.If the returns are normally distributed,the approximate probability of losing 9 percent or more in a single year is ________ percent.
A).26
B)4.56
C)15.87
D)31.74
E)2.28
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12
Chapter 11: Return and Risk: The Capital Asset Pricing Model
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89 Verified Questions
89 Flashcards
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Sample Questions
Q1) RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in a recession.The probability of a recession is 33 percent and the probability of a booming economy is zero.What is the variance of the returns on RTF stock?
A)0.019093
B)0.013760
C)0.017864
D)0.014946
E)0.019394
Q2) You have a two-stock portfolio with an expected return of 11.7 percent.Stock A has an expected return of 13.8 percent while Stock B is expected to return 9.2 percent.What is the portfolio weight of Stock A?
A)59.09%
B)57.82%
C)63.33%
D)54.35%
E)60.33%
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13
Chapter 12: Risk, Cost of Capital, and Valuation
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82 Verified Questions
82 Flashcards
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Sample Questions
Q1) Assume the overall market has a risk premium of 7.1 percent,and the risk-free rate is 2.9 percent.What is the risk premium for a stock that has a beta of 0.94 and a standard deviation of 12.7 percent?
A)5.62%
B)6.67%
C)7.29%
D)5.58%
E)6.82%
Q2) Alto Music is a levered company providing musical instruments and supplies through its retail outlets.The company is considering expanding into art supplies.Since this is an entirely new venture,the company should
A)use the current company beta when computing the required risk premium for the project.
B)use the market beta when computing the project's discount rate.
C)increase the project's initial cost by a factor of (1 + Company )to offset the increased risk.
D)use the company's cost of equity as the project's discount rate.
E)use the pure play approach to assign a discount rate to the project.
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) Which one of the following statements is correct concerning market efficiency?
A)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock in an efficient market.
B)In an efficient market,some market participants will have an advantage over others.
C)If a market is efficient,arbitrage opportunities should be common.
D)Real asset markets are more efficient than financial markets.
E)A firm will generally receive a fair price when it sells shares of stock in an efficient market.
Q2) The efficient market hypothesis implies that
A)all investments should earn the same average rate of return over time.
B)any investment should earn a normal return commensurate with the investment's risk.
C)efficient markets will tend to have fixed prices from one day to the next.
D)stock prices are only efficient when all investors review their portfolios on a daily basis.
E)investors must be disinterested in their investments for the markets to be efficient.
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Chapter 14: Capital Structure: Basic Concepts
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) MM Proposition II,without taxes,is the proposition that A)supports the argument that the capital structure of a firm is irrelevant to the value of the firm.
B)a firm's cost of equity increases in direct relationship to the increase in debt.
C)the cost of levered equity is determined solely by the return on debt,the debt-equity ratio,and the tax rate.
D)the cost of equity depends on the market value of the firm's assets.
E)supports the argument that the size of the pie does not depend on how the pie is sliced.
Q2) In an EPS-EBI graphical relationship,the debt line and the no debt line intersect.Which one of these is true at the intersection point?
A)The advantages of debt outweigh the disadvantages of debt.
B)The aftertax earnings of both capital structures are equal.
C)The earnings per share for both capital structures equal zero.
D)There is no advantage or disadvantage to debt.
E)The EPS is maximized for both the levered and the unlevered firm.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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56 Verified Questions
56 Flashcards
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Sample Questions
Q1) In general,the capital structures of U.S.firms:
A)tend to overweight debt in relation to equity.
B)employ less debt when the firm requires large amounts of tangible assets.
C)are constant over time on a firm-by-firm basis.
D)tend to be those that maximize the use of each firm's available tax shelters.
E)vary significantly across industries.
Q2) The protective covenants contained within a loan agreement
A)impose restrictions on the lender.
B)are designed to protect the borrower's shareholders.
C)increase the borrower's flexibility.
D)tend in increase the bond's interest rate.
E)can increase the value of the borrowing firm.
Q3) The complete termination of a firm as a going business concern is called a A)merger.
B)repurchase program.
C)liquidation.
D)divestiture.
E)reorganization.
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17
Chapter 16: Dividends and Other Payouts
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79 Flashcards
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Sample Questions
Q1) A stock currently sells for $65.70 a share.What type of stock split would be best if the stock's proper trading range centers on $22 a share?
