Financial Management Exam
Preparation Guide
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in managing an organizations financial resources. This course covers essential topics such as financial analysis, planning, and control; budgeting; the time value of money; risk and return; capital structure; and investment decision-making. Students will learn how to interpret financial statements, make informed budgeting decisions, and evaluate various sources of finance to support organizational growth and long-term sustainability. The course emphasizes both the theoretical frameworks and practical tools necessary for effective financial decision-making within corporate, entrepreneurial, and non-profit settings.
Recommended Textbook Essentials of Corporate Finance 9th Edition by Stephen Ross
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Margie opened a used bookstore and is both the 100 percent owner and the store's manager.Which type of business entity does Margie own if she is personally liable for all the store's debts?
A)Sole proprietorship
B)Limited partnership
C)Corporation
D)Joint stock company
E)General partnership
Answer: A
Q2) Capital budgeting includes the evaluation of which of the following?
A)Size of future cash flows only
B)Size and timing of future cash flows only
C)Timing and risk of future cash flows only
D)Risk and size of future cash flows only
E)Size, timing, and risk of future cash flows
Answer: E
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Chapter 2: Financial Statements,Taxes,and Cash Flow
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Sample Questions
Q1) Which one of the following will increase the cash flow from assets for a tax-paying firm,all else constant?
A)An increase in net capital spending
B)A decrease in the cash flow to creditors
C)An increase in depreciation
D)An increase in the change in net working capital
E)A decrease in dividends paid
Answer: C
Q2) Dockside Warehouse has net working capital of $42,400,total assets of $519,300,and net fixed assets of $380,200.What is the value of the current liabilities?
A)$61,700
B)$88,40000
C)$102,900
D)$96,700
E)$111,500
Answer: D
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Turner's Store had a profit margin of 6.8 percent,sales of $498,200,and total assets of $542,000.If management set a goal of increasing the total asset turnover to 1.10 times,what would the new sales figure need to be,assuming no increase in total assets?
A)$467,185
B)$492,727
C)$488,500
D)$596,200
E)$657,480
Answer: D
Q2) The DuPont identity can be accurately defined as:
A)Return on equity xTotal asset turnover xEquity multiplier.
B)Equity multiplier xReturn on assets.
C)Profit margin xReturn on equity.
D)Total asset turnover xProfit margin xDebt-equity ratio.
E)Equity multiplier xReturn on assets Profit margin.
Answer: B
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) Jamie earned $14 in interest on her savings account last year.She has decided to leave the $14 in her account so that she can earn interest on the $14 this year.The interest earned on last year’s interest earnings is called:
A)simple interest.
B)complex interest.
C)accrued interest.
D)interest on interest.
E)discounted interest.
Q2) Today,you deposit $2,500 in a bank account that pays 3.6 percent simple interest.How much interest will you earn over the next 5 years?
A)$90.00
B)$120.00
C)$450.00
D)$483.59
E)$492.27
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Page 6
Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely.These annual scholarships are:
A)an ordinary annuity.
B)an annuity due.
C)amortized payments.
D)a perpetuity.
E)a perpetuity due.
Q2) Suenette plans to save $600 at the end of Year 1,$800 at the end of Year 2,and $1,000 at the end of Year 3.If she earns 3.4 percent on her savings,how much money will she have saved at the end of Year 3?
A)$2,200.00
B)$2,238.47
C)$2,468.69
D)$2,309.16
E)$2,402.19
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) rate If your nominal of return is 14.38 percent and your real rate of return is 4.97 percent,what is the inflation rate?
A)8.47 percent
B)8.96 percent
C)9.44 percent
D)19.35 percent
E)19.92 percent
Q2) If inflation is expected to steadily decrease in the future,the term structure of interest rates will most likely be:
A)upward sloping.
B)flat.
C)humped.
D)downward sloping.
E)double-humped.
Q3) Which one of the following is the quoted price of a bond?
A)Par value
B)Discount price
C)Face value
D)Dirty price
E)Clean price
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Which one of the following features applies to NASDAQ but not the NYSE?
A) Trading in the crowd
B) Multiple market maker system
C) SuperDot
D) Broker market
E) Physical trading floor
Q2) Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?
A) $25.51
B) $26.08
C) $24.57
D) $26.02
E) $26.84
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) You're trying to determine whether or not to expand your business by building a new manufacturing plant.The plant has an installation cost of $29 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $1,848,000,$2,080,000,and $2,720,000 over these three years,what is the project's average accounting return (AAR)?
A)14.69 percent
B)14.14 percent
C)15.03 percent
D)15.28 percent
E)14.21 percent
Q2) Which one of the following methods of analysis ignores cash flows?
A)Profitability index
B)Payback
C)Average accounting return
D)Modified internal rate of return
E)Internal rate of return
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) Turner Industries started a new project three months ago.Sales arising from this project are significantly less than anticipated.Given this,which one of the following is management most apt to implement?
A)Option to wait
B)Soft rationing
C)Option to delay
D)Option to expand
E)Option to abandon
Q2) Ignoring the option to wait:
A)may overestimate the internal rate of return on a project.
B)may underestimate the net present value of a project.
C)ignores the ability of a manager to increase output after a project has been implemented.
D)is the same as ignoring all strategic options.
E)ignores the value of discontinuing a project early.
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11
Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) Based on the period 1926-2014,what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?
A)Between 0 and 1 percent
B)Between 1 and 2 percent
C)Between 2 and 3 percent
D)Between 3 and 4 percent
E)Between 4 and 5 percent
Q2) An efficient capital market is best defined as a market in which security prices reflect which one of the following?
