Financial Management Exam
Preparation Guide
Course Introduction
Financial Management is a foundational course that introduces students to the essential principles and practices of managing an organization's financial resources. The course covers key topics such as financial analysis, planning and forecasting, working capital management, capital budgeting, risk and return evaluation, and the cost of capital. Students will learn how financial decisions impact the value of a firm, the importance of effective budgeting and investment strategies, and the roles of financial markets and institutions. Through case studies and practical exercises, the course equips students with the analytical tools and decision-making skills necessary for sound financial management in both corporate and personal contexts.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley Eugene F. Brigham
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17 Chapters
1876 Verified Questions
1876 Flashcards
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Chapter 1: An Overview of Finance
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42 Verified Questions
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Sample Questions
Q1) During the 1930s,investment experts suggested that stock value should be determined by computing the present value of the future cash flows associated with the stock.
A)True
B)False Answer: False
Q2) In the early 1900s,the investments arena was dominated by a small group of very wealthy investors and opulent corporations.
A)True
B)False Answer: True
Q3) What major factor(s)led to the U.S.economic woes which started in 2007?
A) U.S.overseas military engagements.
B) A decline in real estate values which resulted in increased mortgage defaults and foreclosures and a decline in financial markets.
C) The European economic crisis.
D) Inflation and manufacturing outsourcing.
E) None of the above.
Answer: B
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Page 3
Chapter 2: Financial Assets Instruments
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Sample Questions
Q1) Which of the following statements is correct?
A) All common stock must have full voting rights.
B) While firms are allowed to issue different classes of common stock,the Securities and Exchange Commission (SEC)requires that each class have the same dividend privileges.
C) The New York Stock Exchange (NYSE)allows firms with dual class stock to be listed on the exchange.
D) In order to increase a stock's liquidity,investment bankers generally require that insiders sell some percentage of their shares after a firm has undergone an initial public offering (IPO).
E) When a firm raises capital,investment bankers enter into a "best efforts" arrangement which guarantees that the securities will be sold.
Answer: C
Q2) Which of the following is NOT a source of equity on a firm's balance sheet?
A) additional paid-in capital
B) retained earnings
C) common stock
D) property,plant,and equipment
Answer: D
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4
Chapter 3: Financial Markets and the Investment Banking Process
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) In general,when a firm decides to raise capital there are stage I and stage II decisions.Stage I decisions include the amount to be raised and the type of security to be issued.Once the type of security is chosen this is a decision that cannot be changed in stage II.
A)True
B)False
Answer: False
Q2) When a firm makes an earnings announcement that is different than what the analysts expected the market price of the firm's stock adjusts immediately.This is evidence consistent with markets being ____ efficient but not ____ efficient.
A) weak-form;strong-form
B) weak-form;semistrong-form
C) strong-form;semistrong-form
D) semistrong-form;strong-form
Answer: D
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Page 5
Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) Federal deposit insurance has prevented the failure of depository institutions.
A)True
B)False
Q2) The Federal Reserve has a major influence on financial markets.
A)True
B)False
Q3) All else equal,the money supply should decrease when
A) banks withdraw currency from the Fed.
B) the Fed makes loans at the discount window.
C) the Fed sells securities on the open market.
D) the Fed buys securities on the open market.
E) None of the above
Q4) The most frequent common bond for credit union formation is
A) occupational.
B) church-related or religious affiliation.
C) geographical.
D) ethnicity factors.
E) political affiliation.
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Chapter 5: The Cost of Money Interest Rates
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65 Flashcards
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Sample Questions
Q1) The real risk-free rate of interest is 3 percent.Inflation is expected to be 4 percent this coming year,jump to 5 percent next year,and run at 6 percent the year after (Year 3).According to the expectations theory,what should be the interest rate on 3-year,risk-free securities today?
A) 18%
B) 12%
C) 6%
D) 8%
E) 10%
Q2) The term structure is defined as the relationship between interest rates and maturities of similar securities.
A)True
B)False
Q3) The dollar return earned on a debt investment is comprised of the interest payments received and the change in value of the debt instrument in the financial markets.
