Course Introduction
Financial Management
Final Exam Questions
Financial Management is a comprehensive course that equips students with the essential principles and techniques needed to make informed financial decisions within organizations. Covering topics such as financial statement analysis, budgeting, capital structure, working capital management, risk assessment, and investment appraisal, the course emphasizes the strategic role of finance in achieving organizational objectives. Through case studies and real-world applications, students develop practical skills in planning, directing, and controlling financial resources to maximize value and ensure the long-term financial health of a business.
Recommended Textbook
Fundamentals of Corporate Finance 9th Asia Global Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which of the following represent cash outflows from a corporation?
I. issuance of securities
II. payment of dividends
III. new loan proceeds
IV. payment of government taxes
A)I and III only
B)II and IV only
C)I and IV only
D)I, II, and IV only
E)II, III, and IV only
Answer: B
Q2) Which one of the following characteristics applies to a limited liability company?
A)available only to firms having a single owner
B)limited liability for limited partners only
C)taxed similar to a partnership
D)taxed similar to a corporation
E)all income generated is totally tax-free
Answer: C
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) What is the net capital spending for 2012?
A)$117
B)$239
C)$257
D)$338
E)$421
Answer: B
Q2) The book value of a firm is:
A)equivalent to the firm's market value provided that the firm has some fixed assets.
B)based on historical cost.
C)generally greater than the market value when fixed assets are included.
D)more of a financial than an accounting valuation.
E)adjusted to the market value whenever the market value exceeds the stated book value.
Answer: B
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) On the Statement of Cash Flows, which of the following are considered financing activities?
I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A)I and IV only
B)III and IV only
C)II and III only
D)I, III, and IV only
E)I, II, III, and IV
Answer: A
Q2) What is the return on equity for 2012? (Use 2012 values)
A)15.29 percent
B)16.46 percent
C)17.38 percent
D)18.02 percent
E)18.12 percent
Answer: D
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Page 5
Chapter 4: Long-Term Financial Planning and Growth
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Sample Questions
Q1) Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?
A)7.44 percent
B)7.78 percent
C)9.26 percent
D)9.75 percent
E)10.90 percent
Q2) Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant. If sales increase by 6 percent, what is the pro forma retained earnings?
A)$5,220.18
B)$5,721.42
C)$6,021.56
D)$6,648.42
E)$7,028.56
Q3) Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?
Q4) A) What are the assumptions that underlie the internal growth rate and B) what are the implications of this rate?
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Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
Q2) According to the Rule of 72, you can do which one of the following?
A)double your money in five years at 7.2 percent interest
B)double your money in 7.2 years at 8 percent interest
C)double your money in 8 years at 9 percent interest
D)triple your money in 7.2 years at 5 percent interest
E)triple your money at 10 percent interest in 7.2 years
Q3) Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year?
A)13.33 years
B)16.98 years
C)17.64 years
D)19.29 years
E)21.08 years
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) Will has been purchasing $25,000 worth of New Tek stock annually for the past 11 years. His holdings are now worth $598,100. What is his annual rate of return on this stock?
A)14.13 percent
B)14.24 percent
C)14.29 percent
D)14.37 percent
E)14.68 percent
Q2) Meadow Brook Manor would like to buy some additional land and build a new assisted living center. The anticipated total cost is $23.6 million. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project. Management has decided to save $1.2 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on the funds it saves. How long does the company have to wait before expanding its operations?
A)4.09 years
B)4.32 years
C)4.46 years
D)4.82 years
E)4.91 years
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) Northern Warehouses wants to raise $11.4 million to expand its business. To accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 8.75 percent. What is the minimum number of bonds it must sell to raise the $11.4 million it needs?
A)210,411
B)239,800
C)254,907
D)326,029
E)350,448
Q2) Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
A)at par.
B)in registered form.
C)in street form.
D)as debentures.
E)as callable.
Q3) Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.
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Page 9
Chapter 8: Stock Valuation
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Sample Questions
Q1) Which one of the following is computed by dividing next year's annual dividend by the current stock price?
A)yield to maturity
B)total yield
C)dividend yield
D)capital gains yield
E)growth rate
Q2) Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid?
A)$1.80
B)$1.86
C)$1.92
D)$1.98
E)$2.10
Q3) Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares of common stock or shares of preferred stock. What should he consider before determining the type of share he should purchase?
Q4) What are the primary differences and similarities between NASDAQ and the NYSE?
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Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $5,000. What is the discounted payback period?
A)2.97 years
B)3.11 years
C)3.26 years
D)4.38 years
E)never
Q2) Which one of the following will decrease the net present value of a project?
A)increasing the value of each of the project's discounted cash inflows
B)moving each of the cash inflows back to a later time period
C)decreasing the required discount rate
D)increasing the project's initial cost at time zero
E)increasing the amount of the final cash inflow
Q3) How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders?
Q4) 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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Sample Questions
Q1) Northern Railway is considering a project which will produce annual sales of $975,000 and increase cash expenses by $859,000. If the project is implemented, taxes will increase from $141,000 to $154,000 and depreciation will increase from $194,000 to $272,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach?
