Financial Management
Final Exam Questions
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices essential for effective financial decision-making within organizations. Key topics include financial analysis, budgeting, capital structure, investment appraisal, risk management, and the valuation of assets and firms. Students will learn how to interpret financial statements, assess financial performance, and develop strategies for optimizing resources to achieve organizational goals. The course equips learners with critical skills needed to manage corporate finances responsibly, make informed investment decisions, and understand the influence of financial markets and economic factors on business operations.
Recommended Textbook Fundamentals of Corporate Finance 10th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) A stakeholder is:
A)a person who owns shares of stock.
B)any person who has voting rights based on stock ownership of a corporation.
C)a person who initially founded a firm and currently has management control over that firm.
D)a creditor to whom a firm currently owes money.
E)any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
Answer: E
Q2) Which one of the following is a primary market transaction?
A)sale of currently outstanding stock by a dealer to an individual investor
B)sale of a new share of stock to an individual investor
C)stock ownership transfer from one shareholder to another shareholder
D)gift of stock from one shareholder to another shareholder
E)gift of stock by a shareholder to a family member
Answer: B
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3
Chapter 2: Financial Statements,Taxes,and Cash Flow
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Q1) The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:
A)operating cash flow.
B)net capital spending.
C)net working capital.
D)cash flow from assets.
E)cash flow to stockholders.
Answer: D
Q2) Which one of the following accounts is the most liquid?
A)inventory
B)building
C)accounts receivable
D)equipment
E)land
Answer: C
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Chapter 3: Working With Financial Statements
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Q1) The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?
A)payment to supplier
B)payment to employee
C)payment of interest to a lender
D)payment of principle to a lender
E)payment of a dividend to a shareholder
Answer: C
Q2) Jasper United had sales of $21,000 in 2011 and $24,000 in 2012.The firm's current accounts remained constant.Given this information,which one of the following statements must be true?
A)The total asset turnover rate increased.
B)The days' sales in receivables increased.
C)The net working capital turnover rate increased.
D)The fixed asset turnover decreased.
E)The receivables turnover rate decreased.
Answer: C
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Page 5
Chapter 4: Long-Term Financial Planning and Growth
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Q1) You are comparing the current income statement of a firm to the pro forma income statement for next year.The pro forma is based on a four percent increase in sales.The firm is currently operating at 85 percent of capacity.Net working capital and all costs vary directly with sales.The tax rate and the dividend payout ratio are fixed.Given this information,which one of the following statements must be true?
A)The projected net income is equal to the current year's net income.
B)The tax rate will increase at the same rate as sales.
C)Retained earnings will increase by four percent over its current level.
D)Total assets will increase by less than four percent.
E)Total liabilities and owners' equity will increase by four percent.
Q2) A firm's net working capital and all of its expenses vary directly with sales.The firm is operating currently at 96 percent of capacity.The firm wants no additional external financing of any kind.Which one of the following statements related to the firm's pro forma statements for next year must be correct?
A)Total liabilities will remain constant at this year's value.
B)The maximum rate of sales increase is 4 percent.
C)The firm cannot exceed its internal rate of growth.
D)The projected owners' equity will equal this year's ending equity balance.
E)Fixed assets must remain constant at the current level.
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Page 6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) This morning,TL Trucking invested $75,000 to help fund a company expansion project planned for 4 years from now.How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?
A)$2,940.09
B)$3,423.58
C)$4,008.17
D)$4,219.68
E)$4,711.08
Q2) Your father invested a lump sum 26 years ago at 4.25 percent interest.Today,he gave you the proceeds of that investment which totaled $51,480.79.How much did your father originally invest?
A)$15,929.47
B)$16,500.00
C)$17,444.86
D)$17,500.00
E)$17,999.45
Q3) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
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Chapter 6: Discounted Cash Flow Valuation
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Q1) A preferred stock pays an annual dividend of $3.20.What is one share of this stock worth today if the rate of return is 11.75 percent?
A)$23.48
B)$25.00
C)$27.23
D)$33.80
E)$35.55
Q2) You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month.Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month.Which one of the following statements is correct concerning these two annuities?
A) These two annuities have equal present values but unequal futures values at the end of year five.
B) These two annuities have equal present values as of today and equal future values at the end of year five.
C) Annuity B is an annuity due.
D) Annuity A has a smaller future value than annuity B.
E) Annuity B has a smaller present value than annuity A.
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Q1) A "fallen angel" is a bond that has moved from:
A)being publicly traded to being privately traded.
B)being a long-term obligation to being a short-term obligation.
