Financial Management Exam Solutions
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in managing an organization's financial resources. The course covers key topics such as financial statement analysis, budgeting, capital structure, working capital management, investment appraisal, risk assessment, and the cost of capital. Students will learn how to make informed financial decisions, analyze funding options, and apply financial concepts to real-world business scenarios. Emphasis is placed on the use of quantitative tools and techniques to evaluate financial performance and develop strategies that enhance organizational value and efficiency.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which of the following are key requirements of the Sarbanes-Oxley Act?
I.Officers of the corporation must now own more than 5 percent of the firm's stock.
II.Officers of the corporation must review and sign annual reports.
III.Annual reports must list deficiencies in internal controls.
IV.Annual reports must be filed with the SEC within 30 days of year end.
A)I only
B)II only
C)I and III only
D)II and III only
E)II and IV only
Answer: D
Q2) Which form of business structure faces the greatest agency problems?
A)Sole proprietorship
B)General partnership
C)Limited partnership
D)Limited liability company
E)Corporation
Answer: E
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) Your _____ tax rate measures the total taxes you pay divided by your total taxable income.
A)average
B)marginal
C)total
D)deductible
E)residual
Answer: A
Q2) When making financial decisions related to assets,you should:
A)place primary emphasis on historical costs.
B)place more emphasis on book values than on market values.
C)rely primarily on the value of assets as shown on the balance sheet.
D)always consider market values.
E)only consider market values if they are less than book values.
Answer: D
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Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) Which ratio identifies the amount shareholders are willing to pay for each $1 per share of earnings a firm generates?
A)Equity multiplier
B)Return on equity
C)Price-earnings ratio
D)DuPont identity
E)Return on assets
Answer: C
Q2) Firms with high enterprise value multiples are most apt to have:
A)high growth opportunities.
B)low market-to-book ratios.
C)low profit margins.
D)low inventory turnover rates.
E)a low price-earnings ratio.
Answer: A
Q3) Identify the three parts of the DuPont identity and specify what each part measures. Answer: ROE = Profit margin (Operating efficiency)× Total asset turnover (Asset use efficiency)× Equity multiplier (Financial leverage).
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Identify a type of loan that is a pure discount loan and explain which features of the loan qualify it to be classified as a pure discount loan.
Q2) What is the difference between an ordinary annuity and an annuity due? Which type of annuity would you prefer if you are making the payments? Explain your reasoning.
Q3) You are loaning $1,000 for one year at a 6 percent rate of interest.How much additional interest can you earn if you compound the rate continuously rather than annually?
A)$1.65
B)$1.69
C)$1.78
D)$1.84
E)$1.89
Q4) Given a positive rate of return and multiple time periods,compound interest:
A)increases in an exponential manner.
B)increases in a linear manner.
C)produces the same future values as simple interest.
D)provides future values that are less than those provided by simple interest.
E)increases at a decreasing rate.
Q5) What circumstances are required for an APR to equal an EAR?
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Chapter 5: Interest Rates and Bond Valuation
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Sample Questions
Q1) A corporate bond yields 7.3 percent.What municipal bond rate is equivalent to the corporate rate for an investor with a 25 percent marginal tax rate?
A)5.84%
B)9.13%
C)5.48%
D)6.08%
E)9.73%
Q2) A bond with a 5 percent coupon that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.
A)$1,005;$50
B)$1,050;$25
C)$1,050;$50
D)$1,000;$50
E)$1,000;$25
Q3) Assume you are the manager of a multi-million dollar portfolio of corporate bonds and you believe interest rates will rise in the near future.Other investors have not yet accepted your belief but you want to act based on your personal beliefs.What adjustments should you make to the portfolio?
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Chapter 6: Stock Valuation
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Sample Questions
Q1) A dealer will buy at the ____ price and sell at the _____ price.
A)bid;bid
B)ask;ask
C)ask;bid
D)bid;ask
E)spread;spread
Q2) Doctors-On-Call,a newly formed medical group,just paid a dividend of $.50 a share.The dividends are expected to increase by 20 percent a year for the next two years and then increase by 3 percent annually thereafter.What is the current value of a share if the appropriate discount rate is 12 percent?
