Financial Management
Final Exam Questions
Course Introduction
Financial Management is a comprehensive course designed to introduce students to the foundational principles and practices involved in the effective management of an organization's financial resources. The course covers key topics such as financial analysis, planning and forecasting, capital budgeting, risk and return, cost of capital, and working capital management. Students will also explore financing decisions, dividend policy, and the role of financial markets and institutions. Emphasis is placed on the use of financial information for decision-making, strategic planning, and value maximization, equipping students with the analytical tools and frameworks needed to make informed financial decisions in real-world business environments.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Chapter 1: Getting Started-Principles of Finance
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Q1) If one security has a greater risk than another security,how will investors respond?
A)They will require a lower rate of return for the investment that has greater risk.
B)They would be indifferent regarding their expectation of rates of return for either investment.
C)They will require a higher rate of return for the investment that has greater risk.
D)None of the above.
Answer: C
Q2) Maximization of shareholder wealth as a goal is superior to profit maximization because:
A)it considers the time value of the money.
B)following the shareholder wealth maximization goal will ensure high stock prices.
C)it considers uncertainty.
D)A and C.
Answer: D
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Organized security exchanges do not physically occupy space.
A)True
B)False Answer: False
Q2) Financial intermediaries help bring savers and borrowers together.
A)True
B)False Answer: True
Q3) Which of the following is true about Preferred Stock?
A)Preferred shareholders always have voting rights.
B)If at a time a dividend is due on preferred stock,if the company does not have the funds to pay the dividend,the right of the preferred shareholders to collect that dividend lapses.
C)Preferred dividends are not tax deductible to the corporation.
D)Like bonds,preferred stock always has a maturity date at which time the issue price must be repaid to shareholders.
Answer: C
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Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) Tax tables are based on ________ tax rates.
A)marginal
B)average
C)implied
D)investment
Answer: A
Q2) A firm's balance sheet provides a representation of the current market value of the company.
A)True
B)False
Answer: False
Q3) Which of the following does NOT represent cash outflows to the firm?
A)Taxes
B)Interest payments
C)Dividends
D)Purchase of plant and equipment
E)Depreciation
Answer: E
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) One weakness of the times-interest-earned ratio is that it includes only the annual interest expense as a finance expense that must be paid.
A)True
B)False
Q2) Other things held constant,an increase in ________ will decrease the current ratio.Assume an initial current ratio greater than 1.0.
A)accruals
B)common stock
C)average collection period
D)cash
Q3) Lorna Dome,Inc.has an annual interest expense of $30,000.Lorna Dome's times-interest-earned ratio is 4.2.What is Lorna Dome's operating income?
A)$96,000
B)$57,000
C)$126,000
D)$57,600
Q4) What is the purpose of using common size balance sheets and common size income statements?
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) If you want to have $875 in 32 months,how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).
A)$630
B)$570
C)$650
D)$660
Q2) If you were to deposit $2,000 in an IRA that would earn interest of 7.5%,compounded quarterly for 18 years,how much would you have accumulated?
A)$9,621
B)$36,000
C)$22,419
D)$12,363
E)$7,619
Q3) If we invest money for 10 years at 8% interest,compounded semi-annually,we are really investing money for 20 six-month periods,during which we receive 4% interest each period.
A)True
B)False
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) An amortized loan is a loan paid in unequal installments.
A)True
B)False
Q2) The present value of an annuity increases as the discount rate increases.
A)True
B)False
Q3) How much money must you pay into an account at the beginning of each of five years in order to have $5,000 at the end of the fifth year? Assume that the account pays 12% per year,and round to the nearest $10.
A)$700
B)$1,390
C)$1,550
D)$790
Q4) An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?
A)$735
B)$865
C)$885
D)$900
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Chapter 7: An Introduction to Risk and Return-History of Financial
Market Returns
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Sample Questions
Q1) Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.
A)True
B)False
Q2) An investor with access to all publicly available information will be able to make higher than expected profit if the market has semi-strong efficiency.
A)True
B)False
Q3) How much money did Roddy Richards receive when he sold his shares of W.M.D.?
A)$12,014.88
B)$12,398.42
C)$13,663.47
D)$14,184.73
Q4) What is the arithmetic average return on her stock if she sells it five years from today?
Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) Bell Weather,Inc.has a beta of 1.25.The return on the market portfolio is 12.5%,and the risk-free rate is 5%.According to CAPM,what is the required return on this stock?