A)$25,000
B)$103,000
C)$157,000
D)$181,000
E)$209,000
Q2) The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
A)underlying value principle
B)stand-alone principle
C)equivalent cost principle
D)salvage principle
E)fundamental principle
Q3) Can the initial cash flow at time zero for a project ever be a positive value? If yes, give an example. If no, explain why not.
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Page 12
Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $7,559,000. The company has also spent $1,133,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 8 percent. What is the IRR?
A)7.51 percent
B)7.82 percent
C)8.13 percent
D)8.49 percent
E)8.62 percent
Q2) 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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Sample Questions
Q1) Which one of the following best defines the variance of an investment's annual returns over a number of years?
A)The average squared difference between the arithmetic and the geometric average annual returns.
B)The squared summation of the differences between the actual returns and the average geometric return.
C)The average difference between the annual returns and the average return for the period.
D)The difference between the arithmetic average and the geometric average return for the period.
E)The average squared difference between the actual returns and the arithmetic average return.
Q2) Which one of the following categories of securities had the highest average return for the period 1926-2007?
A)U.S.Treasury bills
B)large company stocks
C)small company stocks
D)long-term corporate bonds
E)long-term government bonds
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Chapter 13: Return, Risk, and the Security Market Line
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Sample Questions
Q1) The intercept point of the security market line is the rate of return which corresponds to:
A)the risk-free rate.
B)the market rate.
C)a return of zero.
D)a return of 1.0 percent.
E)the market risk premium.
Q2) The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?
A)7.02 percent
B)7.90 percent
C)10.63 percent
D)11.22 percent
E)11.60 percent
Q3) A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio. However, the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio. Explain why this difference exists.
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Page 15
Chapter 14: Cost of Capital
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Sample Questions
Q1) Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project?
A)14.59 percent
B)14.72 percent
C)15.17 percent
D)15.54 percent
E)16.41 percent
Q2) A firm's overall cost of equity is:
A)is generally less that the firm's WACC given a leveraged firm.
B)unaffected by changes in the market risk premium.
C)highly dependent upon the growth rate and risk level of the firm.
D)generally less than the firm's aftertax cost of debt.
E)inversely related to changes in the firm's tax rate.
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Page 16
Chapter 15: Raising Capital
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Sample
Questions
Q1) High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share. The current market price of the firm's stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?
A)140,015 shares
B)159,091 shares
C)166,667 shares
D)194,444 shares
E)205,688 shares
Q2) A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.
A)standby
B)best efforts
C)firm commitment
D)direct fee
E)tombstone
Q3) Explain both a rights offering and the basic characteristics of a right.
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) The unlevered cost of capital refers to the cost of capital for a(n):
A)private entity.
B)all-equity firm.
C)governmental entity.
D)private individual.
E)corporate shareholder.
Q2) Which of the following are correct according to pecking-order theory?
I. Firms stockpile internally-generated cash.
II. There is an inverse relationship between a firm's profit level and its debt level.
III. Firms avoid external debt at all costs.
IV. A firm's capital structure is dictated by its need for external financing.
A)I and III only
B)II and IV only
C)I, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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Chapter 17: Dividends and Dividend Policy
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Sample Questions
Q1) A $0.60 quarterly cash payment paid by T.L. Jones & Co. to its shareholders in the normal course of business is called a:
A)repurchase.
B)liquidating dividend.
C)regular cash dividend.
D)special dividend.
E)extra cash dividend.
Q2) Which of the following tends to increase the ability of a shareholder to create his or her own homemade dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases
A)II only
B)II and III only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a:
A)pro forma income statement.
B)sales projection.
C)cash budget.
D)receivables analysis.
E)credit analysis.
Q2) Which of the following statements are correct?
I. An increase in the accounts payable period shortens the cash cycle.
II. The cash cycle is equal to the operating cycle minus the inventory period.
III. A negative cash cycle is preferable to a positive cash cycle.
IV. The cash cycle plus the accounts receivable period is equal to the operating cycle.
A)I only
B)III and IV only
C)I and III only
D)I and IV only
E)I, II, and III only
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Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) The Miller-Orr model:
A)recommends selling securities in an amount equal to (U* - C) when the cash balance reaches L.
B)requires that marketable securities be sold whenever the cash balance falls below the target level.
C)bases the optimal level of cash solely on the opportunity costs of holding cash.
D)supports the argument that the target cash balance declines as order costs increase.
E)advocates investing an amount described as (U* - C) in marketable securities when the cash balance reaches U*.
Q2) Explain what a zero-balance account is, how it is used, and how it affects cash management.
Q3) Adjustment costs is another name for which one of the following?
A)borrowing costs
B)shortage costs
C)cash transfer costs
D)cash wire costs
E)excess cash costs
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21
Chapter 20: Credit and Inventory Management
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Sample Questions
Q1) A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual rate of the discount if the firm purchases $4,600 worth of merchandise?