A)True
B)False
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Page 7
Chapter 6: Business Organizations and the Tax Environment
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96 Verified Questions
96 Flashcards
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Sample Questions
Q1) The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability,whereas proprietorships do not.
A)True
B)False
Q2) Which of the following is a reason why companies move into international operations?
A) To take advantage of lower production costs in regions of inexpensive labor.
B) To develop new markets for their finished products.
C) To better serve their primary customers.
D) Because important raw materials are located abroad.
E) All of the above.
Q3) Which of the following does not need to be considered when assessing the impact of financial decisions?
A) Projected earnings.
B) Financial market conditions.
C) Timing of the earnings flow.
D) Riskiness of the firm.
E) All of the above must be considered.
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Chapter 7: Analysis of Financial Statements
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123 Flashcards
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Sample Questions
Q1) Current cash flow from existing assets is highly relevant to the investor.However,the value of the firm depends primarily upon its growth opportunities.As a result,profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Q2) All of the following represent cash outflows to the firm except A) Taxes.
B) Interest payments.
C) Dividends.
D) Purchase of plant and equipment.
E) Depreciation.
Q3) Most annual reports include detailed financial data for the two most recent years,along with historical summaries of key accounting statistic for the past five or ten years.
A)True
B)False
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Chapter 8: Financial Planning and Control
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122 Flashcards
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Sample Questions
Q1) Holding other things constant,the additional funds required for financing the firm's operations would be reduced with an increase in the firm's
A) Dividend payout ratio.
B) Profit margin.
C) Cost of external funds.
D) Expected growth rate in sales.
E) Tax rate.
Q2) Forecasting financial requirements for a firm involves determining how much money the firm will
A) generate internally.
B) have to raise externally.
C) need during a given period.
D) All of the above.
Q3) A typical sales forecast,though concerned with future events,will usually be based on recent historical trends and events as well as on forecasts of economic prospects.
A)True
B)False
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Chapter 9: Time Value of Money
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132 Flashcards
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Sample Questions
Q1) You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today.If the interest is compounded monthly,then what is the effective annual rate on this loan?
A) 12.68%
B) 14.12%
C) 12.00%
D) 13.25%
E) 15.08%
Q2) You plan to invest $2,500 in a money market account which will pay an annual stated (simple)interest rate of 8.75 percent,but which compounds interest on a weekly basis.If you leave this money on deposit for one year (52 weeks),what will be your ending balance when you close the account?
A) $2,583.28
B) $2,611.72
C) $2,681.00
D) $2,703.46
E) $2,728.50
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Chapter 10: Valuation Concepts
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Sample
Questions
Q1) Due to a number of lawsuits related to toxic wastes,a major chemical manufacturer has recently experienced a market reevaluation.The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent,with interest being paid semiannually.The required simple rate on this debt has now risen to 16 percent.What is the current value of this bond?
A) $1,273
B) $1,000
C) $7,783
D) $550
E) $450
Q2) A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years.If your simple annual required rate of return is 12 percent with quarterly compounding,how much should you be willing to pay for this bond?
A) $941.36
B) $1,051.25
C) $1,115.57
D) $1,391.00
E) $825.49
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Page 12
Chapter 11: Risk and Rates of Return
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104 Flashcards
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Sample Questions
Q1) Which of the following statements is most correct?
A) If you add enough randomly selected stocks to a portfolio,you can completely eliminate all the market risk from the portfolio.
B) If you formed a portfolio which included a large number of low beta stocks (stocks with betas less than 1.0 but greater than 1.0),the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio,so the portfolio would have a relatively low degree of risk.
C) If you were restricted to investing in publicly traded common stocks,yet you wanted to minimize the riskiness of your portfolio as measured by its beta,then,according to the CAPM theory,you should invest some of your money in each stock in the market,i.e. ,if there were 10,000 traded stocks in the world,the least risky portfolio would include some shares in each of them.
D) Company-specific (or unsystematic)risk can be eliminated by forming a large portfolio,but normally even highly diversified portfolios are subject to market (or systematic)risk.
E) Statements b and d are both correct.