A)20.62%
B)9.37%
C)14.37%
D)15.62%
Q2) Investing in foreign stocks is one way to improve diversification of a portfolio.
A)True
B)False
Q3) Beta is a measure of systematic risk.
A)True
B)False
Q4) Which of the following has a beta of zero?
A)A risk-free asset
B)The market
C)A high-risk asset
D)Both A and B
Q5) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Which of the following statements about zero coupon bonds is FALSE?
A)When the bonds mature,the issuing firm is faced with a small cash outflow relative to the cash inflow the firm receives when the bonds are initially issued.
B)Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall.
C)Yields tend to be bid down on zero coupon bonds due to investor demand for the bonds.
D)Zero coupon bonds provide a positive annual cash flow to the issuing firm over the life of the bonds.
Q2) A mortgage bond is always secured by a lien on real property.
A)True
B)False
Q3) The debenture is the legal agreement between the firm issuing a bond and the bond trustee who represents the bondholders.
A)True
B)False
Q4) Debentures are unsecured long-term debt.
A)True
B)False
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Chapter 10: Stock Valuation
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Sample Questions
Q1) You are considering the purchase of Miller Manufacturing,Inc.'s common stock.The stock is selling for $21.00 per share.The next dividend is expected to be $2.10,and you expect the dividend to keep growing at a constant rate.If the stock is returning 15%,calculate the growth rate of dividends.
A)3%
B)5%
C)8%
D)10%
Q2) The cumulative dividend feature is necessary to protect the rights of preferred stockholders.
A)True
B)False
Q3) Which of the following statements concerning preferred stock is correct?
A)Preferred stock generally is more costly to the firm than common stock.
B)Most issues of preferred stock have a cumulative feature.
C)Preferred dividend payments are tax-deductible.
D)Preferred stock is a riskier form of capital to the firm than bonds.
Q4) Distinguish between primary stock market transactions and secondary stock market transaction.
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) The profitability index provides the same decision result as the net present value (NPV)method.
A)True
B)False
Q2) The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $150,000 today,and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year,1/365th each day.What is the discounted payback period for this investment?
A)5.23 years
B)4.86 years
C)4.35 years
D)3.72 years
Q3) The required rate of return represents the cost of capital for a project.
A)True
B)False
Q4) If the NPV of a project is zero,then the profitability index should equal one.
A)True
B)False
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Which of the following would be considered a termination cash flow?
A)The expected salvage value of the asset
B)Any tax payments or refunds associated with the salvage value of the asset
C)Recapture of any investment in working capital that was included as an incremental cash outlay
D)All of the above
Q2) If Morgan Tool & Die Co.acquires a new turret lathe,the lathe will cost $80,000,transportation $6,000,installation $7,500.Installing the new lathe will allow Morgan to reduce its finished goods inventory by $10,000.For capital budgeting purposes,the initial investment required for the new lathe is:
A)$83,500.
B)$87,500.
C)$93,500.
D)$103,500.
Q3) Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
A)True
B)False
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) What is the approximate five year survival rate for new businesses?
A)20%
B)40%
C)60%
D)80%
Q2) Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?
A)Sensitivity analysis
B)Simulation
C)Value driver analysis
D)Scenario analysis
Q3) What is the NPV of the project if first year savings are only $75,000 and the project is not sold.
A)($4,545)
B)($15,691)
C)$15,691
D)$75,000
Q4) Briefly explain what is meant by a real option in capital budgeting.Give 2 concrete examples.
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.What rate should be used to discount the cash flows from the expansion project?
A)6.6%
B)6.0%
C)9.5%
D)16.1%
Q2) The cost of common equity is usually higher than the firm's WACC.
A)True
B)False
Q3) Larger issues of new common stock can cause ________ to increase.
A)flotation costs
B)the investor's required rate of return
C)the stock price
D)the tax rate
Q4) Sutter Corporation's common stock is selling for $16.80 a share.Last year,Sutter paid a dividend of $.80.Investors are expecting Sutter's dividends to grow at a rate of 5% per year.What is the cost of common equity?
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Chapter 15: Capital Structure Policy
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Sample
Questions
Q1) Adams Inc.expects EBIT of $50 million if there is a recession,$100 million if the economy is normal,and $150 million if the economy expands.Bellingham Inc.also expects EBIT of $50 million if there is a recession,$100 million if the economy is normal,and $150 million if the economy expands.Adams is financed entirely with equity while Bellingham is financed 50% with debt at 10%.Adams has $200 million in equity;Bellingham is financed with $100 million of debt and $100 million of equity.The tax rate is 30%.Both firms pay out all available earnings as dividends.If there is a recession,compare dividends and total distributions to investors for each company.