A)$7.68
B)$6.91
C)$7.38
D)$8.26
E)$8.42
Q3) Identify at least five features of preferred stock that are similar to bond features.
Q4) Provide an example that illustrates the key difference between a cumulative and a non-cumulative preferred stock.
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8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) A project has an initial cost of $38,300 and anticipated cash flows of $9,200,$18,700,$14,600 for Years 1 to 3,respectively.What is the profitability index value if the required return is 9.5 percent?
A).86
B).92
C).99
D)1.09
E)1.16
Q2) A project produces annual net income of $9,500,$12,500,and $15,500 over its 3-year life.The initial cost of the project is $210,000.This cost is depreciated straightline to a zero book value over three years.What is the average accounting rate of return if the required discount rate is 12.25 percent?
A)14.80%
B)14.32%
C)23.49%
D)11.90%
E)17.62%
Q3) Academic theory states that net present value is the best capital budgeting model.Why is this the case?
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Page 9
Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Data,Inc.purchased some fixed assets four years ago at a cost of $19,800.It no longer needs these assets,so it is going to sell them today at a price of $3,500.The assets are classified as 5-year property for MACRS.The MACRS table values .2000,.3200,.1920,.1152,.1152,and .0576 for Years 1 to 6,respectively.What is the current book value of these assets?
A)$1,140.48
B)$3,421.44
C)$3,500.00
D)$4,016.67
E)$5,702.40
Q2) A pro forma income statement for a cost reduction project:
A)will generally reflect no incremental sales.
B)will reflect a reduction in the sales revenue.
C)will exclude any effects of depreciation.
D)cannot be prepared due to the lack of any project related sales.
E)will always reflect a negative project operating cash flow.
Q3) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
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10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) Which one of these combines scenario analysis with sensitivity analysis?
A)Financial break-even analysis
B)Monte Carlo simulation
C)Internal rate of return analysis
D)Profitability index analysis
E)Accounting profit break-even analysis
Q2) Monte Carlo simulation is based on assigning a _____ and analyzing the results.
A)single value to each of a project's variables
B)wide range of values to multiple variables simultaneously
C)wide range of values to a single variable
D)narrow range of values to two variables simultaneously
E)narrow range of values to a single variable
Q3) Which method best attempts to model all of the uncertainties of the real world?
A)Scenario analysis
B)Financial break-even analysis
C)Accounting break-even analysis
D)Sensitivity analysis
E)Monte Carlo simulation
Q4) Explain the significance of the financial break-even point.
11
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Chapter 10: Risk and Return Lessons From Market History
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Sample Questions
Q1) Winslow stock is currently selling for $48 a share.The stock has a dividend yield of 3.1 percent.How much dividend income will you receive per year if you purchase 600 shares of this stock?
A)$148.80
B)$390.47
C)$892.80
D)$639.05
E)$1,860.00
Q2) A stock earned a real average arithmetic rate of return of 5.65 percent for a 4-year period.During that period inflation averaged 3.6 percent while U.S.Treasury bills returned 4.2 percent.Assume the stock had annual nominal returns of 8 percent,13 percent and 12 percent for three of the four years.What nominal rate of return did the stock earn in the fourth year?
A)3.25%
B)3.65%
C)3.26%
D)4.00%
E)4.25%
Q3) What does market history tell us about the future performance of various securities?
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Page 12
Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Sample Questions
Q1) The standard deviation of a portfolio will tend to increase when:
A)the portfolio concentration in a single cyclical industry increases.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
C)a risky asset in the portfolio is replaced with U.S.Treasury bills.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.
Q2) KNF stock is quite cyclical.In a boom economy,the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 17 percent in a recessionary period.The probability of a recession is 25%.There is a 15% chance of a boom economy.What is the standard deviation of the returns this stock?
A)10.15%
B)12.60%
C)15.43%
D)17.46%
E)25.04%
Q3) According to the CAPM,the expected return on a risky asset depends on three components.Describe each component,and explain its role in determining expected return.
