Financial Management
Final Exam Questions
Course Introduction
Financial Management is a course that explores the fundamental principles and practices involved in managing an organizations financial resources. It covers key topics such as financial planning and analysis, capital budgeting, working capital management, cost of capital, risk assessment, and various methods of financing. Students learn how to interpret financial statements, make investment decisions, assess profitability, and optimize the financial performance of both businesses and personal finances. The course also emphasizes the importance of ethical considerations, financial markets, and current trends in global finance, equipping students with the analytical skills necessary to make informed financial decisions in complex environments.
Recommended Textbook Fundamentals of Corporate Finance 6th Canadian Edition by Richard A Brealey
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Chapter 1: Goals and Governance of the Firm
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Q1) Ethical decision making by management has a payoff for shareholders in terms of:
A) improved capital structure.
B) enhanced reputation value.
C) increased managerial benefits.
D) higher dividend payments.
Answer: B
Q2) How may a reduction in cash dividends be in the best interests of current shareholders?
A) dividends are taxed at twice the rate of other gains.
B) the firm will have available cash to increase current investment and future profits.
C) reduced dividends increase managerial compensation, thus increasing their motivation.
D) a reduction of cash dividends cannot be in the best interests of current shareholders. Answer: B
Q3) A successful investment is one that increases the value of the firm.
A)True
B)False
Answer: True
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Chapter 2: Financial Markets and Institutions
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Q1) The main cause of the financial crisis of 2007-2009 was caused by which financial market factor?
A) Corporate greed
B) Agency
C) Poor economic advice
D) Lack of understanding about who financial markets operate
Answer: B
Q2) Which one of these correctly applies to mutual funds?
A) mutual funds are a costly means of achieving portfolio diversification.
B) funds are required to limit their annual fees and expenses to less than 1 percent of the portfolio value.
C) you can generally buy additional shares in the fund at any time.
D) shareholders sell their shares to other shareholders.
Answer: C
Q3) The key to the banks' ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Accounting and Finance
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Q1) Which one of the following expense categories is subtracted from total revenues to help arrive at a firm's EBIT (Operating Income)?
A) cash dividends
B) depreciation expense
C) interest expense
D) tax liability
Answer: B
Q2) A balance sheet portrays the value of a firm's assets and liabilities:
A) over an annual period.
B) over any stated period of time.
C) at any stated point in time.
D) only at the end of the calendar year.
Answer: C
Q3) Net working capital is a measure of a company's:
A) goodwill.
B) short-term liabilities.
C) estimated cash reservoir.
D) shareholders' equity.
Answer: C
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Chapter 4: Measuring Corporate Performance
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Q1) XYZ Corp.has an operating profit margin of 7%,a debt burden of .8,and has financed two-thirds of its assets through equity.What asset turnover ratio is necessary to achieve an ROE of 18%?
A) 1.26
B) 1.61
C) 2.14
D) 4.02
Q2) How much will Gamma Inc.'s equity holders earn given a total asset turnover of .85,an operating profit margin of .15,and a debt-equity ratio of .25?
A) 9.56%
B) 15.94%
C) 16.96%
D) 38.25%
Q3) Which of these assets is generally considered to be the most liquid?
A) buildings
B) land
C) finished goods inventory
D) accounts receivable
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Chapter 5: The Time Value of Money
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Q1) What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period?
A) 7.36%
B) 7.50%
C) 7.64%
D) 8.01%
Q2) What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today?
A) $9,655.65
B) $10,814.33
C) $12,112.05
D) $13,200.00
Q3) What will be the monthly payment on a home mortgage of $75,000 at 12% interest compounded monthly,to be amortized over 30 years?
A) $771.46
B) $775.90
C) $1,028.61
D) $1,034.53
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Chapter 6: Valuing Bonds
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Q1) The discount rate that makes the present value of a bond's payments equal to its price is termed the:
A) dividend yield.
B) yield to maturity.
C) current yield.
D) coupon rate.
Q2) Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.