Q2) When benchmarking a firm's capital structure,management should compare it:
A)firms in S&P 500.
B)firms in the same geographic region.
C)firms recognized for the quality of their management.
D)firms in similar lines of business.
Q3) The Tradeoff Theory view of capital structure management says that the cost of capital curve is:
A)a straight line.
B)v-shaped.
C)s-shaped.
D)saucer-shaped.
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Which of the following dividend policies would cause dividends per share to fluctuate the most?
A)Residual dividend policy
B)Stable dollar dividend
C)Small,low,regular dividend plus a year-end extra
D)Small,low,regular dividend
Q2) Dividends tend to be more stable than: A)cash flow.
B)earnings.
C)preferred stock.
D)both B and C.
Q3) The ex-dividend date is ________ the holder of record date.
A)five days before B)two weeks before C)two days before D)three days after
Q4) Due to the strengthening of the stock market over the past 50 years,stock splits and stock dividends are more common than cash dividends.
A)True
B)False
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Assume that Zybo,Inc.has sales of $10 million and inventory of $2 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Zybo is expected to generate sales of $14 million next year,what will the firm's investment in inventory be?
A)$1.4 million
B)$2.0 million
C)$2.8 million
D)None of the above
Q2) Based on the information in Table 1,what is Dorian Industries' ending cash balance (before borrowing)in March?
A)$10,000
B)$25,000
C)$20,000
D)($30,000)
Q3) Depreciation expense is always included in the cash budget as it reflects the impact of fixed asset purchases.
A)True
B)False
Q4) What is meant by discretionary financing?
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Which of the following will reduce the liquidity of a firm? An increase in:
A)short-term notes payable.
B)accounts payable.
C)current assets.
D)both A and B.
Q2) Which of the following is most likely to occur if a firm under-invests in net working capital?
A)The firm might not have sufficient cash to pay its bill in a timely manner.
B)The firm might not have adequate inventory to meet the needs of its customers.
C)The firm could be losing sales because its terms of sale are too strict.
D)All of the above.
Q3) Queen Co.'s balance in accounts receivable is $240,000.Annual credit sales are $2,880,000.Queen's average collection period is:
A)12 days.
B)30.4 days.
C)2.5 days.
D)There is not enough information.
Q4) Describe the differences between secured and unsecured short-term credit.
Q5) Discuss the advantages of using commercial paper.
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Chapter 19: International Business Finance
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Sample Questions
Q1) One U.S.dollar buys 12.706 Mexican pesos and .6936 euros.What is the peso/euro exchange rate.
Q2) Suppose International Trading Enterprises purchased 25,000 kilograms of Belgian chocolate for a price of 100,000 euros.If the current exchange rate is .69368 euros to the U.S.dollar,what is the purchase price of the chocolate in dollars?
A)$14,416
B)$693,368
C)$69,368
D)$144,159
Q3) An investor purchased Canadian dollars at an exchange rate of $0.97 U.S.to 1 Canadian dollar.The Canadian dollars cost her $1,000,000 (U.S.dollars).How many Canadian dollars did she buy?
A)$103,090
B)$970,026
C)$1,030,927
D)$97,000
Q4) As of January 8,2010,the spot rate for Swiss francs was .9772.The 180 day forward rate was .9783.Compute the annualized percentage rate premium or discount for Swiss francs.
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) The most you can ever lose when you purchase a put or call option is the premium.
A)True
B)False
Q2) Which of the following scenarios carries the greatest risk of NOT being able to meet required payments (capital expenditure,dividend,interest and principal requirements)totaling $96 million?
A)Expected cash flow,$116 million,standard deviation $5 million
B)Expected cash flow,$107 million,standard deviation $5.5 million
C)Expected cash flow,$112 million,standard deviation $8 million
D)Expected cash flow,$134 million,standard deviation $38 million
Q3) Which of the following types of insurance cannot be sold in the United States?
A)Insurance that protects against loss of revenue due to bad weather.
B)Insurance that protects a companies executives and directors from lawsuits.
C)Life insurance which pays the corporation when an employee dies.
D)All these types of insurance can be sold in the U.S.
Q4) If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.
A)True B)False
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