Page 13
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) The Flying Dove has 1,200 bonds outstanding with a $1,000 par value,a 7 percent coupon,12 years to maturity,semiannual interest payments,and a market price equal to 102 percent of par.The firm also has 47,000 shares of common stock outstanding at a price per share of $38 and a beta of 1.3.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 34 percent.What is the firm's WACC? (When computing WACC,round your cost of debt to 4 decimal places when expressed as a decimal value. )
A)9.58%
B)10.51%
C)9.82%
D)9.37%
E)10.38%
Q2) Which one of these statements is correct?
A)The asset beta will equal the equity beta for a levered firm.
B)Leverage increases the asset beta.
C)A portfolio beta is the summation of the betas of each of the individual securities held in the portfolio.
D)The equity beta refers to the beta of an all-equity firm.
E)Financial leverage refers to a firm's use of debt and its related fixed costs of finance.
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Page 14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) Southern Goods announced at Time t that it was replacing its CEO.There were no other announcements affecting the firm.The stock had daily returns of -.3,+.2,-.2,-.1,+.3 for Time <sub>t - 2</sub> to Time <sub>t + 2</sub>,respectively.The daily returns on the market were -.4,+.2,-.4,-.2,and +.2 for Time <sub>t - 2</sub> to Time <sub>t + 2</sub>,respectively.What is the cumulative abnormal return for these five days?
A)+.1
B)+.3
C).5
D)-.1
E)-.3
Q2) The principle that investors might be too slow in adjusting their beliefs to new information is referred to as:
A)conservatism.
B)liberalism.
C)representativeness.
D)weak form efficiency.
E)the timing decision.
Q3) What are the basic principles behind behavioral finance?
Q4) What key item should managers look for when considering an acquisition?
Page 15
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) The fact that interest payments on debt are tax deductible is a key factor in which of these propositions?
A)Both MM Proposition I and II with taxes
B)MM Proposition I without tax
C)MM Proposition II without tax
D)MM Proposition I with tax
E)MM Proposition II with tax
Q2) Financial analysts value items in terms of their:
A)useful life.
B)tax benefits.
C)original cost.
D)depreciated value.
E)market value.
Q3) In the absence of taxes,MM argues that:
A)no one capital structure for a firm is superior to any other capital structure for that firm.
B)the cost of equity for a levered firm is equal to the firm's unlevered WACC.
C)homemade leverage is insufficient to offset a firm's use of leverage.
D)the value of a levered firm exceeds the value of the unlevered firm.
E)the cost of equity decreases as the debt-equity ratio increases.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Indirect bankruptcy costs:
A)effectively limit the amount of equity a firm issues.
B)serve as an incentive to increase the financial leverage of a firm.
C)tend to increase as the debt-equity ratio decreases.
D)include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.
E)include the legal and accounting fees incurred during the bankruptcy process.
Q2) ATC has a value of $70,000 in a good economy and $55,000 in a recession.The firm has $60,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $73,000 in a good economy and $50,000 in a recession.If the firm accepts this project,the firm value will ______ and shareholder value will ______.
A)decrease by $1,000;decrease by $1,000
B)decrease by $2,000;decrease by $2,000
C)decrease by $1,000;increase by $1,500
D)increase by $1,500;increase by $1,500
E)increase by $1,500;decrease by $1,000
Q3) How might business risk affect the capital structure of a firm?
Q4) Explain a Section 363 bankruptcy and identify its primary benefit over a traditional bankruptcy.
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Chapter 16: Dividends and Other Payouts
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Sample Questions
Q1) The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:
A)ex-dividend date.
B)date of record.
C)ex-rights date.
D)declaration date.
E)date of payment.
Q2) End Zone just paid an annual dividend of $.68 a share.The firm has a target payout ratio of .6 and a speed of adjustment value of .4.What is the expected value of next year's annual dividend if the firm expects its earnings per share to be $2.20?
A)$.94
B)$.90
C)$1.09
D)$1.32
E)$.53
Q3) Identify at least four pros of paying dividends.
