Financial Management
Final Test Solutions
Course Introduction
Financial Management is a foundational course that introduces students to the principles and practices essential for effective business financial decision-making. The course covers key topics such as financial analysis, planning and forecasting, risk and return, capital budgeting, cost of capital, working capital management, sources of financing, and valuation of assets. Students will learn how to interpret financial statements, assess investment opportunities, optimize funding strategies, and manage corporate resources efficiently. Real-world case studies and analytical tools are employed to develop practical skills needed to solve complex financial problems, preparing students for careers in finance, accounting, and management.
Recommended Textbook Finance Applications and Theory 4th Edition by Marcia Cornett
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20 Chapters
2227 Verified Questions
2227 Flashcards
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which of the following is an example of aligning managers' personal interests with those of the owners?
A)allow the managers to have as many perks as they request
B)pay the managers high salaries
C)offer the managers an equity stake in the firm
D)trust the managers' actions as they will always act in the owners' best interest
Answer: C
Q2) Which of the following is the firm's highest-level financial manager?
A)chief executive officer
B)chief financial officer
C)board of directors
D)corporate governance
Answer: B
Q3) Agency problems exist in which forms of business ownership?
A)sole proprietorship
B)S corporation
C)partnership
D)corporation
Answer: D
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) You are considering an investment in Fields and Struthers, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $52 million, paid taxes of $10 million, and its depreciation expense was $5 million. Fields and Struthers' gross fixed assets increased by $38 million from 2012 to 2013. The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million. Calculate Fields and Struthers' operating cash flow (OCF), investment in operating capital (IOC), and free cash flow (FCF) for 2013.
A)OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000
B)OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000
C)OCF = $42,000,000; IOC = $46,000,000; FCF = -$4,000,000
D)OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000
Answer: D
Q2) For which of the following would one expect the book value of the asset to differ widely from its market value?
A)accounts receivable
B)accounts payable
C)notes payable
D)equity
Answer: D
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4
Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the equity multiplier for the two firms.
A)Firm A: 15 times; Firm B: 1.00 times
B)Firm A: 10 times; Firm B: 1.11 times
C)Firm A: 10 times; Firm B: 9.99 times
D)Firm A: 20 times; Firm B: 1.11 times
Answer: B
Q2) Last year Mocha Java, Inc. had an ROA of 10 percent, a profit margin of 5 percent, and sales of $25 million. What is Mocha Java's total assets?
A)$0.125m.
B)$1.25m.
C)$12.5m.
D)$12m.
Answer: D
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) Determine the interest rate earned on a $450 deposit when $475 is paid back in one year.
A) 0.89 percent
B) 1.13 percent
C) 5.56 percent
D) 13.0 percent
Q2) You just won the lottery and after taxes you have $32,000. You want to have $1,000,000 by the time you are 65, which is 45 years from now. Assuming that you can earn 9 percent each year on your money, how much (in dollars) of the $32,000 must you invest today?
A) $17,891.62
B) $18,524.91
C) $20,692.24
D) $22,943.28
Q3) What is the future value of $1,000 deposited for one year earning 5 percent interest rate annually?
A) $1,000
B) $1,005
C) $1,050
D) $2,050
Page 6
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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Sample Questions
Q1) Bank A charges a 7.75 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 7 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?
A)Bank A: 7.75 percent, Bank B: 7.23 percent
B)Bank A: 7.85 percent, Bank B: 7.23 percent
C)Bank A: 7.25 percent, Bank B: 7.5 percent
D)Bank A: 7.85 percent, Bank B: 8.15 percent
Q2) If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the future value of the same annuity due?
A)$943.40
B)$1,000.00
C)$1,040.00
D)$1,060.00
Q3) What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?
A)$204.17
B)$440.80
C)$1,197.81
D)$1,938.96
Page 7
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) Which of the following is NOT a money market instrument?
A)treasury bills
B)commercial paper
C)corporate bonds
D)bankers' acceptances
Q2) Which of these is the interest rate that would exist on a default-free security if no inflation were expected?
A)nominal interest rate
B)real interest rate
C)default premium
D)market premium
Q3) Which of the following statements is correct?
A)The default risk premium of Baa 20-year corporate bonds over Aaa 20-year corporate bonds does not vary.
B)The market segmentation theory assumes that borrowers and investors do not want to shift from one maturity sector to another without an interest rate premium.