A)True
B)False
Q3) A bond has a coupon rate of 8%,pays interest semiannually,sells for $960,and matures in 3 years.What is its yield to maturity?
A) 4.78%
B) 5.48%
C) 9.57%
D) 12.17%
Q4) It is impossible for an investor to insure against the risk of bond default.
A)True
B)False
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Chapter 7: Valuing Stocks
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Q1) Investors are willing to purchase stocks having high P/E ratios because:
A) they expect these shares to sell for a lower price.
B) they expect these shares to offer higher dividend payments.
C) these shares are accompanied by guaranteed earnings.
D) they expect these shares to have greater growth opportunities.
Q2) The dividend discount model should not be used to value stocks in which the dividend does not grow.
A)True
B)False
Q3) A firm's liquidation value is the amount:
A) necessary to repurchase all shares of common stock.
B) realized from selling all assets and repaying debts.
C) a purchaser would pay for the firm in bankruptcy.
D) equal to the book value of equity.
Q4) In general,if a firm has positive present value of growth opportunities,then its price-earnings ratio:
A) is greater than its required rate of return.
B) is less than its required rate of return.
C) equals its required rate of return.
D) will be lower than the industry average.
Page 9
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) Determine the project's NPV if the Profitability Index is 1.4; and the investment value is $500,000.
A) $25,000
B) $75,000
C) $200,000
D) $250,000
Q2) A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10 percent and the polisher will last for 5 years,what is the equivalent annual cost of the tool?
A) $22,638
B) $85,815
C) $12,638
D) $32,638
Q3) What should occur when a Project's net present value is determined to be negative?
A) the discount rate should be decreased.
B) the profitability index should be calculated.
C) the present value of the project cost should be determined.
D) the project should be rejected.
Q4) Why doesn't the payback rule always make shareholders better off?
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Chapter 9: Using Discounted Cash Flow Analysis to Make Investment
Decisions
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Q1) Assuming that an asset has been fully depreciated according to its straight line CCA class,which of the following statements is correct concerning the value of the asset:
A) its market value is zero.
B) its UCC value is zero.
C) its book value is the current market value.
D) it has neither book value nor market value.
Q2) When an asset class is terminated,there will be recaptured depreciation when the adjusted cost of disposal from UCC of the asset class is a negative balance.
A)True
B)False
Q3) Sunk costs do not affect project NPV.
A)True
B)False
Q4) The opportunity cost of an asset:
A) should be depreciated annually.
B) can differ depending on market conditions.
C) is typically ignored in capital budgeting.
D) is important only for parcels of land.
11
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Chapter 10: Project Analysis
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Q1) How are sensitivity,scenario,and break-even analysis used to see the effect of an error in forecasts on project profitability? Why is an overestimate of sales more serious for projects with high operating leverage?
Q2) Which of the following statements is likely to be correct for a decision tree which indicates a 30 percent chance of making a $250,000 profit and a 70 percent chance of sustaining a $140,000 loss?
A) the decision should be "yes" whenever the amount of possible profit exceeds the amount of possible loss.
B) the decision should be "no" whenever there is a possibility of loss.
C) the expected value is positive before discounting.
D) the expected value is negative before discounting.
Q3) Which of the following offers the most plausible scenario for a firm that maintained a constant degree of operating leverage when its level of fixed costs doubled?
A) depreciation expense increased
B) variable cost percentage decreased
C) sales revenues declined
D) pretax profits decreased
Q4) What is the degree of operating leverage of this project?
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Q1) Investment risk can best be described as the:
A) dispersion of possible returns.
B) elimination of macro risk through diversification.
C) possibility of changes in the cost of capital.
D) level of systematic risk for an undiversified investor.
Q2) Cyclical stocks tend to perform well when other stocks are performing well also.
A)True
B)False
Q3) What nominal return was received by an investor when inflation averaged 8.0 percent and the real rate of return was a negative 2.5 percent?
A) 5.30 percent
B) 5.36 percent
C) 6.50 percent
D) 10.77 percent
Q4) Which of the following risk types can be diversified by adding stocks to a portfolio?