Q4) What is the theory behind the Lintner formula and why might firms adopt the Lintner approach?
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Page 18
Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) Assuming all else equal,the value of an in-the-money call increases when:
I.the time to expiration increases.
II.the stock price increases.
III.the risk-free rate of return increases.
IV.the volatility of the price of the underlying stock increases.
A)I and III only
B)II,III,and IV only
C)I,III,and IV only
D)I,II,and III only
E)I,II,III,and IV
Q2) You own an October 12 call and an October 12 put on SC stock.If the call finishes in the money,then the put will:
A)also finish in the money.
B)finish out of the money.
C)finish at the money.
D)either finish at the money or out of the money.
E)either finish at the money or in the money.
Q3) What would you expect to occur if a call were to sell for less than its intrinsic value? Ignore taxes and transaction costs.
Q4) What is a protective put and what does it protect?
Page 19
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) A supplier offers you credit terms of 1.5/10,net 30.What is the cost of forgoing the discount on a $1,200 purchase?
A)34.21%
B)27.79%
C)29.03%
D)32.33%
E)31.76%
Q2) Which one of the following is a source of cash?
A)A decrease in inventory
B)An increase in fixed assets
C)A decrease in long-term debt
D)The payment of a cash dividend
E)An increase in accounts receivable
Q3) If you delay paying your suppliers by an additional ten days,then:
A)you will require less bank financing of your operations.
B)your stock-out costs will rise.
C)the cash cycle will increase by ten days.
D)your operating cycle will lengthen by ten days.
E)your payables turnover rate will increase.
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Page 20
Chapter 19: Raising Capital
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Sample Questions
Q1) When issuing securities,which of the following can occur prior to receiving SEC approval?
I.Oral offer to buy shares
II.Written offer to buy shares
III.Final determination of the offer price
IV.Distribution of a preliminary prospectus
A)I only
B)II only
C)III and IV only
D)I and IV only
E)I,III,and IV only
Q2) Denver Mines is offering 45,000 shares of stock to the public in a general cash offer.The offer price is $48 a share and the underwriter's spread is 9.5 percent.The administrative costs are estimated at $360,000.How much will Denver Mines net from this stock offering assuming the issue is completely sold?
A)$1,629,000
B)$1,646,000
C)$1,594,800
D)$1,705,450
E)$1,988,950
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Chapter 20: International Corporate Finance
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Sample Questions
Q1) Assume the indirect quote for the Swedish krona is 6.561 while it is .924 for the Swiss franc.What is the cross-rate between the Swedish krona and the Swiss franc?
A)SKr7.101 = NZ$1
B)SKr7.209 = NZ$1
C)SKr1.302 = NZ$1
D)SKr1.16 = NZ$1
E)SKr.141 = NZ$1
Q2) Which one of these expresses the concept that a commodity will cost the same regardless of where the commodity is located or the currency used to pay for it?
A)Interest rate parity
B)Uncovered interest rate parity
C)Absolute purchasing power parity
D)International Fisher effect
E)Relative purchasing power parity
Q3) What role does triangle arbitrage play in the foreign exchange markets? What might limit the effectiveness of triangle arbitrage?
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) Dog Treats has 6,500 shares of stock outstanding at a market price per share of $11.FIDO has 15,000 shares outstanding that sell for $18 a share.By merging,$9,600 of synergy can be created.What would be the post-merger value of the combined firm if FIDO pays $75,000 to acquire Dog Treats?
A)$341,500
B)$276,100
C)$156,100
D)$266,500
E)$351,100
Q2) Explain the pros and cons of a cash acquisition over a stock acquisition.
Q3) Global Network has a market value of $898,000.AG Communications has 50,000 shares of stock outstanding at a price per share of $60.AG is acquiring Global in an exchange for 15,000 shares of AG stock.The merger is expected to create $220,000 of synergy.What will be the post-merger value of the firm?
A)$3,218,000
B)$3,782,000
C)$4,118,000
D)$3,220,000
E)$3,898,000
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