C)having a yield-to-maturity in excess of the coupon rate to having a yield-to- maturity that is less than the coupon rate.
D)senior status to junior status for liquidation purposes.
E)investment grade to speculative grade.
Q2) The liquidity premium is compensation to investors for:
A)purchasing a bond in the secondary market.
B)the lack of an active market wherein a bond can be sold for its actual value.
C)acquiring a bond with an unfavorable tax status.
D)redeeming a bond prior to maturity.
E)purchasing a bond that has defaulted on its coupon payments.
Q3) The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
A)coupon date
B)yield date
C)maturity
D)dirty date
E)clean date
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Chapter 8: Stock Valuation
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Sample Questions
Q1) Bonnie's Ice Cream is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus,the company has announced that it will be reducing its annual dividend by 2 percent a year for the next five years.After that,it will maintain a constant dividend of $2 a share.Last year,the company paid $2.35 per share.What is this stock worth to you if you require a 9.5 percent rate of return?
A)$16.21
B)$17.48
C)$18.64
D)$19.09
E)$21.90
Q2) Winston Co.has a dividend-paying stock with a total return for the year of -6.5 percent.Which one of the following must be true?
A)The dividend must be constant.
B)The stock has a negative capital gains yield.
C)The dividend yield must be zero.
D)The required rate of return for this stock increased over the year.
E)The firm is experiencing supernormal growth.
Q3) What are the primary differences and similarities between NASDAQ and the NYSE?
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Which one of the following is an advantage of the average accounting return method of analysis?
A)easy availability of information needed for the computation
B)inclusion of time value of money considerations
C)the use of a cutoff rate as a benchmark
D)the use of pre-tax income in the computation
E)use of real, versus nominal, average income
Q2) Which one of the following statements related to payback and discounted payback is correct?
A)Payback is a better method of analysis than is discounted payback.
B)Discounted payback is used more frequently in business than is payback.
C)Discounted payback does not require a cutoff point like the payback method does.
D)Discounted payback is biased towards long-term projects while payback is biased towards short-term projects.
E)Payback is used more frequently even though discounted payback is a better method.
Q3) Explain the differences and similarities between net present value (NPV)and the profitability index.
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Chapter 10: Making Capital Investment Decisions
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Q1) You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $147,000.What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time? \[\begin{array}{l}
\text { MACRS 5-year property }\\
\begin{array} { c c }
\frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\
2 & 32.00 \% \\
3 & 19.20 \% \\
4 & 11.52 \% \\
5 & 11.52 \% \\
6 & 5.76 \%
\end{array}
\end{array}\]
A)$8,467.20
B)$25,401.60
C)$42,336.00
D)$121,598.40
E)$138,532.80
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Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) Variable costs can be defined as the costs that:
A)remain constant for all time periods.
B)remain constant over the short run.
C)vary directly with sales.
D)are classified as non-cash expenses.
E)are inversely related to the number of units sold.
Q2) Operating leverage is the degree of dependence a firm places on its:
A)variable costs.
B)fixed costs.
C)sales.
D)operating cash flows.
E)net working capital.
Q3) The base case values used in scenario analysis are the ones considered the most: A)optimistic.
B)desired by management.
C)pessimistic.
D)conducive to creating a positive net present value.
E)likely to occur.
Q4) What are the key features of the accounting,cash,and financial break-even points?
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Chapter 12: Some Lessons From Capital Market History
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Q1) The common stock of Air United,Inc.,had annual returns of 15.6 percent,2.4 percent,-11.8 percent,and 32.9 percent over the last four years,respectively.What is the standard deviation of these returns?
A)13.29 percent
B)14.14 percent
C)16.50 percent
D)17.78 percent
E)19.05 percent
Q2) To convince investors to accept greater volatility,you must:
A)decrease the risk premium.
B)increase the risk premium.
C)decrease the real return.
D)decrease the risk-free rate.
E)increase the risk-free rate.
Q3) Inside information has the least value when financial markets are:
A)weak form efficient.
B)semiweak form efficient.
C)semistrong form efficient.
D)strong form efficient.
E)inefficient.
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Chapter 13: Return,Risk,and the Security Market Line
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Q1) A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?
A)portfolio
B)nondiversifiable
C)market
D)unsystematic
E)total
Q2) You have a portfolio consisting solely of stock A and stock B.The portfolio has an expected return of 9.8 percent.Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent.What is the portfolio weight of stock A?
A) 59 percent
B) 68 percent
C) 74 percent
D) 81 percent
E) 87 percent
Q3) Explain how the slope of the security market line is determined and why every stock that is correctly priced,according to CAPM,will lie on this line.
