Financial Management
Exam Questions
Course Introduction
Financial Management is a foundational course that explores the principles and practices essential to effective corporate finance and decision-making within organizations. The course examines key topics such as financial statement analysis, budgeting, working capital management, capital structure, investment appraisal, risk assessment, and sources of financing. Students will develop the analytical and problem-solving skills needed to evaluate financial performance, make strategic financial decisions, and understand the role of financial managers in creating value for stakeholders. Emphasis is placed on real-world applications, ethical considerations, and the dynamic nature of financial environments.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Do corporate decisions that increase the value of the firm's equity benefit society as a whole?
A)Yes,as long as the value of the firm's equity increases,society is better off.
B)Yes,as long as the increase in the value of the firm's equity does not come at the expense of others.
C)No,any gain in the value of the firm's equity is always less than the cost to society.
D)No,any gains in the value of the firm's equity are perfectly offset by societal costs.
Answer: B
Q2) Which of the following organization forms accounts for the most revenue?
A)"S" corporation
B)Limited partnership
C)"C" corporation
D)Limited liability company
Answer: C
Q3) Explain the benefits of incorporation.
Answer: 1.Limited liability 2.Unlimited life 3.Access to capital markets/availability of outside funding
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) If ECE's stock is currently trading at $24.00 and ECE has 25 million shares outstanding,then ECE's market-to-book ratio is closest to:
A)0.24
B)4
C)6
D)30
Answer: C
Q2) Wyatt Oil has a net profit margin of 4.0%,a total asset turnover of 2.2,total assets of $525 million,and a book value of equity of $220 million.Wyatt Oil's current return-on-equity (ROE)is closest to:
A)8.8%
B)9.5%
C)21.0%
D)22.8%
Answer: C
Q3) What are the four financial statements that all public companies must produce?
Answer: 1.Balance Sheet 2.Income Statement 3.Statement of Cash Flows 4.Statement of Stockholder's Equity
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Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) Recycle America Inc.has the opportunity to trade 8000 pounds of plastic pellets made from recycled soda bottles for 5000 pounds of aluminum cans.If the current market price of scrap aluminum is $0.83 per pound and the current market price for plastic pellets is $0.57 per pound,then the added benefit (cost)of making this trade is:
A)($410)
B)$410
C)($780)
D)$780
Answer: A
Q2) If the value of security "C" is $180,then what must be the value of security "A"?
A)$80
B)$90
C)$100
D)Unable to determine without the risk-free rate.
Answer: A
Q3) The price per share of the ETF in a normal market is:
Answer:
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) How do you calculate (mathematically)the present value of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
Q2) Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:
A)$106,230
B)$156,000
C)$137,900
D)This problem cannot be solved.
Q3) The future value at retirement (age 65)of your savings is closest to:
A)$497,530
B)$928,895
C)$1,263,236
D)$108,000
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Page 6
Chapter 5: Interest Rates
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Q1) You are purchasing a new home and need to borrow $325,000 from a mortgage lender.The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month).The mortgage lender also tells you that if you are willing to pay 1 point,they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage.One point is equal to 1% of the loan value.So if you take the lower rate and pay the points,you will need to borrow an additional $3250 to cover points you are paying the lender.Assuming that you do not intend to prepay your mortgage (pay off your mortgage early),are you better off paying the 1 point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Q2) Which of the following statements is FALSE?
A)When we refer to the "risk-free interest rate," we mean the rate on U.S.Treasuries.
B)Interest rates vary with the investment horizon.
C)All borrowers,besides the U.S.Treasury,have some risk of default.
D)When interest on a loan is tax deductible,the effective after-tax interest rate is × (1 - r).
Q3) Assuming that you have made all of the first 24 payments on time,then how much interest have you paid over the first two years of your loan?
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Bond prices converge to the bond's face value due to the time effect,but simultaneously move up and down due to unpredictable changes in bond yields.
B)As interest rates and bond yields fall,bond prices will rise.
C)Bonds with higher coupon rates are more sensitive to interest rate changes.
