Financial Management Exam Review
Course Introduction
Financial Management is a comprehensive course that explores the principles, tools, and techniques essential for effective financial decision-making within an organization. Covering topics such as financial statement analysis, budgeting, working capital management, capital structure, investment appraisal, and risk assessment, the course equips students with the skills necessary to evaluate financial performance and make strategic decisions. By integrating theoretical concepts with practical applications, students learn to analyze financial information, develop financial strategies, optimize the allocation of resources, and understand the impact of financial decisions on organizational value and sustainability.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene
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Page 2
F. Brigham
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.
A)True
B)False Answer: False
Q2) One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
A)True
B)False Answer: True
Q3) The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.
A)True
B)False Answer: False
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Page 3
Chapter 2: Risk and Return-Part I
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Questions
Q1) Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)
\(\text { Economic }\)
\(\begin{array}{llr}
\text { Conditions } & \text { Prob. } & \text { Return } \\
\hline \text { Strong } & 30 \% & 32.0 \% \\
\text { Normal } & 40 \% & 10.0 \% \\
\text { Weak } & 30 \% & -16.0 \%
\end{array}\)
A) 17.69%
B) 18.62%
C) 19.55%
D) 20.52%
E) 21.55%
Answer: B
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Chapter 3: Risk and Return-Part II
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Q1) For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),
A) the past realized rate of return must be equal to the expected rate of return; that is, .
B) the required rate of return must equal the realized rate of return; that is, r = .
C) all companies must pay dividends.
D) no companies can be in danger of declaring bankruptcy.
E) the expected rate of return must be equal to the required rate of return; that is, = r.
Answer: E
Q2) In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.
A)True
B)False
Answer: True
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Chapter 4: Bond Valuation
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Q1) A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?
A) if the yield to maturity remains at 8%, then the bond's price will decline over the next year.
B) the bond's coupon rate is less than 8%.
C) if the yield to maturity increases, then the bond's price will increase.
D) if the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
E) the bond's current yield is less than 8%.
Q2) "Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
A)True
B)False
Q3) For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
A)True
B)False
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Chapter 5: Financial Options
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Q1) Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
A)True
B)False
Q2) As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.
A)True
B)False
Q3) If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action?Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
A) lemond's tax liability for the year will be lower.
B) lemond's taxable income will be lower.
C) lemond's net fixed assets as shown on the balance sheet will be higher at the end of the year.
D) lemond's cash position will improve (increase).
E) lemond's reported net income after taxes for the year will be lower.
Q2) The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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Q1) Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
A)True
B)False
Q2) Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?
2.03
Q3) Considered alone, which of the following would increase a company's current ratio?
A) an increase in accounts payable.
B) an increase in net fixed assets.
C) an increase in accrued liabilities.
D) an increase in notes payable.
E) an increase in accounts receivable.
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Chapter 8: Basic Stock Valuation
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Q1) Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
A)True
B)False
Q2) Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? \(\begin{array}{lcc} & \underline{X}& \underline{Y} \\
\text { Price }&30\$ &30\$\\
\text { Expected growth (constant) } & 6 \% &4\%\\
\text { Required return } & 12 \% &10\% \end{array}\)
A) stock y has a higher dividend yield than stock x.
B) one year from now, stock x's price is expected to be higher than stock y's price.
C) stock x has the higher expected year-end dividend.
D) stock y has a higher capital gains yield.
E) stock x has a higher dividend yield than stock y.
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
A)True
B)False
Q2) The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.
A)True
B)False
Q3) A firm's AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
Q4) A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.
A)True
B)False
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11
Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) frequently, large boards of directors are less effective than small boards of directors.
B) since outside directors have no other connection with the firm, they are indebted to the ceo for putting them on the board.
C) the more members of a board of directors, the better its function.
D) a company has an interlocking board of directors if the ceo also serves as the chairman of the board of directors.
E) a company whose board members are elected in staggered terms is said to be an interlocking board of directors.
Q2) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 11: Determining the Cost of Capital
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Q1) Which of the following statements is CORRECT?
A) the after-tax cost of debt usually exceeds the after-tax cost of equity.
B) for a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.
C) retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year.
D) the wacc that should be used in capital budgeting is the firm's marginal, after-tax cost of capital.
E) the wacc is calculated using before-tax costs for all components.
Q2) 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, rs, than on the interest rate on long-term debt, rd, for most firms. Therefore, 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
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Kiley Electronics is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. \[\begin{array}{l}
\begin{array} { l }
\text { Year } \\
\text { Cash flows }
\end{array}
\begin{array} { c c c c }
0 & 1 & 2 & 3 \\
\hline - \$ 1,100 & \$ 450 & \$ 470 & \$ 490 \end{array}
\end{array}\]
A) 9.70%
B) 10.78%
C) 11.98%
D) 13.31%
E) 14.64%
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14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?
A) revenues from an existing product would be lost as a result of customers switching to the new product.
B) shipping and installation costs associated with a machine that would be used to produce the new product.
C) the cost of a study relating to the market for the new product that was completed last year. the results of this research were positive, and they led to the tentative decision to go ahead with the new product. the cost of the research was incurred and expensed for tax purposes last year.
D) it is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.
E) using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product. this space could be used for other products if it is not used for the project under consideration.
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Chapter 14: Real Options
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Q1) Which of the following will NOT increase the value of a real option?
A) an increase in the volatility of the underlying source of risk.
B) an increase in the risk-free rate.
C) an increase in the cost of obtaining the real option.
D) a decrease in the probability that a competitor will enter the market of the project in question.
E) lengthening the time in which a real option must be exercised.
Q2) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
Q3) Refer to data for Steppingstone Incorporated. Based on the above information, what is the Z 90's expected net present value?