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15
Chapter 14: Cost of Capital
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Q1) The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
I.firms that have a 100 percent retention ratio
II.firms that pay a constant dividend
III.firms that pay an increasing dividend
IV.firms that pay a decreasing dividend
A)I and II only
B)I and III only
C)II and III only
D)I, II, and III only
E)II, III, and IV only
Q2) The flotation cost for a firm is computed as:
A)the arithmetic average of the flotation costs of both debt and equity.
B)the weighted average of the flotation costs associated with each form of financing.
C)the geometric average of the flotation costs associated with each form of financing.
D)one-half of the flotation cost of debt plus one-half of the flotation cost of equity.
E)a weighted average based on the book values of the firm's debt and equity.
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Page 16
Chapter 15: Raising Capital
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Q1) Which one of the following statements concerning dilution is correct?
A)Dilution of percentage ownership occurs whenever an investor participates in a rights offer.
B)Market value dilution increases as the net present value of a project increases.
C)Market value dilution occurs when the net present value of a project is negative.
D)Neither book value dilution nor market value dilution has any direct bearing on individual shareholders.
E)Book value dilution is the cause of market value dilution.
Q2) Which one of the following statements is correct concerning the costs of issuing securities?
A)Domestic bonds are generally more expensive to issue than equity IPOs.
B)Abnormal returns are rarely associated with seasoned issues.
C)A seasoned offering is typically more expensive on a percentage basis than an IPO.
D)There tends to be substantial economies of scale when issuing securities.
E)The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) The explicit costs,such as legal and administrative expenses,associated with corporate default are classified as _____ costs.
A)flotation
B)issue
C)direct bankruptcy
D)indirect bankruptcy
E)unlevered
Q2) Which one of the following is the equity risk that is most related to the daily operations of a firm?
A)market risk
B)systematic risk
C)extrinsic risk
D)business risk
E)financial risk
Q3) The value of a firm is maximized when the:
A)cost of equity is maximized.
B)tax rate is zero.
C)levered cost of capital is maximized.
D)weighted average cost of capital is minimized.
E)debt-equity ratio is minimized.
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Chapter 17: Dividends and Payout Policy
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Q1) Which one of the following is a direct result of a 2-for-1 stock split?
A)a 100 percent increase in the number of shareholders
B)a 100 percent increase in the common stock account balance
C)a 100 percent decrease in the stock price
D)a 50 percent increase in the number of shares outstanding
E)a 50 percent decrease in the par value per share
Q2) Which two of the following are the best justifications for a reverse stock split?
I.combine a reverse stock split with a stock repurchase to enable a firm to go dark
II.increase the respectability of the stock
III.avoid delisting
IV.reduce transaction costs for shareholders
A)I and II only
B)I and III only
C)II and III only
D)II and IV only
E)III and IV only
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Chapter 18: Short-Term Finance and Planning
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Q1) A compensating balance:
I.is required when a firm acquires any bank financing other than a line of credit.
II.increases the cost of short-term bank financing.
III.may be required even if a firm never borrows funds.
IV.is often used as a means of paying for banking services received.
A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)II, III, and IV only
Q2) Which one of the following statements is correct concerning the cash cycle?
A)The longer the cash cycle, the more likely a firm will need external financing.
B)Increasing the accounts payable period increases the cash cycle.
C)A positive cash cycle is preferable to a negative cash cycle.
D)The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E)Offering early payment discounts to customers will tend to increase the cash cycle.
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Chapter 19: Cash and Liquidity Management
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Q1) The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance limit of $60,000.The standard deviation of the disbursements is $7,500.The applicable weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50.What is your optimal average cash balance based on the Miller-Orr model?
A)$79,116
B)$83,208
C)$110,315
D)$237,348
E)$249,624
Q2) A repurchase agreement generally has a maximum life of:
A)1 day.
B)a few days.
C)one month.
D)one to three months.
E)three to six months.
Q3) Explain what a zero-balance account is,how it is used,and how it affects cash management.
Q4) Explain how the Check Clearing Act for the 21<sup>st</sup> Century affects both collection and disbursement float.
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Chapter 20: Credit and Inventory Management
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Q1) Weisbrough United currently has a cash sales only policy.Under this policy,the firm sells 410 units a month at a price of $219 a unit.The variable cost per unit is $140 and the carrying cost per unit is $3.30.The monthly interest rate is 1.3 percent.The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy.What is the net present value of the switch using the one-shot approach?
A)$255,590
B)$296,110
C)$298,470
D)$302,233
E)$305,902
Q2) The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _____ period.
