Financial Management
Final Exam Questions
Course Introduction
Financial Management introduces students to the fundamental concepts and techniques used to plan, analyze, and control financial activities within organizations. The course covers topics such as time value of money, risk and return, valuation of securities, capital budgeting, cost of capital, financial analysis, and working capital management. Through case studies and practical examples, students learn how to make informed decisions about investments, financing, and resource allocation that maximize shareholder value and ensure long-term organizational growth. The course also addresses the ethical and legal considerations inherent in financial decision-making.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank
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Page 2
K. Reilly
Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1-9. Calculate your holding period yield (HPY) for this investment in GE stock.
A) 0.0345
B) 0.0090
C) 0.0086
D) 0.0643
E) 0.0804
Answer: C
Q2) The variability of operating earnings is associated with
A) Business risk.
B) Liquidity risk.
C) Exchange rate risk.
D) Financial risk.
E) Market risk.
Answer: A
Q3) The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.
A)True
B)False
Answer: True
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) An individual in the 36% tax bracket invests $5,000 in a RRSP. If the investment earns 10% annually, what will be the value of the RRSP after five years?
A) $6,600
B) $8,053
C) $7,500
D) $6,818
E) $10,879
Answer: D
Q2) Refer to Exhibit 2-1. What is the marginal tax rate for a single individual with taxable income of $85,000?
A) 15%
B) 25%
C) 28%
D) 33%
E) 35%
Answer: C
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Diversification with foreign securities can help reduce portfolio risk.
A)True
B)False
Answer: True
Q2) Which of the following statements regarding real estate investments is false?
A) The large number of transactions and national data sources provide accurate readily available estimates of historical returns.
B) S&P/TSX had higher returns than 90-day Treasury-bill from 1993 to 2009.
C) S&P/TSX had lower returns than 90-day Treasury-bill from 1993 to 2009.
D) S&P/TSX had higher volatility than 90-day Treasury-bill from 1993 to 2009.
E) All of the above are false.
Answer: A
Q3) What is the original maturity of a Canadian Treasury bill?
A) Zero years to five years.
B) Six months to ten years.
C) One year or less.
D) One year to ten years.
E) Over ten years.
Answer: C
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Page 5
Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Which of the following is an underwriting function?
A) Origination
B) Risk-bearing
C) Distribution
D) Choices b and
E) All of the above
Q2) Suppose you buy a round lot of Altman Industries stock on 50% margin when it is selling at $35 per share. The broker charges a 10% annual interest rate and commissions are 5% of the total stock value on both the purchase and the sale. If at year end you receive a $1.00 per share dividend and sell the stock for $42.63, what is your rate of return on the investment?
A) 15.58%
B) 11.84%
C) 14.74%
D) 21.84%
E) 28.38%
Q3) It is required by law that a stock market must have a physical location.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 5-4. What is the abnormal rate of return for Stock B during period t using only the aggregate market return (ignore differential systematic risk)?
A) 0.40
B) 1.40
C) -1.10
D) -4.40
E) -6.40
Q2) Refer to Exhibit 5-1. What is the abnormal rate of return for Stock C when you consider its systematic risk measure (beta)?
A) 4.0%
B) 1.2%
C) 2.0%
D) -1.05%
E) -8.5%
Q3) The random walk hypothesis contends that stock prices occur randomly.
A)True B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6-5. What is the expected return of a portfolio of two risky assets if the expected return E(R<sub>i</sub>), standard deviation (?<sub>i</sub>), covariance (COV<sub>i,j</sub>), and asset weight (W<sub>i</sub>) are as shown above?
A) 8.0%
B) 12.2%
C) 7.4%
D) 9.1%
E) 11.6%
Q2) A positive relationship between expected return and expected risk is consistent with A) investors being risk seekers.
B) investors being risk avoiders.
C) investors being risk averse.
D) all of the above.
E) none of the above.
Q3) Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.
A)True
B)False
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8
Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) Refer to Exhibit 7-6. Based on the Capital Asset Pricing Model (CAPM), what is the required rate of return for this portfolio?