A) systematic risk
B) unique risk
C) default risk
D) market risk
13
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) A project should be accepted if its return plots above the security market line.
A)True
B)False
Q2) A stock's risk premium is equal to the:
A) expected market return times Beta.
B) treasury bill yield plus expected market return.
C) risk-free rate plus expected market risk premium.
D) expected market risk premium times Beta.
Q3) The slope of the regression line that exhibits the past relationship between a stock's return and the market's return is the:
A) security market line.
B) stock's Beta.
C) market risk premium.
D) stock's unique risk.
Q4) Stock returns can be explained by the stock's _________ and the stock's __________.
A) Beta; unique risk
B) Beta; market risk
C) unique risk; firm-specific risk
D) aggressive risk; defensive risk
Page 14
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) Calculate a firm's required rates of return for both of its equity components: Its common stock sells for $50 per share and will pay a $6 dividend which is expected to grow at a constant 5% rate.Its preferred stock sells for $22.50 per share and pays $1.80 in dividends.What accounts for the difference in returns,given that these are both forms of equity?
Q2) How would a company's cost of capital calculated from book values be affected if the company's bonds were selling for more than face value?
A) the cost of capital would increase.
B) the cost of capital would decrease.
C) the cost of capital would not be affected.
D) the effect depends on the bonds' coupon rate.
Q3) The weighted average cost of capital should be used on projects of similar risk that are funded through:
A) debt issues.
B) retained earnings.
C) Depreciation.
D) any external financing.
Q4) Can WACC be used to value an entire business?
Q5) Why are investors interested in free cash flow?
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Chapter 14: Introduction to Corporate Financing and Governance
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Q1) All of the following are types of innovative bonds except:
A) convertible bonds.
B) bowie bonds.
C) mortality bonds.
D) indexed bonds.
Q2) How would a convertible bondholder decide whether to exercise his rights of exchange?
Q3) A stock's par value is represented by:
A) the maturity value of the stock.
B) the price at which each share is recorded.
C) the price at which an investor could sell the stock.
D) the price received by the firm when the stock was issued.
Q4) Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:
A) common shareholders.
B) preferred shareholders.
C) Bondholders.
D) both common and preferred shareholders.
Page 16
Q5) What conflicts of interest can arise between managers and stockholders?
Q6) Outline the impact of Bill C198
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Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Q1) One of the primary reasons for disbursing venture-capital funds in installments is to:
A) avoid tax liability.
B) identify and cut losses early.
C) increase the importance of the venture capitalist.
D) take advantage of the time value of money.
Q2) Underwriters are commercial banking firms that act as financial midwives to a new issue.
A)True
B)False
Q3) Discuss the potential benefits to a corporation of POP registration,coupled with bought deals.
Q4) Which of the following is correct for stock issued under a firm commitment where the underwriter is to receive an 8% spread?
A) the underwriter's profits are guaranteed to be 8%.
B) the underwriter must sell at least 92% of the shares.
C) the underwriter receives 8% of all shares.
D) the underwriter may suffer a loss on the issue.
Q5) What is venture capital?
Q6) Discuss the functions conducted by security underwriters.
Page 18
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Chapter 16: Debt and Payout Policy
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Q1) MM's proposition II states that the:
A) expected return on equity increases as financial leverage increases.
B) expected return on assets decreases as expected return on debt decreases.
C) firm's capital structure is irrelevant to value determination.
D) greater the proportion of equity, the higher the expected return on debt.
Q2) An increase in a firm's financial leverage will:
A) increase the variability in earnings per share.
B) reduce the operating risk of the firm.
C) increase the value of the firm in a non-MM world.
D) increase the WACC.
Q3) The pecking-order theory of capital structure suggests the following order of financing:
A) internal financing, debt issue, equity issue.
B) internal financing, equity issue, debt issue.
C) debt issue, equity issue, internal financing.
D) equity issue, internal financing, debt issue.
Q4) The benefit of an interest tax shield is captured by the equity holders.
