Financial Management
Exam Questions
Course Introduction
Financial Management is a comprehensive course that introduces students to the principles and practices involved in the effective management of financial resources in organizations. The course covers key topics such as time value of money, financial analysis and planning, capital budgeting, cost of capital, risk and return, asset valuation, and working capital management. By examining financial markets, investment decisions, and strategies for financing and dividend policies, students gain a thorough understanding of how financial managers make decisions to maximize organizational value, ensure long-term growth, and maintain fiscal responsibility within various business settings.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Industrial groups that exist in foreign countries are _____.
A)owned and managed by the Securities and Exchange Commission
B)organizations that tie together all the functions of production and sales from start to finish
C)organizations that encompass firms involved in financing and marketing only
D)privately held companies and the stock of such firms are not traded publicly
E)led by the firm involved with manufacturing and distribution of products
Answer: B
Q2) The riskiness inherent in a firm's earnings per share (EPS) depends on both, the types of projects the firm takes on and the manner in which the projects are financed.
A)True
B)False
Answer: True
Q3) As hostile takeovers are most likely to occur when a firm's stock is overvalued, the managers have a strong incentive to undervalue the firm's stock relative to its potential.
A)True
B)False
Answer: False
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Chapter 2: Analysis of Financial Statements
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Q1) Which of the following is true about a common size balance sheet?
A)The assets, liabilities, and equities are reported at their market values.
B)The assets, liabilities, and equities are reported as percentages of common stock.
C)The assets, liabilities, and equities are reported as percentages of total assets.
D)The assets, liabilities, and equities are arranged in the alphabetical order.
E)The assets, liabilities, and equities are reported as percentages of the assets, liabilities, and equities of a competing firm.
Answer: C
Q2) Which of the following is an example of a current asset?
A)Inventory
B)Retained earnings
C)Accounts payable
D)Plant and equipment
E)Common stock
Answer: A
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) During the past decade, the areas of greatest worldwide growth in the financial markets have occurred in _____.
A)China, India, and Brazil
B)China, India, and Argentina
C)India, Brazil, and South Africa
D)China, Brazil, and Argentina
E)China, South Africa, and Argentina
Answer: A
Q2) Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____.
A)financial intermediation
B)negotiated deal
C)competitive bid
D)shelf registration
E)dual listing
Answer: C
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Chapter 4: Time Value of Money
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Sample Questions
Q1) A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?
A)8.16%
B)8.36%
C)8.56%
D)8.76%
E)8.96%
Q2) Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.
A)$17,226
B)$14,868
C)$23,252
D)$18,725
E)$21,804
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Chapter 5: The Cost of Money Interest Rates
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Q1) Assume that the expectations theory holds and that liquidity and maturity risk premiums are zero. The annual rate of interest on a two-year Treasury bond is 10.5 percent and the rate on a one-year Treasury bond is 12 percent. What is the expected one-year interest rate during the second year?
A)9.0%
B)9.5%
C)10.0%
D)10.5%
E)11.0%
Q2) Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up.
A)True
B)False
Q3) A foreign trade deficit occurs when a country's _____.
A)imports are greater than its exports
B)tax revenues are greater than its expenditures
C)savings rate is higher than its borrowing rate
D)purchase of Treasury securities is more than sale of Treasury securities
E)cash reserves are higher than its expenses
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Chapter 6: Bonds Debt Characteristics and Valuation
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Q1) Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets.
A)the par value
B)a discount
C)a premium
D)the inflation adjusted interest rate
E)a floating interest rate
Q2) If interest rates decline, bondholders will earn:
A)a lower rate of return on reinvested cash flows.
B)a higher current yield.
C)no capital gain on the bond's maturity.
D)a lower coupon interest on the bond.
E)a higher maturity value on the maturity date.
Q3) A bond's value will increase when interest rates increase.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) Considering the economic value added (EVA) of a firm, which of the following should increase the firm's value?
A)EVA = 0
B)EVA > 0
C)EVA < 0
D)EVA >Earnings per share (EPS)
E)Price-earnings ratio (P/E) ratio > EVA
Q2) Which of the following is a feature of a preferred stock?
A)Preferred stockholders have priority over debt holders, with regard to the distribution of earnings and assets of the firm.
B)Preferred stockholders can elect the members of the board of directors and also vote on corporate issues.
C)The firm generally pays different amounts of preferred stock dividends each year.
D)Preferred stockholders have the right to receive shares of any new common stock issues in proportion to their current ownership holdings.
E)Preferred stockholders have a higher priority claim to distributions made by the firm than common stockholders.
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Chapter 8: Risk and Rates of Return
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Q1) Which of the following statements about market risk and firm-specific risk is true?
A)Market risk is an unsystematic risk, whereas firm-specific risk is systematic risk.
B)Investors are not rewarded for taking market risk, whereas they are rewarded for taking firm-specific risk.
C)Market risk is a diversifiable risk, whereas firm-specific risk is a nondiversifiable risk.
D)Market risk is the relevant risk, whereas firm-specific risk is an irrelevant risk.
E)Market risk includes a firm's default risk, whereas firm-specific risk includes economic risk.
Q2) The risk that is limited to a particular firm is also known as _____.
A)unsystematic risk
B)non-diversifiable risk
C)market risk
D)relevant risk
E)combined risk
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Chapter 9: Capital Budgeting Techniques
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Q1) Which of the following is a reason the modified internal rate of return (MIRR) measure is a better indicator of a project's true profitability than the internal rate of return (IRR) measure?