A)Current inflation
B)A risk premium
C)All available information
D)The historical arithmetic rate of return
E)The historical geometric rate of return
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12
Chapter 11: Risk and Return
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Sample Questions
Q1) Bruno's stock should return 14 percent in a boom,11 percent in a normal economy,and 4 percent in a recession.The probabilities of a boom,normal economy,and recession are 8 percent,90 percent,and 2 percent,respectively.What is the variance of the returns on this stock?
A)011387
B).000169
C)001506
D)001538
E)011561
Q2) Which one of the following portfolios will have a beta of zero?
A)A portfolio that is equally as risky as the overall market
B)A portfolio that consists of a single stock
C)A portfolio comprised solely of U.S.Treasury bills
D)A portfolio with a zero variance of returns
E)No portfolio can have a beta of zero.
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Chapter 12: Cost of Capital
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Sample Questions
Q1) Beta Industries is considering a project with an initial cost of $6.9 million.The project will produce cash inflows of $1.52 million a year for seven years.The firm uses the subjective approach to assign discount rates to projects.For this project,the subjective adjustment is +2.2 percent.The firm has a pretax cost of debt of 9.1 percent and a cost of equity of 17.7 percent.The debt-equity ratio is .57 and the tax rate is 34 percent.What is the net present value of the project? (Round the answer to the nearest $100.)
A)-$698,400
B)-$187,100
C)$48,200
D)$333,300
E)$2,500
Q2) All else constant,an increase in a firm's cost of debt:
A)could be caused by an increase in the firm's tax rate.
B)will result in an increase in the firm's cost of capital.
C)will lower the firm's weighted average cost of capital.
D)will lower the firm's cost of equity.
E)will increase the firm's capital structure weight of debt
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Which one of the following is the theory that a firm should borrow up to the point where the additional tax benefit from an extra dollar of debt equals the additional costs associated with financial distress from that additional debt?
A)M& M Proposition I, with taxes
B)M& M Proposition II, with taxes
C)M& M Proposition I, without taxes
D)Homemade leverage proposition
E)Static theory of capital structure
Q2) When is a firm insolvent from an accounting perspective?
A)When the firm is unable to meet its financial obligations in a timely manner
B)When the firm's debt exceeds the value of the firm's equity
C)When the firm has a negative net worth
D)When the firm's revenues cease
E)When the market value of the firm's equity equals zero
Q3) Which one of the following is an example of a direct bankruptcy cost?
A)Operating at a debt-equity ratio that is less than the optimal ratio
B)Reducing the dividend payout ratio as a means of increasing a firm's equity
C)Forgoing a positive net present value project to conserve current cash
D)Incurring legal fees for the preparation of bankruptcy filings
E)Losing a key customer due to concerns over a firm's financial viability
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Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) What percentage of capital gains are excluded from taxation for corporate shareholders?
A)0 percent
B)10 percent
C)25 percent
D)70 percent
E)75 percent
Q2) Of the following,which two are the best reasons for doing a reverse stock split?
I.Return a stock to its normal trading range
II.Eliminate small shareholders
III.Reduce shareholder costs
IV.Avoid delisting
A)I and II
B)I and III
C)II and III
D)II and IV
E)III and IV
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Chapter 15: Raising Capital
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Sample Questions
Q1) Which of the following duties belong to the underwriters of a firm commitment securities offer?
I.Duty to offer the Green Shoe provision to all investors who buy at the offer price
II.Duty to set the offer price
III.Duty to distribute the offered shares
IV.Duty to purchase any unsold shares
A)I and III only
B)II and IV only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) Which one of the following is an underwriting of securities where the offer price is determined by investor bids?
A)Private placement
B)Best efforts underwriting
C)Initial public offering
D)Green Shoe option
E)Dutch auction
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Page 17
Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) AC Sales has estimated quarterly sales for next year,starting with Quarter 1,of $16,200,$17,300,$18,700,and $20,400.If purchases are equal to 72 percent of the following quarter's sales,what is the estimated amount of purchases for Quarter 2?
A)$12,960
B)$14,688
C)$12,456
D)$13,464
E)$13,720
Q2) The Corner Market has annual sales of $761,000 and cost of goods sold of $568,000.The profit margin is 4.2 percent and the accounts payable period is 37 days.What is the average accounts payable balance?
A)$77,142
B)$65,488
C)$57,578
D)$73,211
E)$59,449
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Chapter 17: Working Capital Management
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Sample Questions
Q1) The terms of sale are best defined as the:
A)total invoice amount including all shipping costs and taxes.
B)period of time during which a sale price applies.
C)legal documents related to the credit sale of either goods or services.
D)conditions under which a firm sells its goods or services for either cash or credit.
E)process used to determine which customers will be granted credit and which will not.
Q2) Taylor's Market received five checks today and went to the bank to deposit all of them.Unfortunately,the bank was closed for the day due to a robbery.How does the bank closure affect the firm's float assuming these five checks are the only outstanding bank items?
A)Collection float increased
B)Collection float decreased
C)Disbursement float increased
D)Disbursement float decreased
E)Net float remained unchanged
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19
Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) Rembrandt,Samurai,Yankee,and Bulldog are all names associated with which one of the following?
A)Eurobonds
B)Currencies
C)Cross-rate
D)Foreign bonds
E)Foreign interest rates
Q2) Assume the one-year forward rate for the Swiss franc is SF.9655 = $1.The spot rate is SF .9702 = $1.The interest rate on a risk-free asset in Switzerland is 3.8 percent.If interest rate parity exists,a one-year risk-free security in the U.S.is yielding _____ percent.
A)4.21
B)4.51
C)3.98
D)4.40
E)4.31
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