A)True
B)False
Q5) What's the pecking order theory?
Page 19
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Chapter 17: Leasing
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Q1) If a leased asset were scrapped from a continuing CCA pool after four years,and its UCC were $10,000 and its salvage is zero,what would the present value of this asset's tax shelter be if the appropriate after-tax borrowing rate is 9%,the CCA rate is 20%,and the tax rate is 40%?
A) -$2,759
B) -$1,955
C) +$10,000
D) +$2,759
Q2) If a financial lease analysis shows a NPV of $1,750 that means:
A) it will cost the lessee $1,750 more to lease.
B) it will cost the lessee $1,750 more to own.
C) the lessee will have to put down $1,750 as a lease deposit.
D) the lessor should raise his annual lease payments by $1,750.
Q3) If the asset in Question above were exactly equal to its undepreciated capital cost instead of zero,what effect would this change have on the financial lease analysis?
A) the salvage would become a benefit of leasing.
B) the change would have no effect on the lease analysis.
C) the terminal loss would disappear and that would be the only change.
D) the terminal loss would disappear and the salvage is now a leasing cost.
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Chapter 18: Payout Policy
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Q1) MM's dividend irrelevance proposition assumes that dividends do not affect investment or borrowing policies.
A)True
B)False
Q2) What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain? Assume 30% tax rate on dividends.
A) 8.00%
B) 9.29%
C) 11.02%
D) 12.31%
Q3) What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Ignore tax.the price should:
A) increase by the amount of the dividend.
B) decrease by the amount of the dividend.
C) decrease by one-half the amount of the dividend.
D) remain constant.
Q4) How are dividends paid and how do companies decide on dividend payments?
Q5) Discuss the concept of dividend "smoothing."
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Chapter 19: Long-Term Financial Planning
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Q1) Increases in sales are typically accompanied by:
A) More than proportionate increases in fixed assets
B) Less than proportionate decreases in debt
C) More than proportionate decreases in dividends
D) Less than proportionate increases in working capital
Q2) What new investment is required for a firm that projects 12% growth has $400,000 in assets,and retained earnings of $40,000?
A) $0
B) $4,800
C) $8,000
D) $66,667
Q3) A firm's sustainable growth rate represents the:
A) Highest growth rate without decreasing the dividend
B) Highest growth rate without increasing financial leverage
C) Percentage change in sales times the profit margin
D) Possible growth without jeopardizing net working capital
Q4) What is the difference between the internal and sustainable growth rates,both in definition and in calculation? In what case are the rates equal?
Q5) Describe the role of a balancing item or "plug" in financial planning.
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Chapter 20: Short-Term Financial Planning
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Q1) What was the sales volume in the current quarter if beginning accounts receivable,at $5,000,was $1,000 higher than ending,and $20,000 was collected?
A) $19,000
B) $20,000
C) $21,000
D) $24,000
Q2) What is the inventory period for a firm with an annual cost of goods sold of $8 million,$1.5 million in average inventory,and a cash conversion cycle of 75 days?
A) 6.56 days
B) 18.75 days
C) 53.33 days
D) 68.44 days
Q3) Company which sees a customer pay a $2,500 bill resulting from a previous sale will see no change in its net working capital.
A)True
B)False
Q4) How does long-term financing policy affect short-term financing requirements?
Q5) List and explain the four forecast uses of cash.
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Chapter 21: Cash and Inventory Management
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Q1) What is the economic order quantity for firm that sells 30,000 units annually,each unit has a $6 carrying cost,and the fixed cost of placing an order is $100?
A) 100 units
B) 122 units
C) 707 units
D) 1,000 units
Q2) A common characteristic of money market instruments is their high degree of liquidity.
A)True
B)False
Q3) Repos are long-term unsecured loan agreements.
A)True
B)False
Q4) From the day a cheque is put in the mail,discuss the delays before it is credited or debited appropriately; e.g.,discuss the issue from the perspective of both payer and recipient.
Q5) Where do firms invest excess funds until they are needed to pay bills?