C)Real interest rates are the rates that are quoted in the news.
D)All of these choices are correct.
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Which of the following was the catalyst for the recent financial crisis?
A)corruption in the investment banking industry
B)widespread layoffs due to illegal alien hiring
C)defaults on subprime mortgages
D)All of these choices are correct.
Q2) Which of the following is NOT true about EE savings bonds?
A)Interest payments are received annually but are tax deductible.
B)About one in six Americans owns a savings bond.
C)These are tax deferred investments.
D)Paper bonds sell for one-half of their face value.
Q3) A 3.5 percent coupon municipal bond has 8 years left to maturity and has a price quote of 102.75. The bond can be called in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $1,000.)
A)2.35 percent
B)3.50 percent
C)4.64 percent
D)9.75 percent
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Page 9
Chapter 8: Valuing Stocks
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Sample Questions
Q1) All of the following are stock market indices EXCEPT
A)Standard & Poor's 500 Index.
B)Dow Jones Industrial Average.
C)Nasdaq Composite Index.
D)Mercantile 1000.
Q2) Which of the following is an electronic stock market without a physical trading floor?
A)American Stock Exchange
B)Mercantile Exchange
C)New York Stock Exchange
D)Nasdaq Stock Market
Q3) At your discount brokerage firm, it costs $10.50 per stock trade. How much money do you need to buy 100 shares of Apple (AAPL), which trades at $202.64?
A)$20,253.50
B)$20,264.00
C)$20,274.50
D)$21,314.00
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Modern portfolio theory is
A)a concept and procedure for combining securities into a portfolio to minimize risk.
B)a concept and procedure for combining securities into a portfolio to maximize return.
C)a concept and procedure for combining securities into a portfolio to maximize volatility.
D)a concept and procedure for combining securities into a portfolio to maximize dollar return.
Q2) Which of the following is correct?
A)Over a long time frame, stocks have performed better than long-term Treasury bonds.
B)Average stock returns are not an indication of what an investor may earn in any one year.
C)In some years, long-term Treasury bonds performed better than stocks.
D)All of these choices are correct.
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11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct?
A)This is an example of a market overreaction.
B)This is an example of a market underreaction.
C)This is an example of a semi-strong efficient market.
D)none of these choices are complete.
Q2) The study of the cognitive processes and biases associated with making financial and economic decisions is known as
A)asset pricing model.
B)behavioral finance.
C)efficient market hypothesis.
D)stock market bubble.
Q3) Which of the following is the reward investors require for taking risk?
A)required return
B)risk-free rate
C)risk premium
D)market risk premium
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Solar Shades has 8 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $13 per share, the preferred shares are selling for $30 per share, and the bonds are selling for 105 percent of par, what would be the weight used for equity in the computation of Solar Shades' WACC?
A)33.33 percent
B)44.35 percent
C)46.42 percent
D)66.61 percent
Q2) OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of par ($1,000), what weight should you use for debt in the computation of OMG's WACC?
A)32.74 percent
B)29.86 percent
C)25.79 percent
D)21.86 percent
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13
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) You are evaluating a project for your company. You estimate the sales price to be $50 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $75,000 per year. The project requires an initial investment of $25,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $5,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 13 percent. What change in NWC occurs at the end of year 1?
A)$13,000
B)$34,000
C)$50,000
D)$75,000
Q2) All of the following are incremental cash flows attributable to the project EXCEPT: A)opportunity costs.
B)financing costs.
C)substitutionary effects.
D)complementary effects.
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?
\[\begin{array} { l c c c c c c c }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\
\hline \text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \end{array}\]
A)NPV = $1,766.55; accept the project
B)NPV = $892.19; accept the project
C)NPV = $1,288.94; accept the project
D)NPV = -$104.73; reject the project
Q2) The least-used capital budgeting technique in industry is:
A)NPV.
B)IRR.
C)P\payback.
D)MIRR.
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) What must the rate be less than to be worth it to incur a compensating balance of $2,000 in order to get a 2 percent lower interest rate on a one-year, pure discount loan of $50,000?
A)The rate must be less than 48 percent.
B)The rate must be greater than 48 percent.
C)The rate must be greater than 48 percent.
D)The rate must be less than 48 percent.
Q2) Which of the following actions will cause a firm's net working capital to decrease?
A)The firm relaxes its credit policy.
