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. The course covers key topics such as financial statement analysis, budgeting, capital structure, investment decisions, risk assessment, and working capital management. Students will learn how to analyze financial data, make informed investment choices, and understand the role of financial markets and institutions. Emphasis is placed on strategic financial planning and decision-making to maximize a firms value, with practical applications and case studies to enhance analytical and problem-solving skills.
Recommended Textbook
Corporate Finance Linking Theory to What Companies Do 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) Which of the following describes the "collective action problem"?
A) When a CEO fails to represent the interest of shareholders in daily decisions of the firm.
B) When the shareholders of a firm fail to act in their own best interests.
C) When the managers of a firm lack incentive to maximize shareholder wealth.
D) When an individual stockholder spends time and resources monitoring managers, bearing the cost, while the benefits go to all the shareholders in the firm.
Answer: D
Q2) When a corporation offers shares to the public for the first time that is an:
A) IPO
B) PPO
C) NPO
D) LBO
Answer: A
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Chapter 2: Financial Statement and Cash Flow Analysis
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Q1) Refer to Tax Table.First Watch,Inc.has a pretax income of $3,755,250.What is the company's average tax rate?
A) 25%
B) 15%
C) 39%
D) 34%
Answer: D
Q2) Use the following information to determine Bill's Solvency Ratio.
Total net worth: $150,000
Cash surplus: $15,000
Income after taxes: 105,000
Total assets: $300,000
A) 14.29%
B) 50%
C) 2
D) None of the above
Answer: B
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Chapter 3: The Time Value of Money
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Questions
Q1) You set up a college fund in which you pay $2,000 each year at the BEGINNING of the year.How much money will you have accumulated in the fund after 18 years,if your fund earns 7% compounded annually?
A) $72,757.93
B) $67,998.07
C) $20,118.17
D) $28,339.25
Answer: A
Q2) Which of the following investments would have the highest future value (in year 5)if the discount rate is 12%?
A) A five year ordinary annuity of $100 per year.
B) A five year annuity due of $100 per year.
C) $700 to be received at year 5
D) $500 to be received TODAY (year 0)
Answer: D
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Chapter 4: Valuing Bonds
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Sample Questions
Q1) Observing the following term structure; a US treasury bond maturing in 5 years has a yield of 6% while US Treasury bond maturing in 3 years has a yield of 8%; what is the expected 2 year rate,3 years from now?
A) 3.07%
B) 8.07%
C) 2.36%
D) 4.35%
Q2) You own a bond that pays a 12% annualized SEMIANNUAL coupon rate and has 10 years to maturity.If the discount rate increases from 14% to 16% during the next two years of the bonds life,then what is the dollar increase (decrease)in value for the bond during the two year period?
A) ($69.42)
B) ($71.09)
C) $69.42
D) $71.09
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Chapter 5: Valuing Stocks
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Sample Questions
Q1) A "dealer market" is:
A) when buyers and sellers contact each other directly to arrange an exchange of securities.
B) a market in which the buyer and seller are not brought together directly but, rather, have their orders executed by securities dealers.
C) a market in which buyers and sellers are brought together on a securities exchange to trade securities.
D) none of the above
Q2) Harder Points One has just paid a dividend of $1.50,has a required return of 17% and a current stock price of $50.65.What is the expected growth rate?
A) 13.63%
B) 14.04%
C) 14.44%
D) cannot be determined
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Chapter 6: The Trade-Off Between Risk and Return
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Q1) Which statement is FALSE regarding risk and return?
A) For broad asset classes, the relationship between risk and return is nearly linear.
B) Adding multiple stocks to a portfolio can reduce non-systematic risk.
C) There is a nearly linear relationship between risk and return for individual stocks.
D) Because investors can easily eliminate risk through diversification, investors should only be rewarded for non-diversifiable risk.
Q2) Refer to Bavarian Sausage 2.What is the capital gain's yield of your investment?
A) 2.15%
B) -3.76%
C) 8.06%
D) 5.91%
Q3) Refer to Bavarian Sausage 2.What is the total return on your investment?