D)Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.
Q2) Which of the following statements is FALSE?
A)Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.
B)The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.
C)The risk of default,which is known as the credit risk of the bond,means that the bond's cash flows are not known with certainty.
D)For corporate bonds,the issuer may default-that is,it might not pay back the full amount promised in the bond certificate.
Q3) Compute the yield to maturity for each of the five zero-coupon bonds.
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Page 8
Chapter 7: Investment Decision Rules
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Sample Questions
Q1) Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:
A)11.0%
B)0.0%
C)2.5%
D)1.0%
Q2) Assume that your capital is constrained,so that you only have $600,000 available to invest in projects.If you invest in the optimal combination of projects given your capital constraint,then the total NPV for all the projects you invest in will be closest to:
A)$65,000
B)$80,000
C)$69,000
D)$111,000
Q3) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%,then given that these are mutually exclusive projects,which project would you take and why?
Q4) If the discount rate for project B is 15%,then what is the NPV for project B?
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Chapter 8: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The amount that Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:
A)$13.5 million
B)$31.5 million
C)$56.0 million
D)$24.0 million
Q2) You are considering investing $600,000 in a new automated inventory system that will provide after-tax cost savings of $50,000 next year.These cost savings are expected to grow at the same rate as sales.If sales are expected to grow at 5% per year and your cost of capital is 10%,then what is the NPV of the automated inventory system?
A)$400,000
B)$500,000
C)-$100,000
D)$1,000,000
Q3) What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?
Q4) What is the NPV of the Epiphany's project?
Q5) What is sensitivity analysis?
Q6) How does scenario analysis differ from sensitivity analysis?
Page 10
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Chapter 9: Valuing Stocks
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Sample Questions
Q1) Monsters Inc.is a utility company that recently paid a common stock dividend of $2.35 per share.Determine the current price of a share of Monsters' common stock if its divided growth rate is expected to remain at 7 percent per year indefinitely and its equity cost of capital is 12 percent.
Q2) If CCM has $200 million of debt and 8 million shares of stock outstanding,then the share price for CCM is closest to:
A)$49.50
B)$12.50
C)$19.35
D)$24.50
Q3) If DM has $500 million of debt and 14 million shares of stock outstanding,then what is the price per share for DM Corporation?
Q4) Taggart's market capitalization is closest to:
A)$25 billion
B)$31 billion
C)$40 billion
D)$50 billion
Q5) What are the implications of the efficient market hypothesis for corporate managers?
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Assume that you purchased J.P.Morgan Chase stock at the closing price on December 31,2008 and sold it at the closing price on December 30,2009.Calculate your realized annual return is for the year 2005.
Q2) Which of the following statements is FALSE?
A)The compounded geometric average return is most often used for comparative purposes.
B)We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance.
C)The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns.
D)The geometric average return is a better description of the long-run historical performance of an investment.
Q3) The standard deviation of the returns on Stock A from 2000 to 2009 is closest to:
A)33.2%
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then calculate the required return on Mary's portfolio.
Q2) The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A)8%
B)9%
C)11%
D)6%
Q3) What is the variance on a portfolio that has $2000 invested in Duke Energy,$3000 invested in Microsoft,and $5000 invested in Wal-Mart stock?
Q4) Monsters' beta with the market is closest to:
A)1.3
B)1.0
C)0.6
D)0.8
Q5) The variance on a portfolio that is made up of a $6000 investments in Microsoft and a $4000 investment in Wal-Mart stock is closest to:
Page 13
Q6) Will adding the precious metals fund improve your portfolio?
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Chapter 12: Estimating the Cost of Capital
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Sample Questions
Q1) Luther's after-tax debt cost of capital is closest to:
A)4.2%
B)5.4%
C)7.0%
D)9.8%
Q2) Galt Industries has a market capitalization of $50 billion,$30 billion in BBB rated debt,and $8 billion in cash.If Galt's equity beta is 1.15,then Galt's underlying asset beta is closest to:
A)0.83
B)0.92
C)1.00
D)1.15
Q3) Wyatt Oil's average historical excess return is closest to:
A)-2.50%
B)-3.33%
C)-4.33%
D)-5.17%
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14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Which of the following statements regarding portfolio "C" is/are correct?