B)The firm increases its usage of accruals.
C)The firm pays off a short-term bank loan with cash.
D)None of the options will cause a firm's net working capital to decrease.
Q3) Would it be worth it to incur a compensating balance of $2,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $100,000?
A)Yes
B)No
C)Not enough information is given to determine
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Page 16
Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) Which of the following defines iterative calculation?
A)The practice of overriding a spreadsheet program or calculator in order to be able to compute an answer so as to take into account circular dependency in a system of equations.
B)The practice of ensuring there are no circular dependencies in a system of equations.
C)The practice of letting a spreadsheet program or calculator repeatedly compute an answer so as to take into account circular dependency in a system of equations.
D)The practice of using the AFN formula to calculate an answer in order to avoid circular dependencies in a system of equations.
Q2) Which of the following will increase the additional funds needed from external sources?
A)The firm's profit margin increases
B)The firm's sales forecast is decreased
C)The firm reduces its usage of trade credit
D)The firm's retention ratio is increased
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17
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
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Sample Questions
Q1) Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 108 percent of par ($1,000), what are the firm's current capital structure weights?
A)Weight of Equity = 25.23 percent; Weight of Debt = 74.77 percent
B)Weight of Equity = 84.77 percent; Weight of Debt = 15.23 percent
C)Weight of Equity = 74.77 percent; Weight of Debt = 25.23 percent
D)Weight of Equity = 32.23 percent; Weight of Debt = 67.77 percent
Q2) A firm faces a 30 percent tax rate and has $700m in assets, currently financed entirely with equity. Equity is worth $100 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $100m. The firm is considering switching to a 45 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. How much will ROE change if they switch to the proposed capital structure?
A)There will be no change in the firm's ROE.
B)The ROE will increase by 3.50 percent.
C)The ROE will increase by 2.45 percent.
D)The ROE will increase by 0.02 percent.Step 1: Find Interest expense: 700m *0.45 * 0.10 = $31.5m per year;
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Chapter 17: Sharing Firm Wealth: Dividends, Share
Repurchases, and Other Payouts
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Sample Questions
Q1) Suppose a firm pays total dividends of $200,000 out of net income of $2.5 million. What would the firm's payout ratio be?
A)0.08
B)0.80
C)8.00
D)80.00
Q2) Suppose a firm has a retention ratio of 33 percent and net income of $6.25 million. How much does it pay out in dividends?
A)$4,187,500
B)$2,062,500
C)$1,987,500
D)$4,375,500
Q3) Which of the following is when the Board of Directors announces its intention to pay a dividend?
A)Declaration date
B)Ex-dividend date
C)Record date
D)Payment date
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Chapter 18: Issuing Capital and the Investment Banking Process
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Sample Questions
Q1) During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $25,000,000, of which you took down $20,000,000. It is now the end of the loan commitment period and your bank is asking you to pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $20,000,000) of $110,000 on this loan commitment. You remember that the back-end fee was 60 basis points. Calculate the front-end fee on this loan commitment.
A)60 basis points
B)32 basis points
C)40 basis points
D)16 basis points
Q2) Most business loans today are:
A)pre-negotiated lines of credit.
B)spot loans.
C)collateralized lines of credit.
D)None of the options.
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Page 20
Chapter 19: International Corporate Finance
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Sample Questions
Q1) Convert the following indirect quote to a dollar direct quote: $1 = 0.5467 Latvian lat
A)$1.5467
B)$0.15467
C)$0.018292
D)$1.8292
Q2) Which of the following is NOT an example of how a company could hedge to reduce currency risk?
A)Buying futures contracts
B)Buying options
C)Currency swaps
D)Fixed peg arrangements
Q3) In the late 1990s, many East Asian currencies suddenly and dramatically devalued. What is the percentage change in the value of a $75 million investment in Indonesia when the exchange rate changes from $1 = 1,000 rupiah to $1 = 7,000 rupiah?
A)14.29 percent
B)85.71 percent
C)12.5 percent
D)87.5 percent
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) Baby Supplies is considering a merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a sales volume (JP) of $975,000. For a sales volume of $3.125 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 19.5 percent.
A)Decrease of $609,375
B)Decrease of $90,625
C)Decrease of $9,375
D)Decrease of $159,375
Q2) Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?
A)Vertical
B)Conglomerate
C)Product extension
D)Market extension
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