Q6) Discuss the distinction of playing the float versus cheque kiting.
Q7) What is the payment float?
Page 24
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Chapter 22: Credit Management and Collection
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Q1) How do firms assess the probability that a customer will pay?
Q2) A higher score in a typical questionnaire for credit scoring analysis indicates a higher creditworthiness.
A)True
B)False
Q3) What are the usual steps in credit management?
Q4) What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?
A) The rate declines
B) The rate increases
C) The rate remains constant
D) Impossible to predict without knowing length of discount period
Q5) Which of the following is the least expensive source of credit information?
A) Dun & Bradstreet
B) Moody's
C) Standard & Poor's
D) Bond ratings
Q6) How do firms decide whether to grant credit to a customer?
Q7) How do firms decide whether it makes sense to grant credit to a customer?
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Chapter 23: Mergers, Acquisitions, and Corporate Control
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Q1) Firms A and B intend to merge and Firm A has calculated the NPV of the merger to be $2 million after paying $8 million for Firm
B. If Firm A had a pre-merger value of $10 million and Firm B had a pre-merger value of $6 million, calculate the value of the merged entity, as well as the cost of the merger.
PV<sub>AB</sub> = PV<sub>A</sub> + PV<sub>B</sub> + gain
= $10 million + $6 million + $4 million = $20 million
Cost or merger = cash - PV<sub>B</sub><sub> </sub>= $8 million - $6 million = $2 million
NPV = $4 million - $2 million = $2 million
Q2) The market for corporate control suggests that:
A) management and ownership make a large difference in a firm's results.
B) it is rare for mergers to show economic benefits over a sustained period.
C) hostile takeovers generate the most in additional value.
D) LBOs cost more than they are worth.
Q3) In what ways do companies change the composition of ownership and management?
Q4) Who is typically the primary beneficiary(ies)in a merger?
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Chapter 24: International Financial Management
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Q1) You are importing TV sets worth ¥10,000,000 from a Japanese manufacturer,and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.
A) Buying Japanese Yen in the forward market.
B) Selling Japanese Yen in the forward market.
C) Borrowing Japanese Yen.
D) Do nothing.
Q2) Which of the following is correct when contracting ahead in the forward exchange market?
A) At contract close you pay either the forward rate that was contracted or the then-current rate
B) Contracting ahead is always cheaper than waiting to pay spot rates
C) Your cost is locked-in from the beginning of the contract, regardless of market changes
D) Paying spot price is safer than contracting forward
Q3) Buying currency in the forward market is a costly way of hedging the currency risk.
A)True
B)False
Q4) Explain the expectations theory of exchange rates.
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Chapter 25: Options
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Q1) How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?
A) $46
B) $50
C) $52
D) $54
Q2) A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.
A)True
B)False
Q3) The payoffs from holding a call option can be replicated by:
A) borrowing money to buy a put option.
B) borrowing money to invest in the stock.
C) simultaneously selling a call and buying a put.
D) simultaneously buying a share and buying a put.
Q4) Define and briefly explain the relationship between value of a call option and the following five factors: Stock price,exercise price,interest rate,time to expiration,volatility of stock price.
Q5) What options may be provided in financial securities?
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Chapter 26: Risk Management
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Q1) Which of the following is not correct concerning the financial futures markets?
A) One of the prominent exchanges for financial futures is the Chicago Board of Trade.
B) The contracts were first traded in 1972.
C) A major use is protection from interest-rate risk.
D) Trading in commodity futures significantly exceeds trading in financial futures.
Q2) If the market for corn futures has more prospective sellers than buyers,then one would expect:
A) the price of corn futures to decrease.
B) the price of corn futures to increase.
C) some traders to change from seller to buyer.
D) the market to cease operations until demand is rebalanced.
Q3) Discuss the statement,"managers are not paid to avoid risk".
Q4) Both the seller and the buyer in a futures contract are required to put up margins.
A)True
B)False
Q5) What is a currency swap and give an example of how this might be used?
Q6) Provide a brief explanation of a currency and interest rate swap.
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