1.Portfolio "C" has a negative alpha.
2.Portfolio "C" is overpriced.
3.Portfolio "C" is less risky than the market portfolio.
4.Portfolio "C" should not exist if the market portfolio is efficient.
A)1 and 3
B)2 and 4
C)1,3,and 4
D)3 only
Q2) Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of March,which stocks are you most inclined to sell?
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors
A)1 only
B)1 and 3 only
C)2 only
D)2 and 4 only
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Page 15
Chapter 14: Capital Structure in a Perfect Market
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Q1) Which of the following statements is FALSE?
A)Since the publication of their original paper,Modigliani and Miller's ideas have greatly influenced finance research and practice.
B)Proposition I was one of the first arguments to show that the Law of One Price could have strong implications for security prices and firm values in a competitive market; it marks the beginning of the modern theory of corporate finance.
C)The conservation of value principle applies only to questions of debt versus equity or capital structure.
D)The conservation of value principle for financial markets states that with perfect capital markets,financial transactions neither add nor destroy value,but instead represent a repackaging of risk (and therefore return).
Q2) Following the borrowing of $12 million and subsequent share repurchase,the expected earnings per share for RC is closest to:
A)$1.32
B)$1.44
C)$1.40
D)$1.20
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Page 16
Chapter 15: Debt and Taxes
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Q1) After the recapitalization,the total value of KD as a levered firm is closest to:
A)$470 million
B)$730 million
C)$670 million
D)$530 million
Q2) If Flagstaff maintains a debt to equity ratio of 1,then Flagstaff's pre-tax WACC is closest to:
A)11.0%
B)10.5%
C)10.0%
D)9.0%
Q3) Assume that the corporate tax rate is 40%,the personal tax rate on income from equity is 20% and the personal rate on interest income is 36%.The effective tax advantage of a corporate issuing debt would be closest to:
A)10%
B)15%
C)25%
D)28%
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Q1) Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.EGI's share price following the release of the new video game will be closest to:
A)$18.00
B)$19.00
C)$20.00
D)$16.00
Q2) Assume that EGI decides to raise the $100 million through the issuance of new shares prior to the release of the new video game.The number of new shares that EGI will issue is closest to:
A)5.0 million
B)6.25 million
C)10 million
D)1.6 million
Q3) Which of the following is NOT an indirect cost of bankruptcy?
A)Loss of suppliers
B)Fire sales of assets
C)Costs of appraisers
D)Loss of employees
Q4) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the:
A)declaration date.
B)record date.
C)distribution date.
D)ex-dividend date.
Q2) Net of capital gains taxes,the amount the total value of d'Anconia Copper shares increase is closest to:
A)$5.5 million
B)$6.5 million
C)$7.0 million
D)$10.0 million
Q3) Wyatt Oil's current stock price is closest to:
A)$11.00
B)$12.50
C)$14.00
D)$17.50
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Omicron's weighted average cost of capital is closest to:
A)7.10%
B)7.50%
C)9.60%
D)8.75%
Q2) Rose's unlevered cost of capital is closest to:
A)8.0%
B)7.5%
C)7.0%
D)9.0%
Q3) Luther's Unlevered cost of capital is closest to:
A)8.0%
B)8.5%
C)9.0%
D)6.4%
Q4) The NPV of this project using the APV method is closest to:
A)$10 million
B)$13 million
C)$42 million
D)$71 million
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation enterprise value of Ideko in 2010 is closest to:
A)$181.7 million
B)$152.8 million
C)$272.8 million
D)$301.7 million
Q2) With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2006 is closest to:
A)$19,690
B)$16,970
C)$22,710
D)$14,525
Q3) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation enterprise value of Ideko in 2010 is closest to:
A)$152.8 million
B)$272.8 million
C)$301.7 million
D)$181.7 million
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