A)float
B)cash collection
C)sales
D)accounts receivable
E)discount
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Chapter 21: International Corporate Finance
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Q1) Assume that $1 can buy you either ¥95.42 or £0.6211.If a TV in London costs £990,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?
A)¥58,797
B)¥60,554
C)¥152,094
D)¥161,855
E)¥163,542
Q2) What is the relationship between the value of the dollar and the value of the euro in relation to the rate of inflation in the United States?
Q3) The international Fisher effect states that _____ rates are equal across countries.
A)spot
B)one-year future
C)nominal
D)inflation
E)real
Q4) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Kate is attempting to sell her house for $260,000.Fred lives across the street in an identical house.Fred recently stated to his wife that Kate's house is probably worth only $250,000 but that once she sells her house,he would like to put their house on the market at $285,000 and then move into a condominium.Which one of the following behaviors applies to Fred?
A)myopic loss aversion
B)house money effect
C)money illusion
D)self-attribution bias
E)endowment effect
Q2) Most people would tend to agree that technology stocks were highly overvalued in the late 1990's.This time period is best described as a technology:
A)crash.
B)circle.
C)bubble.
D)limit.
E)arbitrage.
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Chapter 23: Enterprise Risk Management
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Q1) The seller of a forward contract:
A)is obligated to make delivery and accept the forward price.
B)has the option of making delivery and receiving the greater of the spot price or the contract price.
C)has the option of either making delivery or accepting delivery.
D)is obligated to take delivery and pays the lower of the spot market price or the contract price.
E)is obligated to take delivery and pay the forward price.
Q2) Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge.What does the manufacturer hope to gain?
Q3) Explain why a swap is effectively a series of forward contracts.
Q4) A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?
A)wheat farmer and bakery
B)oil producer and coal miner
C)wheat grower and pharmaceutical firm
D)pastry bakery and cotton farmer
E)shoe manufacturer and coat manufacturer
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Chapter 24: Options and Corporate Finance
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Q1) The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?
A)$0
B)$1.20
C)$3.00
D)$4.20
E)$5.51
Q2) Jeff owns a $1,000 face value bond.He can exchange that bond for 25 shares of KNJ stock at any time within the next 2 years.What type of bond does Jeff own?
A)secured
B)warranted
C)convertible
D)junk
E)callable
Q3) Circle Stores stock is priced at $28 a share.A $40 call on this stock has five months until expiration and a call price of $0.15.Why would an investor purchase a call that is so far out of the money?
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Chapter 25: Option Valuation
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Q1) Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?
A)3.95 percent
B)4.21 percent
C)4.67 percent
D)5.38 percent
E)5.57 percent
Q2) The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:
A)$141,765.
B)$180,219.
C)$211,481.
D)$264,909.
E)$268,226.
Q3) Explain how an increase in T-bill rates will affect the value of an American call and an American put.
Q4) Explain why financial mergers tend to benefit bondholders more than shareholders.
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Page 27
Chapter 26: Mergers and Acquisitions
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Q1) Roger is a major shareholder in RB Industrial Supply.Currently,Roger is quite unhappy with the direction the firm is headed and is rumored to be considering an attempt to take over the firm by soliciting the votes of other shareholders.To head off this potential attempt,the board of RB Industrial Supply has decided to offer Roger $35 a share for all the shares he owns in the firm.The current market value per share is $32.This offer to purchase Roger's shares is commonly referred to as:
A)a golden parachute.
B)standstill payments.
C)greenmail.
D)a poison pill.
E)a white knight.
Q2) A potential merger which produces synergy:
A)should be rejected due to the projected negative cash flows.
B)should be rejected because the synergy will dilute the benefits of the merger.
C)has a net present value of zero.
D)creates value and therefore should be pursued.
E)reduces the anticipated net income from the target firm.
Q3) Identify the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Page 28
Chapter 27: Leasing
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Sample Questions
Q1) Your firm is considering either leasing or buying some new equipment.The lessor will charge $13,800 a year for 4 years should you decide to lease.The purchase price is $47,800.The equipment has a 4-year life after which it is expected to have a resale value of $8,400.Your firm uses straight-line depreciation,borrows money at 10 percent,and has a 33 percent tax rate.What is the aftertax salvage value of the equipment?
A)$5,544
B)$5,628
C)$5,709
D)$5,748
E)$5,820
Q2) Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".
Q3) What are some "good" reasons for opting to lease rather than purchase an asset?
Q4) The relevant discount rate for evaluating a lease is the firm's:
A)cost of equity financing.
B)pre-tax cost of borrowing.
C)aftertax cost of borrowing.
D)cost of working capital.
E)rate of return on short-term assets.
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