A)27.24 percent
B)27.86 percent
C)28.80 percent
D)29.03 percent
E)29.27 percent
Q2) The ABC approach to inventory management is based on the concept that:
A)inventory should arrive just in time to be used.
B)the inventory period should be constant for all inventory items.
C)basic inventory items that are essential to production and also inexpensive should be ordered in small quantities only.
D)a small percentage of the inventory items probably represents a large percentage of the inventory cost.
E)one-third of a year's inventory need should be on hand, another third should be on order, and the last third should not be ordered yet.
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Chapter 21: International Corporate Finance
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Sample Questions
Q1) Which one of the following supports the idea that real interest rates are equal across countries?
A)unbiased forward rates condition
B)uncovered interest rate parity
C)international Fisher effect
D)purchasing power parity
E)interest rate parity
Q2) You want to import $147,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $0.0202?
A)Rs 6,887,424
B)Rs 7,238,911
C)Rs 7,277,228
D)Rs 8,367,594
E)Rs 8,415,096
Q3) The LIBOR is primarily used as the basis for the rate charged on:
A)short-term debt in the Lisbon market.
B)mortgage loans in the Lisbon market.
C)Eurodollar loans in the London market.
D)U.S.federal funds.
E)interbank loans in the U.S.
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Sample Questions
Q1) You are a hard-charging manager who doesn't really like to sit at a desk for too long. You prefer to gather information quickly, make a decision, and move on to the next item on your agenda. Which one of the following applies to you?
A)availability bias
B)arbitrage limits
C)law of small numbers
D)representativeness heuristic
E)regret aversion
Q2) Stewart is a fellow finance student at your school who is addicted to day trading and thus buys and sells stocks between classes and over his lunch break. He never has time to really analyze a security so just trades the stock symbols that other investors appear to be trading. Stewart is which one of the following?
A)noise trader
B)arbitrageur
C)crasher
D)regret averter
E)myopic loss averter
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24
Chapter 23: Risk Management: An Introduction to Financial Engineering
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Sample Questions
Q1) 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?
Q2) You believe the price of a stock is going to decline within the next three months. Which one of the following option payoff profiles will reflect a profit if your belief is correct?
A)buying a call
B)selling a call
C)buying a put
D)selling a put
E)none of the above
Q3) The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:
A)forward agreement.
B)derivative security.
C)mezzanine asset.
D)contingent security.
E)junior security.
Q4) Explain why a swap is effectively a series of forward contracts.
Page 25
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Chapter 24: Options and Corporate Finance
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Q1) Ignoring which of the following will cause the NPV of a project to be underestimated?
I. option to abandon
II. option to expand
III. option to wait
IV. option to contract
A)I and III only
B)II, III, and IV only
C)I, II, and III only
D)I, III, and IV only
E)I, II, III, and IV
Q2) Which one of the following statements correctly describes your situation as the holder of a European call option?
A)You are obligated to buy if the option is exercised.
B)You have a right to sell.
C)You have a right to buy but only on the expiration date.
D)You are obligated to sell if the option is exercised.
E)You have a right to buy at any time before the option expires.
Q3) What are the upper and lower bounds for an American call option?
Explain what would happen in each case if the bound was violated.
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Page 26
Chapter 25: Option Valuation
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Sample Questions
Q1) Which of the following variables are included in the Black-Scholes call option pricing formula?
I. put premium
II. N(d<sub>1</sub>)
III. exercise price
IV. stock price
A)III and IV only
B)I, II, and IV only
C)II, III, and IV only
D)I, III, and IV only
E)I, II, III, and IV
Q2) J&N, Inc. stock has a current market price of $46 a share. The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24. What is the risk-free rate of return?
A)1.49 percent
B)1.82 percent
C)3.10 percent
D)3.64 percent
E)4.21 percent
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Chapter 26: Mergers and Acquisitions
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Sample Questions
Q1) A proposed acquisition may create synergy by:
I. increasing the market power of the combined firm.
II. improving the distribution network of the acquiring firm.
III. providing the combined firm with a strategic advantage.
IV. reducing the utilization of the acquiring firm's assets.
A)I and III only
B)II and III only
C)I and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) The value of a target firm to the acquiring firm is equal to:
A)the value of the target firm as a separate entity plus the incremental value derived from the acquisition.
B)the purchase cost of the target firm.
C)the value of the merged firm minus the value of the target firm as a separate entity.
D)the purchase cost plus the incremental value derived from the acquisition.
E)the incremental value derived from the acquisition.
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Chapter 27: Leasing
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Sample Questions
Q1) The incremental cash flows of leasing consider which of the following?
I. cost of the asset
II. lease payment amount
III. applicable tax rate
IV. annual depreciation expense
A)I and III only
B)II and IV only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV
Q2) Alfredo has a non-cancelable, five year lease on an industrial-grade sewing machine for stitching upholstery. For accounting purposes, this is considered to be a capital lease. The life of the sewing machine is five years. Alfredo must pay all taxes and insurances related to this lease. Which type of lease does Alfredo have on this sewing machine?
A)open
B)straight
C)operating
D)financial
E)tax-oriented
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Page 29