A)two-for-five reverse stock split
B)one-for-three reverse stock split
C)two-for-three reverse stock split
D)five-for-two stock split
E)three-for-one stock split
Q2) Observation and research shows that
A)dividends have almost been eliminated due to increased stock repurchases.
B)during the year 1979,about two-thirds of dividends were paid to individuals with a marginal tax rate of 15 percent or less.
C)the largest corporations have been holding their dividends constant over the last 20 years.
D)for the period 1980 to 2012,aggregate dividends averaged about 30 percent of aggregate earnings.
E)the percentage of corporations paying dividends has increased since the Year 2002.
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18
Chapter 17: Options and Corporate Finance
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80 Flashcards
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Sample Questions
Q1) A stock has a market value of $36.10 a share.The $35 call option is priced at $1.48.The intrinsic value of this option is ________,and the time value is ________.
A)$1.10; $.38
B)$1.10; $1.48
C)$0; $1.48
D)$0; $.38
E)$0; $1.10
Q2) The $17.50 put option on ALF stock is priced at $.75.What is the total intrinsic value of one option contract if the underlying stock is currently selling for $18 a share?
A) $50
B) $25
C)$0
D)$25
E)$50
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Chapter 18: Short-Term Finance and Planning
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79 Flashcards
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Sample Questions
Q1) Which one of the following will increase the net working capital of a firm? Assume the current ratio is positive.
A)Selling a fixed asset
B)Selling inventory at cost for cash
C)Making a payment on a long-term debt
D)Buying inventory on credit
E)Paying an accounts payable
Q2) A supplier offers you credit terms of 2/10,net 45.What is the cost of forgoing the discount on a purchase of $318,600? Assume a 365-day year.
A)20.41%
B)21.08%
C)24.83%
D)22.69%
E)23.45%
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Chapter 19: Raising Capital
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75 Flashcards
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Sample Questions
Q1) Max's Outlet stock currently sells for $43 a share.The firm has a rights offer outstanding for new equity shares with one right granted for each outstanding share.To purchase one new share,you must submit five rights and $38.What is the ex-rights stock price?
A)$42.17
B)$41.25
C)$42.45
D)$41.55
E)$41.97
Q2) Disaster Cleanup stock sells for $29 a share.The firm has a rights offer outstanding for new equity shares.Antonio currently owns 400 shares.He just received one right for every share he owns.To purchase one new share he must submit five rights and $22.What is the value of one right?
A)$1.17
B)$1.33
C)$.91
D)$.84
E)$1.09
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Chapter 20: International Corporate Finance
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79 Flashcards
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Sample Questions
Q1) Triangle arbitrage:
A)no longer exists as all currencies have obtained equilibrium on an ongoing basis.
B)prevents exchange markets from obtaining equilibrium.
C)opportunities can exist in either the spot or the forward market.
D)requires three currencies that are correctly priced plus one incorrectly priced currency.
E)is rarely profitable.
Q2) Assume the current spot rate for the Norwegian krone is $1 = NKr7.0305.The expected inflation rate in Norway is 2.6 percent,and in the United States its 1.3 percent.A risk-free asset in the U.S.is yielding 2.2 percent.What risk-free rate of return should you expect on a Norwegian security?
A)2.8%
B)3.3%
C)3.5%
D)1.7%
E)1.9%
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Chapter 21: Mergers and Acquisitions Web Only
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Sample Questions
Q1) Low's has 17,500 shares of stock outstanding at a price per share of $37.40.Bert's has 25,000 shares outstanding at a price per share of $41.50.Bert's believes it can create $12,800 of synergy if it acquires Low's in an exchange of stock.What is the value of the combined firm following the merger? Assume both firms are all-equity financed.
A)$1,704,800
B)$1,597,500
C)$1,753,300
D)$1,692,000
E)$1,679,200
Q2) Wilson's has 6,000 shares of stock outstanding at a market price per share of $19.Neilsen's has 22,000 shares outstanding that sell for $33 a share.By merging,$11,000 of synergy can be created.Neilsen's is acquiring Wilson's for $115,005 worth of Neilsen stock.What is the postmerger value per share?
A)$33.39
B)$33.00
C)$29.97
D)$29.42
E)$28.15
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