A) 2.15%
B) -3.76%
C) 8.06%
D) 5.91%
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Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Q1) Given Exhibit 7-2,what is the expected standard deviation?
A) 957.38%
B) 1058.69%
C) 30.71%
D) 32.54%
Q2) A portfolio has 40% invested in Asset 1 and 60% invested in Asset 2.If Asset 1 has a beta of 1.2 and Asset 2 has a beta of 1.8,what's the beta of the portfolio?
A) 1.50
B) 1.56
C) 1.20
D) 1.80
E) cannot tell from the given information
Q3) A particular stock has an expected return of 11%.If the expected risk premium on the market portfolio is 8%,and the risk-free rate is 5%,what's the stock's CAPM beta?
A) 1.375
B) 0.750
C) 0.846
D) 0.462
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Q1) Refer to NPV Profile.If the hurdle rate is 19%,and the two projects are independent,which project should be accepted?
A) Project 1
B) Project 2
C) Both projects
D) Neither project
Q2) Refer to Exhibit 8-1.If a firm uses discounted payback with a 15% discount rate and a 3-year cutoff period,what's the discount payback period of the project? Should the firm accept the project?
A) 3.3 years; reject
B) 3.6 years; reject
C) 3.6 years; accept
D) 2.7 years; accept
Q3) What is the net present value of the proposed Commerce Company project if the discount rate is 7%?
A) $10,000
B) $9,347
C) $6,921
D) $5,847
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Page 10
Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) The relevant tax rate for capital budgeting purposes is the:
A) average tax rate.
B) maximum tax rate.
C) minimum tax rate.
D) marginal tax rate.
Q2) An asset that falls into the 3-year MACRS asset class is fully depreciated over:
A) 2 years.
B) 3 years.
C) 4 years.
D) 5 years.
Q3) An increase in inventory will ____ net working capital.
A) increase
B) decrease C) have no affect on D) cannot be determined.
Q4) Refer to FAR Corporation.What is the total cash flow generated in year 3?
A) $35,000
B) $9,554
C) $15,000
D) $40,446
Page 11
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Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) What is Bavarian Sausage's breakeven point in the most likely scenario?
A) 572
B) 1,125
C) 5,000
D) 2,526
Q2) Hollywood Productions has a $4 contribution margin for the new DVD they are releasing to the general public.The DVD sells for $20.If the fixed costs to produce the DVD were $500,000,how many units must be sold for Hollywood Productions to break even?
A) 25,000 units
B) 31,250 units
C) 75,000 units
D) 125,000 units
Q3) The right to invest additional resources in investments that enjoy early success is known as a(n):
A) expansion option
B) abandonment option
C) follow-on investment option
D) flexibility option
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Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) Refer to Brooks Corporation.ABC Investments is able to sell the stock on the secondary market at $6.00.What is the profit for ABC Investments for underwriting this seasoned offering?
A) $7.2 million
B) $7.6 million
C) $8.0 million
D) $8.8 million
Q2) One characteristic of share privatizations is
A) that they are generally much larger than the IPOs of their private-sector counterparts. B) that they are generally much smaller than the IPOs of their private-sector counterparts.
C) that the decision to privatize is made solely on economic grounds.
D) none of the above.
Q3) What is the initial return earned by investors on this Bavarian Brewhouse IPO?
A) 20%
B) 15%
C) 17%
D) 22%
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) Calculate Bavarian Brew's earnings per share after the restructuring.Assume no corporate taxes.
A) $2.20
B) $2.50
C) $2.00
D) $2.25
Q2) You need to calculate the gains from using $1,000,000 of additional leverage on the average company in the U.S.economy.You are told that the average investor's personal tax rate on income from stock is 15% and that investors can generally avoid personal taxes on income from debt.You are also told that the average corporation is subject to the 35% marginal corporate tax rate.What is the benefit to firm value for this additional debt load?
