Financial Management
Final Exam Questions
Course Introduction
Financial Management is a comprehensive course that examines the principles and practices of managing a firm's financial resources to achieve organizational objectives. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, capital structure, and working capital management. Students will gain a solid understanding of how financial decisions influence the value of a business, and they will develop analytical skills necessary to evaluate investment opportunities, finance business operations, and maximize shareholder value. Emphasis is placed on both theoretical concepts and practical tools used in financial decision-making within a corporate environment.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.
A)True
B)False Answer: True
Q2) The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.
A)True
B)False Answer: True
Q3) If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.
A)True
B)False Answer: True
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?
A) Increase the number of years over which fixed assets are depreciated for tax purposes.
B) Pay down the accounts payables.
C) Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.
D) Pay workers more frequently to decrease the accrued wages balance.
E) Reduce the inventory turnover ratio without affecting sales or operating costs.
Answer: C
Q2) Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.
A)True
B)False
Answer: True
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Chapter 4: Time Value of Money
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Sample Questions
Q1) A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?
A) The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.
B) The periodic interest rate is greater than 3%.
C) The periodic rate is less than 3%.
D) The present value would be greater if the lump sum were discounted back for more periods.
E) The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.
Q2) Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?
A) $1,200.33
B) $1,263.50
C) $1,330.00
D) $1,400.00
E) $1,470.00
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Page 5
Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?
A) 2.59%
B) 2.88%
C) 3.20%
D) 3.52%
E) 3.87%
Q2) Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?
A) 20-year, 10% coupon bond.
B) 20-year, 5% coupon bond.
C) 1-year, 10% coupon bond.
D) 20-year, zero coupon bond.
E) 10-year, zero coupon bond.
Q3) As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
A)True
B)False
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Page 6
Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The slope of the Security Market Line is beta.
B) Any stock with a negative beta must in theory have a negative required rate of return, provided r<sub>RF</sub> is positive.
C) If a stock's beta doubles, its required rate of return must also double.
D) If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.
E) If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
Q2) If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.
A)True
B)False
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) A company is expected to have free cash flows of $0.75 million next year. The weighted average cost of capital is WACC = 10.5%, and the expected constant growth rate is g = 6.4%. The company has $2 million in short-term investments, $2 million in debt, and 1 million shares. What is the stock's current intrinsic stock price?
A) $17.39
B) $17.84
C) $18.29
D) $18.75
E) $19.22
Q2) The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.
A)True
B)False
Q3) A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.
A)True
B)False
Page 8
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Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) 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
Q2) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
Q3) If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.
A)True
B)False
Q2) The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm's common stock.
A)True
B)False
Q3) You are a finance intern at Chambers and Sons and they have asked you to help estimate the company's cost of common equity. You obtained the following data: D<sub>1</sub> = $1.25; P<sub>0</sub> = $27.50; g<sub>L</sub> = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock?
A) 9.06%
B) 9.44%
C) 9.84%
D) 10.23%
E) 10.64%
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Page 10
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) The cost of capital for two mutually exclusive projects that are being considered is 12%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 12% current cost of capital. Interest rates are currently high. However, you believe that money costs and thus your cost of capital will soon decline. You also think that the projects will not be funded until the cost of capital has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?
A) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
B) You should recommend Project R, because at the new cost of capital it will have the higher NPV.
C) You should recommend Project K, because at the new cost of capital it will have the higher NPV.
D) You should recommend Project R because it will have both a higher IRR and a higher NPV under the new conditions.
E) You should reject both projects because they will both have negative NPVs under the new conditions.
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
A) Shipping and installation costs.
B) Cannibalization effects.
C) Opportunity costs.
D) Sunk costs that have been expensed for tax purposes.
E) Changes in net working capital.
Q2) Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation. This is because the total cash flows over the project's life will be higher if accelerated depreciation is used, other things held constant.
A)True
B)False
Q3) Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.
A)True
B)False
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Chapter 12: Financial Planning and Forecasting Financial Statements
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Sample Questions
Q1) Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing. There are currently no alternatives for these types of firms to lower their asset requirements.
A)True
B)False
Q2) Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital. For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.
A)True
B)False
Q3) The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.
A)True
B)False
Page 13
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Chapter 13: Corporate Valuation, Value-Based
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Sample Questions
Q1) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q2) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
Q3) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q4) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
To
Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) McCann Publishing has a target capital structure of 35% debt and 65% equity. This year's capital budget is $850,000 and it wants to pay a dividend of $400,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?
A) $904,875
B) $952,500
C) $1,000,125
D) $1,050,131
E) $1,102,638
Q2) Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?
A) $28.43
B) $29.93
C) $31.50
D) $33.08
E) $34.73
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) 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
Q2) Refer to the data for Eccles Inc.What is the firm's cost of equity according to MM with corporate taxes?
A)
Q3) As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components.
A)True
B)False
Q4) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.
A)True
B)False
Q2) 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
Q3) The four primary elements in a firm's credit policy are (1) credit standards, (2) cash discounts offered, (3) credit period, and (4) collection policy.
A)True
B)False
Q4) A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Sample Questions
Q1) 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
Q2) Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
A) 155.5 yen
B) 144.0 yen
C) 133.5 yen
D) 78.0 yen
E) 72.0 yen
Q3) Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.
A)True
B)False
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