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) If expectations for long-term inflation rose,but the slope of the SML remained constant,this would have a greater impact on the required rate of return on equity,r<sub>s</sub>,than on the interest rate on long-term debt,r<sub>d</sub>,for most firms.In other words,the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
A)True
B)False
Q2) The cost of debt,r<sub>d</sub>,is always less than r<sub>s</sub>,so r<sub>d</sub>(1 T)will certainly be less than r<sub>s</sub>.Therefore,since a firm cannot be 100% debt financed,the weighted average cost of capital will always be greater than r<sub>d</sub>(1 T).
A)True
B)False
Q3) Refer to Becker Glass Corporation.What is the firm's cost of retained earnings?
A) 15.0%
B) 15.5%
C) 16.0%
D) 16.5%
E) 17.0%
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Page 14
Chapter 13: Capital Budgeting
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Sample Questions
Q1) Which of the following statements is correct?
A) If a firm's stockholders are well diversified,we know from theory and from studies of market behavior that corporate risk is not important.
B) Undiversified stockholders,including the owners of small businesses,are more concerned about corporate risk than market risk.
C) Empirical studies of the determinants of required rates of return (r)have found that only market risk affects stock prices.
D) Market risk is important but does not have a direct effect on stock price because it only affects beta.
Q2) Capital budgeting is process of planning expenditures on assets whose cash flows are expected to end in less than one year.
A)True
B)False
Q3) When risk is explicitly accounted for in capital budgeting,a project will be acceptable to a firm if its IRR is greater than the firm's average required rate of return.
A)True
B)False
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Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) Which of the following would not have an influence on the optimal dividend policy?
A) The possibility of accelerating or delaying investment projects.
B) A strong shareholders' preference for current income versus capital gains.
C) Bond indenture constraints.
D) The costs associated with selling new common stock.
E) All of the above can have an effect on dividend policy.
Q2) Business risk is concerned with the operations of the firm.Which of the following is not associated with (or not a part of)business risk?
A) Demand variability.
B) Sales price variability.
C) The extent to which operating costs are fixed.
D) Changes in required returns due to financing decisions.
E) The ability to change prices as costs change.
Q3) If Miller and Modigliani had considered the cost of bankruptcy,it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.
A)True
B)False
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Chapter 15: Working Capital Management
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Sample Questions
Q1) Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary to conduct business.
A)True
B)False
Q2) Due to advanced technology and the similarity of general procedures,working capital management for multinational firms is no more complex than it is for domestic firms.
A)True
B)False
Q3) Short-term financing might be riskier than long-term financing because,during periods of tight credit,the firm might not be able to rollover (renew)its debt.
A)True
B)False
Q4) If the unit sales of a firm double,the optimal order quantity as determined by the EOQ model will also double.
A)True
B)False
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Chapter 16: Investment and Securities
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102 Flashcards
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Sample Questions
Q1) The simple arithmetic average return and the geometric average return will be equal only if the annual returns are increasing over time.
A)True
B)False
Q2) A long-term investment strategy where investors purchase securities with the intent to keep them for a long period before liquidation is called
A) Speculation.
B) Shorting the stock.
C) Buy-and-hold.
D) Margin trading.
E) Option trading.
Q3) The relative amount of personal funds,or initial equity,an investor has to "put up" when purchasing stocks on margin is called the initial margin requirement.
A)True
B)False
Q4) When the market is rising,it is called a bull market.
A)True
B)False
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Chapter 17: Investment Analysis and Valuation Techniques
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) If the industry P/E ratio normally varies from 15 to 20,which of the following prices is most appropriate for a company that has an EPS equal to $3?
A) $57.60
B) $40.00
C) $188.20
D) $43.20
E) Not enough information is given to answer this question.
Q2) Technical analysts often are called chartists because they depend solely on charts and graphs to determine stock market trends.
A)True
B)False
Q3) What is the expected price for the stock of a company that just paid a dividend of $3.00? The company has a dividend payout ratio of 50 percent,discount rate of 25 percent,and a P/E of 10.
A) $60.00
B) $30.00
C) $12.00
D) $45.00
E) $22.50
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