A) $650,000
B) $447,500
C) $350,000
D) none of the above
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14
Chapter 13: Long-Term Debt and Leasing
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Sample Questions
Q1) Refer to BLEC.What is the after tax cash flow for the first year from a purchase of the machine?
A) $31,583
B) $21,167
C) $19,515
D) $25,000
Q2) If a borrower violates a covenant the lender may:
A) demand immediate repayment
B) waive the violation and continue the loan
C) waive the violation but alter the terms of the original debt agreement
D) any of the above are possible
Q3) Another term for junk bonds is
A) low-risk bonds
B) low-yield bonds
C) high-yield bonds
D) vulture bonds
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Chapter 14: Payout Policy
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Sample Questions
Q1) Refer to Exhibit 14-1.If you were to sell your stock today,what would be the after tax return on your investment?
A) 8.33%
B) 9.88%
C) 7.45%
D) 11.27%
Q2) Bavarian Brewhouse had after-tax earnings of $1,500,000 in 2004.The company needs $2,500,000 for new investments and plans to finance 50% of those investments with debt.If Bavarian Brew follows a residual dividend policy,what total dividend will be paid?
A) $1,500,000
B) $0
C) $250,000
D) $500,000
Q3) Which of the following is not a practical motive for stock repurchases?
A) The desire to reduce the amount of the firm's outstanding debt.
B) Having shares available for employee stock-option plans.
C) Retiring shares of common stock.
D) Obtaining shares to be used in acquisitions.
E) All of the above are practical motives for stock repurchases.
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Chapter 15: Financial Planning
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Sample Questions
Q1) What is Bavarian Brew's expected net cash flow in March?
A) -$402.25
B) $402.25
C) $726
D) -$1,128.25
Q2) Which of the following statements is false?
A) The EVA method is conceptually valid but due to the disconnect it has between accrual-based accounting and economic value coupled with increased computational complexity, it is not the most popular method for growth planning.
B) Firms generally assumed that if ROI is greater than the firm's cost of capital then shareholder value will be created.
C) One of the typical growth targets is depreciation.
D) The popular growth targets tend to rely on accounting data and are typically measured on an annual basis.
Q3) What is the value of Bavarian Brew's accounts payable at the end of March?
A) $515.25
B) $755.25
C) $1,515.25
D) $1,015.25
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Page 17
Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) Smart Products is considering changing its credit terms from net 30 to 2/10 net 30.The firm's financial managers need to evaluate
A) the increased investment in accounts receivable due to increased sales.
B) the reduced level of bad debt expense as customers pay sooner.
C) the increased contribution margin as customers pay sooner.
D) all of the above.
Q2) Louis International is considering easing credit standards to increase sales,and potentially profits.Currently the firm sells 200,000 units at a sales price of $125 per unit and variable cost of $103 per unit.Currently the average collection period is 15 days and the bad debt expense is 3% of sales.The required return on investment is 18%.If credit standards are eased,the sales will increase to 250,000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 5% All else will remain the same.What is the increase in bad debt expense?
A) $ 812,500.00
B) $6,250,000.00
C) $1,562,500.00
D) $ 750,000.00
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Page 18
Chapter 17: Cash, payables, and Liquidity Management
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Sample Questions
Q1) Bavarian Brew is contemplating implementing a lockbox system that would decrease the collection float by 2 days.What would be the most the company should be willing to pay on an annual basis for the system?
A) $96,250
B) $482,500
C) $38,500
D) $48,125
Q2) Place the following in the correct order of priority for selecting short-term investments:
A) expected return, liquidity, preservation of capital
B) expected return, preservation of capital, liquidity
C) liquidity, expected return, preservation of capital
D) preservation of capital, liquidity, expected return
Q3) $100 million dollar days of float could be arrived at by
A) $100 million dollars worth of checks with an average of 5 days of float.
B) $20 million dollars worth of checks with an average of 5 days of float.
C) $10 million dollars worth of checks with an average of 20 days of float.
D) $10 million dollars worth of checks with an average of 5 days of float.