A)$6,678
B)$3,251
C) $15,303
D) $20,004
E) $45,965
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Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
A)True
B)False
Q2) Which of the following statements is correct?
A) an open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers.
B) stock repurchases tend to reduce financial leverage.
C) if a company declares a 2-for-1 stock split, its stock price should roughly double.
D) one advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of modigliani and miller's dividend clientele theory.
E) if a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.
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Chapter 16: Capital Structure Decisions
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Q1) Firms U and L both have a return on invested capital (ROIC) of 12% and each has the same amount of assets. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L's debt has an after-tax cost of 4.8%. Both firms have positive net income. Which of the following statements is CORRECT?
A) firm l has a lower roa than firm u.
B) firm l has a lower roe than firm u.
C) firm l has the higher times interest earned (tie) ratio.
D) firm l has a higher ebit than firm u.
E) the two companies have the same times interest earned (tie) ratio.
Q2) The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.
A)True
B)False
Q3) A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.
A)True
B)False
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Page 18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?
A) the value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
B) the value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.
C) the value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
D) the capv approach stands for the accounting pre-valuation approach.
E) the value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
Q2) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
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Q1) Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
Q2) Which of the following statements is most CORRECT?
A) private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
B) private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
C) the sec requires that all private placements be handled by a registered investment banker.
D) private placements can generally bring in funds faster than is the case with public offerings.
E) in a private placement, securities are sold to private (individual) investors rather than to institutions.
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20
Chapter 19: Lease Financing
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Q1) Which of the following statements is most CORRECT?
A) capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
B) the fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
C) capital, or financial, leases generally provide for maintenance by the lessor.
D) a key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.
E) firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.
Q2) A sale and leaseback arrangement is a type of financial, or capital, lease.
A)True
B)False
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Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Which of the following statements concerning warrants is correct?
A) warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
B) warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
C) a firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
D) a drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
E) bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. however, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.
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Chapter 21: Supply Chains and Working Capital Management
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Q1) As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
A)True
B)False
Q2) Which of the following will cause an increase in net working capital, other things held constant?
A) a cash dividend is declared and paid.
B) merchandise is sold at a profit, but the sale is on credit.
C) long-term bonds are retired with the proceeds of a preferred stock issue.
D) missing inventory is written off against retained earnings.
E) cash is used to buy marketable securities.
Q3) The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current operating assets represent a minimum level of current assets that must be financed.
A)True
B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) Sunnydale Organics, Inc. harvests crops in roughly 90-day cycles based on a 360-day year. The firm receives payment from its harvests sometime after shipment. Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest. If the firm requires $60,000 in proceeds from each note, what must be the face value of each note?
A) $61,856
B) $67,531
C) $60,000
D) $68,182
E) $67,423
Q2) A firm's credit policy consists of which of the following items?
A) credit period, cash discounts, credit standards, collection policy.
B) credit period, cash discounts, receivables monitoring, collection policy.
C) cash discounts, credit standards, receivables monitoring, collection policy.
D) credit period, receivables monitoring, credit standards, collection policy.
E) credit period, cash discounts, credit standards, receivables monitoring.
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Page 24
Chapter 23: Other Topics in Working Capital Management
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Q1) Refer to Exhibit Duckett Group. What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?
A) $35,356
B) $7,071
C) $18,493
D) $70,711
E) $53,190
Q2) A just-in-time system is designed to stretch accounts payable as long as possible. A)True
B)False
Q3) Refer to Exhibit Duckett Group. According to the Baumol model, what should be Duckett's average cash balance?
A) $35,356
B) $3,536
C) $22,157
D) $70,711
E) $42,918
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Chapter 24: Enterprise Risk Management
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Q1) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
Q2) Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.
A)True
B)False
Q3) The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.
A)True
B)False
Q4) Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.
A)True
B)False
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
Q2) Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
Q3) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) Which of the following statements is most CORRECT
A) the smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
B) since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
C) managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. however, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.
D) operating economies are never a motive for mergers.
E) tax considerations often play a part in mergers. if one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. thus, firms with excess cash rarely undertake mergers.
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Chapter 27: Multinational Financial Management
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Q1) A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?
A) 1 u.s. dollar equals 0.69 swiss francs
B) 1 u.s. dollar equals 0.85 swiss francs
C) 1 u.s. dollar equals 1.21 swiss francs
D) 1 u.s. dollar equals 1.29 swiss francs
E) 1 u.s. dollar equals 1.44 swiss francs
Q2) The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
A)True
B)False
Q3) Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
A)True
B)False
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29
Chapter 28: Time Value of Money
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Q1) If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
A)True
B)False
Q2) Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?
A) exactly 10% of the first monthly payment represents interest.
B) the monthly payments will increase over time.
C) a larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.
D) the total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.
E) the amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
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Chapter 29: Basic Financial Tools: A review
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249 Verified Questions
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Source URL: https://quizplus.com/quiz/6753
Sample Questions
Q1) On January 1, 2016, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2016?
A) $17,419.55
B) $17,593.75
C) $17,769.68
D) $17,947.38
E) $18,126.85
Q2) After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?
A) $50,753
B) $53,424
C) $56,236
D) $59,195
E) $62,311
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Chapter 30: Pension Plan Management
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Sample Questions
Q1) Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.
A)True
B)False
Q2) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
Q3) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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Q1) Which of the following statements about a not-for-profit firm's cost of capital estimate is most correct?
A) the capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
B) the cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 t in the wacc estimate to reflect the fact that such firms do not pay taxes.
C) equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
D) not-for-profit firms have a zero cost of capital.
E) since a not-for-profit firm has no shareholders, its wacc estimate does not include a cost of equity (fund capital) estimate.
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects. A)True B)False
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