A)The modified internal rate of return (MIRR) assumes that the project's cash flows are reinvested at its internal rate of return (IRR), which is generally correct.
B)The modified internal rate of return (MIRR) assumes that the terminal value of the project is the profit it generates, which is generally correct.
C)The modified internal rate of return (MIRR) assumes that the project's cash flows are reinvested at the firm's required rate of return, which is a better assumption than the IRR assumption that the cash flows are reinvested at its IRR.
D)The modified internal rate of return (MIRR) assumes that the future value of the project's cash outflows is equal to its terminal value, which is generally correct.
E)The modified internal rate of return (MIRR) assumes that projects with multiple cash outflows should be evaluated with high required rates of return, which is generally correct.
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Chapter 10: Project Cash Flows and Risk
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Q1) If a capital budgeting project has a higher corporate risk than the average risk contained in the firm's portfolio of assets, it generally has a:
A)lower political risk.
B)greater beta risk.
C)lower project risk.
D)lower exchange rate risk.
E)greater financial risk.
Q2) Which of the following provides a measure of systematic risk?
A)Sensitivity analysis
B)Net present value analysis
C)Beta coefficient
D)Monte Carlo simulation
E)Accumulated depreciation
Q3) A major problem with Monte Carlo simulation analysis is that while the analysis provides insights into the riskiness of a project, it does not lead to a clear-cut accept/reject decision.
A)True
B)False
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Chapter 11: The Cost of Capital
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Q1) Super Solutions Inc. just paid a dividend equal to $3.00 per share. Its stock sells for $33.00 per share, it is growing at an annual rate equal to 6 percent, which is expected to continue long into the future. What is Super's cost of retained earnings?
A)9.09%
B)15.64%
C)15.09%
D)9.64%
E)14.58%
Q2) A firm should continue to invest in capital budgeting projects until its marginal cost of capital is equal to the:
A)net present value (NPV) of the last project purchased.
B)internal rate of return (IRR) of the first project purchased.
C)marginal return (internal rate of return, IRR) generated by the last project purchased.
D)combined cost of all of the projects purchased.
E)weighted average cost of capital for all of the projects purchased.
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Chapter 12: Capital Structure
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Sample Questions
Q1) The risk associated with a firm's operations, ignoring any financing effects, is known as _____ risk.
A)market
B)business
C)leverage
D)liquidity
E)inflation
Q2) Which of the following statements is true of the capital structure of companies in Germany?
A)Companies in Germany use the lowest proportion of debt of industrialized countries.
B)Companies in Germany use only equity to finance their projects.
C)The corporate debt raised by companies in Germany mostly consists of publicly issued bonds.
D)Debt monitoring costs are high in Germany because of stringent audit requirements.
E)Companies in Germany raise most of their corporate debt through bank loans.
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) Everything else equal, in which of the following situations will a firm generally have a high dividend-payout ratio?
A)The existence of the impairment of capital rule.
B)The firm's stockholders prefer capital gains rather than current income.
C)The firm's senior management wishes to limit the number of investors who own the company's stock.
D)The firm has excess cash after purchasing all acceptable independent capital budgeting projects.
E)The firm's bond indentures severely restrict the amount of earnings that can be distributed each year.
Q2) If a firm wants to decrease the per-share price of its common stock, which of the following actions should it take? Assume everything else remains constant.
A)Initiate a 1-for-3 reverse stock split
B)Initiate a 2-for-1 stock split
C)Increase the per share dividend that it pays
D)Repurchase some of its stock, and use the proceeds to pay off long-term bonds
E)Issue a substantial amount of new bonds to finance capital budgeting projects that have negative net present values (NPVs)
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Chapter 14: Managing Short-Term Financing Liabilities
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Q1) Most firms purchase from their suppliers on credit, recording these debts in their financial statements/accounts as ______.
A)accounts payable
B)notes payable
C)promissory notes
D)inventory
E)accounts receivable
Q2) A(n) ______ is a type of legal claim (lien) against a firm's inventory when it is used as collateral for a loan and the goods are relatively high priced, slow moving, and easy to identify individually using serial numbers or other distinguishing characteristics.
A)note payable
B)trust receipt
C)blanket lien
D)bond indenture
E)recourse inventories order
Q3) Commercial paper is a discount interest loan.
A)True
B)False
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Chapter 15: Managing Short-Term Assets
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Q1) Which of the following statements about the cash management in multinational companies is correct?
A)Most multinational companies prefer to operate in countries that enact quotas on imported goods, because such quotas normally limit the amount of money the firms can lose in those countries.
B)Multinational companies do not use lock box systems, because most countries do not permit such banking arrangements.
C)Multinational companies always prefer holding more cash in their foreign operations than in their domestic operations.
D)Multinational companies often try to slow down collections and speed up disbursements where possible.
E)Most multinational companies face restrictions imposed by foreign governments when transferring funds from their foreign operations to their home countries.
Q2) A firm's target cash balance is the difference between its total cash receipts and its total cash disbursements over a particular time period.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Q1) In the financial control phase of the financial planning process, a firm is primarily concerned with:
A)the amount of funds it generates internally.
B)determining the investments it should purchase with free cash flows.
C)determining its financial breakeven point.
D)the degree of financial leverage that is acceptable.
E)implementing financial plans and dealing with the feedback and the adjustments needed to meet its goals.
Q2) Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are $720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is Citation's operating breakeven point?
A)8,000 components
B)1,200 components
C)1,412 components
D)$720,000 in sales
E)$389,189 in sales
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