A) 6.3%
B) 7.8%
C) 10.6%
D) 12.8%
E) 15.4%
Q2) Refer to Exhibit 7-8. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are
A) $53.55, $54.4, $55.25
B) $45.35, $54.4, $55.25
C) $55.55, $56.35, $57.15
D) $50, $50, $50
E) $51.35, $47.79, $51.58.
Q3) If the market portfolio is mean-variance efficient it has the lowest risk for a given level of return among the attainable set of portfolios.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Which of the following is not a stage in the industrial life cycle?
A) Early pioneering development
B) Rapid accelerating growth
C) Acquisition and consolidation
D) Mature growth
E) Stabilization and market maturity
Q2) Refer to Exhibit 8-1. Estimate the industry growth rate in sales per share.
A) 10.5%
B) 11%
C) 12.16%
D) 9.5%
E) 8.73%
Q3) Which of the following is not considered a structural influence on the economy and industry?
A) Demographics
B) Life-styles
C) International economics
D) Social values
E) Technology
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Page 10
Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) ABC Co. has paid annual dividends in the past five years of $.20, $.25, $.28, $.33, and $.36. Calculate the average growth rate of its dividends.
A) 1.16%
B) 1.80%
C) 12.47%
D) 15.83%
E) None of the above
Q2) Which of the following is a management tenet of Warren Buffett?
A) Long term prospects.
B) Resistance to institutional imperative.
C) Creation of one dollar of market value for every dollar retained.
D) Purchase at discount to intrinsic value.
E) Product is not faddish
Q3) Refer to Exhibit 9-9. Calculate Rollerball Corporation's Total Asset Turnover.
A) 0.72
B) 0.85
C) 1.39
D) 1.65
E) 2.31
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Chapter 10: Technical Analysis
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Sample Questions
Q1) What would analysts following what the smart, sophisticated investor is doing examine?
A) Mutual fund cash positions.
B) Debit balances in brokerage houses.
C) Investment advisory opinions.
D) Breadth of market.
E) Stocks above their 200 day moving average.
Q2) When the 50-day moving average crosses the 200-day moving average from below on good volume
A) This would be a bearish indicator because it signals a change to a negative trend.
B) This would be a bullish indicator because it signals a change to a negative trend.
C) This would be a bullish indicator because it signals a change to a positive trend.
D) This would be a bearish indicator because it signals a change to a positive trend.
E) None of the above.
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) In the case of a bond, the only contractual factor is the amount of interest payments, since beginning and ending bond prices are determined by market forces.
A)True
B)False
Q2) A major source of risk faced by CMO issues is
A) Default risk.
B) Prepayment risk.
C) Counterparty risk.
D) Choices a and b.
E) Choices a, b and c.
Q3) The legal document setting forth the obligations of a bond's issuer is called
A) A debenture.
B) A warrant.
C) An indenture.
D) A rights certificate.
E) A trustee deed.
Q4) Bonds rated BB or above are considered to be investment grade bonds.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) The promised yield to maturity calculation assumes that
A) All coupon interest payments are reinvested at the current market interest rate for the bond.
B) All coupon interest payments are reinvested at the coupon interest rate for the bond.
C) All coupon interest payments are reinvested at short term money market interest rates.
D) All coupon interest payments are not reinvested.
E) None of the above
Q2) If you expected interest rates to fall, you would prefer to own bonds with
A) long durations and high convexity.
B) long durations and low convexity.
C) short durations and high convexity.
D) short durations and low convexity.
E) none of the above.
Q3) The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.
A)True
B)False
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Page 14
Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) A call option is in the money if the current market price is above the strike price.
A)True
B)False
Q2) A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.
A)True
B)False
Q3) A price spread (or vertical spread) involves buying and selling an option for the same stock and expiration date but with different exercise prices.
A)True
B)False
Q4) Which of the following is not a factor needed to calculate the value of an American call option?
A) The price of the underlying stock.
B) The exercise price.
C) The price of an equivalent put option.
D) The volatility of the underlying stock.
E) The interest rate.
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Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) Which of the following is not true about interest rate swaps?
A) Payments are based on a notional principal.
B) Floating rate payers profit if interest rates fall.
C) Payments can be quarterly as well as semi-annually.
D) Parities exchange debt obligations.