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Chapter 18: International Financial Management
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Q1) If you are looking at an indirect quote for a U.S.Dollar -foreign currency exchange rate and the number has increased from yesterday to today,then
A) the U.S Dollar has increased in value.
B) the U.S Dollar has decreased in value.
C) the foreign currency has decreased in value.
D) both a and c are correct.
Q2) You checked the /$ exchange rate a week ago and you found that one Dollar cost you 0.8214.When you checked the /$ exchange rate again yesterday one dollar was trading at 0.8026.By how much did the value of the Euro appreciate (depreciate)?
A) depreciated by 3.56%
B) appreciated by 3.56%
C) appreciated by 2.29%
D) depreciated by 2.29%
Q3) If you are a U.S.based company making sales in Europe,you would benefit from A) a strengthening U.S. dollar.
B) a weakening U.S. dollar.
C) a weakening Euro.
D) none of the above.
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Page 20
Chapter 19: Options
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Q1) Jimmy Campbell is looking to buy put options on Hawkwood Corporation.Currently Hawkwood Corp.stock is trading at $40 per share.The put options that he is considering buying have a strike price of $45.These put options are
A) in-the-money
B) American options
C) out-of-the money
D) European options
Q2) Which of the following is NOT needed to price options using the binomial approach?
A) the current price of the underlying stock
B) the risk-free rate
C) the possible values that the underlying stock could take in the future
D) the strike price of the option
E) the value of N(d<sub>1</sub>)
Q3) Which of the following conditions must be met in order for put - call parity to hold.
A) The call and put options must be on the same underlying stock
B) The call and put options must have the same expiration date
C) Both options should be European options
D) All of the above
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Which of the following is the most popular exit strategy that VCs use?
A) IPO
B) through sale of the portfolio company directly to another company
C) by selling the portfolio company back to the entrepreneur
D) none of the above
Q2) A rapidly growing source of new money for institutional venture capital funds is
A) bank loans
B) pension funds
C) individuals
D) government grants
Q3) Most of the capital for early venture funds came from
A) corporate backers.
B) wealthy individuals.
C) family trusts.
D) all of the above.
Q4) What is the annual (compounded)return on Pickswinners' investment?
A) 13%
B) 31%
C) 131%
D) 231%
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) Financial synergies are largely the anticipated result of A) vertical mergers.
B) horizontal mergers.
C) conglomerate mergers.
D) forced mergers.
Q2) Which of the following anti-takeover measures may actually help align manager and shareholder interests?
A) super majority votes
B) pac man defense
C) golden parachutes
D) staggered director elections
Q3) A structured purchase of the target's shares in which the acquirer announces a public offer to buy a minimum number of shares at a specific price is called
A) LBO
B) tender offer
C) exchange offer
D) green mail
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Chapter 22: Bankruptcy and Financial Distress
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Q1) If the company has $578,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case III occurs?
A) 24.86%
B) 75.14%
C) 100%
D) 56.35%
Q2) What is the term that describes an arrangement a firm can make with its creditors that enables it to bypass many of the costs involved in legal bankruptcy proceedings if it becomes technically insolvent?
A) voluntary reorganization
B) composition
C) liquidation
D) workout
E) none of the above
Q3) A creditor that has a specific asset pledged as collateral are called
A) secured creditors
B) unsecured creditors
C) general creditors
D) shareholders
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Page 24
Chapter 23: Risk Management
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Q1) Refer to CBOE.Suppose you want to construct a collar to reduce the cost of the cap by selling a floor.What is the net cost of the least expensive such collar? (Be sure the strike prices on the call and the put are NOT the same!)
A) $0.10 per contract outflow
B) $10 per contract outflow
C) $0.10 per contract inflow
D) $10 per contract inflow
Q2) Consider a forward contract to buy a ten-year bond in one year; currently the eleven-year bond has a coupon rate of 10%,paid semi-annually with a price of $1,050.The current and effective risk-free rate of interest is 4%.What is the fair forward price?
A) $991.01
B) $992.04
C) $1,092.04
D) $1,009.62
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