E) Default risk is a possibility in the swaps market.
Q2) ____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.
A) Structured notes
B) Variable rate notes
C) Systematic notes
D) Embedded notes
E) PC bonds
Q3) Which of the following is not a characteristic of warrants?
A) They are sweeteners added to other security issues.
B) After the initial sale, warrants are detachable.
C) They pay no dividends.
D) They provide no voting rights.
E) No dilution protection is offered in the event of stock dividends or stock splits.
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Page 16
Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) Growth oriented investors focus on the price component of the Price/Earnings ratio.
A)True
B)False
Q2) Refer to Exhibit 15-1. The expected utilities of Portfolios A, B and C for Bob Bowman are
A) Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73
B) Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0
C) Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73
D) Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73
E) Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 4.73
Q3) Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.
A)True
B)False
Q4) It does not make economic sense for portfolio managers to try to "time" between different investment styles.
A)True
B)False
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-6. The dollar investment in the candidate bond is
A) $1515.36
B) $853.50
C) $780.46
D) $779.13
E) $877.53
Q2) Junk bonds are high yield bond bonds rated below
A) Rating BBB.
B) Rating BB.
C) Rating B.
D) Rating CCC.
E) Rating CC.
Q3) Refer to Exhibit 16-8. Assume that your investment horizon is 6 years and your portfolio consists only of Bond C and Bond D. Indicate the proportions invested in each bond, so that the portfolio is immunized.
A) 50% in Bond C and 50% in Bond D
B) 64% in Bond C and 36% in Bond D
C) 36% in Bond C and 64% in Bond D
D) 100% in Bond D
E) None of the above
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) The total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net asset value.
A)True
B)False
Q2) High Portfolio turnover lowers mutual fund costs.
A)True
B)False
Q3) The text offers a number of suggestions for investing in mutual funds. Which of the following is not such a suggestion?
A) Choose only those mutual funds which are consistent with your objectives and constraints.
B) Invest in no-load funds whenever possible.
C) Avoid investing in index funds.
D) Use a dollar cost average strategy.
E) None of the above (that is, all are valid suggestions for investing in mutual funds)
Q4) In an investment company, the invested funds belong to many individuals. A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Refer to Exhibit 18-5. Compute the Sharpe Measure for the XXX fund.
A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72
Q2) Sharpe's performance assumes that all portfolios are completely diversified.
A)True
B)False
Q3) Refer to Exhibit 18-5. Compute the Jensen Measure for the YYY fund.
A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72
Q4) Investors want their portfolio managers to completely diversify their portfolio, that is, eliminate all systematic risk.
A)True B)False
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-5. Calculate the interest expense rate.
A) 7%
B) 0.5%
C) 1.2%
D) 5%
E) 2.3%
Q2) According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.
A)True
B)False
Q3) The Canadian Institute of Chartered Accountants (CICA) recognizes that it would be improper for all companies to use identical and restrictive accounting principles.
A)True
B)False
Q4) It is important to compare a firm's performance relative to: the aggregate economy, its industry, its major competitors and its past performance.
A)True
B)False
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21
Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) Using the constant growth model, an increase in the required rate of return from 14 to 15% combined with an increase in the growth rate from 6 to 7% would cause the price to
A) Rise more than 1%
B) Rise less than 1%.
C) Remain constant.
D) Fall more than 1%.
E) Fall less than 1%.
Q2) Refer to Exhibit 20-8. If the required return is 14%, what is the value of Fast Grow Corporation common stock today?
A) $40.26
B) $42.38
C) $46.70
D) $52.63
E) $62.78
Q3) In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.
A)True
B)False
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22
Chapter 21: Web Appendix: A Review of Statistics and the
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Sample Questions
Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter
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Sample Questions
Q1) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter
Institutional Investors
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Sample Questions
Q1) Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.
A)True
B)False
Q2) Banks typically have short-term investment horizons because
A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
Q3) In a defined contribution pension plan,
A) The plan does not promise to pay the retiree a specific income stream after retirement.
B) The plan does promise to pay the retiree a specific income stream after retirement.
C) The employee's retirement income is not an obligation of the firm.
D) The company carries the risk of paying future pension benefits to retirees.
E) Choices a and c.
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