Financial Management
Final Test Solutions
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in the effective management of an organizations financial resources. The course covers essential topics such as financial statement analysis, budgeting, working capital management, capital structure, investment decisions, and risk assessment. Students will learn how to apply financial concepts and analytical tools to make informed decisions that maximize organizational value. Emphasis is placed on the role of financial managers in planning, acquiring, and utilizing funds efficiently, ensuring students gain both practical skills and theoretical understanding necessary for careers in finance and business administration.
Recommended Textbook
Corporate Finance 9th Edition by Stephen A. Ross
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2336 Verified Questions
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and information system functions is the:
A)treasurer.
B)director.
C)controller.
D)chairman of the board.
E)chief executive officer.
Answer: C
Q2) Which type of business organization has all the respective rights and privileges of a legal person?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) Your firm has net income of $198 on total sales of $1,200.Costs are $715 and depreciation is $145.The tax rate is 34%.The firm does not have interest expenses.What is the operating cash flow?
A)$93
B)$241
C)$340
D)$383
E)$485
Answer: D
Q2) Refer to the above Table.What is the change in the net working capital from 2007 to 2008?
A)$1,235
B)$1,035
C)$1,335
D)$3,405
E)$4,740
Answer: C
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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) Mario's Home Systems has sales of $2,800, cost of goods sold of $2,100, inventory of $500, and accounts receivable of $400.How many days, on average, does it take Mario's to sell its inventory?
A)65.2 days
B)85.2 days
C)86.9 days
D)96.9 days
E)117.3 days
Answer: C
Q2) The quick ratio is measured as:
A)current assets divided by current liabilities.
B)cash on hand plus current liabilities, divided by current assets.
C)current liabilities divided by current assets, plus inventory.
D)current assets minus inventory, divided by current liabilities.
E)current assets minus inventory minus current liabilities.
Answer: D
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Your rich uncle establishes a trust in your name and deposits $150,000 in it.The trust pays a guaranteed 4% rate of return.How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis?
A)$3,750
B)$4,000
C)$4,500
D)$5,400
E)$6,000
Q2) Your car dealer is willing to lease you a new car for $299 a month for 60 months.Payments are due on the first day of each month starting with the day you sign the lease contract.If your cost of money is 4.9%, what is the current value of the lease?
A)$15,882.75
B)$15,906.14
C)$15,947.61
D)$16,235.42
E)$16,289.54
Q3) What is the different between an ordinary annuity and an annuity due? Which occurs more in practice? Give a common example of both.
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) Explain the differences and similarities between net present value (NPV) and the profitability index (PI).
Q2) A mutually exclusive project is a project whose:
A)acceptance or rejection has no effect on other projects.
B)NPV is always negative.
C)IRR is always negative.
D)acceptance or rejection affects other projects.
E)cash flow pattern exhibits more than one sign change.
Q3) The internal rate of return (IRR):
I.rule states that a typical investment project with an IRR that is less than the required rate should be accepted.
II.is the rate generated solely by the cash flows of an investment.
III.is the rate that causes the net present value of a project to exactly equal zero.
IV.can effectively be used to analyze all investment scenarios.
A)I and IV only
B)II and III only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
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Page 7
Chapter 6: Making Capital Investment Decisions
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Sample Questions
Q1) What is the amount of the after-tax salvage value of the equipment?
A)$134,000
B)$150,000
C)$195,400
D)$250,000
E)$300,000
Q2) The cash flows of a new project that come at the expense of a firm's existing projects are called:
A)salvage value expenses.
B)net working capital expenses.
C)sunk costs.
D)opportunity costs.
E)erosion costs.
Q3) Tax shield refers to a reduction in taxes created by:
A)a reduction in sales.
B)an increase in interest expense.
C)noncash expenses.
D)a project's incremental expenses.
E)opportunity costs.
Q4) Explain the half year convention used in MACRS depreciation.
Page 8
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Chapter 7: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) Which of the following statements are correct concerning the accounting break-even point?
I.The net income is equal to zero at the accounting break-even point.
II.The net present value is equal to zero at the accounting break-even point.
III.The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin.
IV.The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.
A)I and III only
B)I and IV only
C)II and III only
D)II and IV only
E)I, II, and IV only
Q2) All else constant, as the variable cost per unit increases, the:
A)contribution margin decreases.
B)sensitivity to fixed costs decreases.
C)degree of operating leverage decreases.
D)operating cash flow increases.
E)net profit increases.
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) The annual coupon of a bond divided by its face value is called the bond's:
A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.
Q2) A General Co.bond has an 8% coupon and pays interest annually.The face value is $1,000 and the current market price is $1,020.50.The bond matures in 20 years.What is the yield to maturity?
A)7.79%
B)7.82%
C)8.00%
D)8.04%
E)8.12%
Q3) The yield to maturity is:
A)the rate that equates the price of the bond with the discounted cash flows.
B)the expected rate to be earned if held to maturity.
C)the rate that is used to determine the market price of the bond.
D)equal to the current yield for bonds priced at par.
E)All of the above.
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Chapter 9: Stock Valuation
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Sample Questions
Q1) The Felix Corp.projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 years before growing at 8% indefinitely thereafter.The equity has a required return of 10% in the market.The price of the stock should be ____.
A)$9.38
B)$17.05
C)$41.67
D)$59.80
E)$62.38
Q2) The value of common stock today depends on:
A)the expected future holding period and the discount rate.
B)the expected future dividends and the capital gains.
C)the expected future dividends, capital gains and the discount rate.
D)the expected future holding period and capital gains.
E)None of the above.
Q3) What are the components of the required rate of return on a share of stock? Briefly explain each component.
Q4) A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms.How is this possible? Does this violate our basic principle of stock valuation? Explain.
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Which one of the following is a correct statement concerning risk premium?
A)The greater the volatility of returns, the greater the risk premium.
B)The lower the volatility of returns, the greater the risk premium.
C)The lower the average rate of return, the greater the risk premium.
D)The risk premium is not correlated to the average rate of return.
E)The risk premium is not affected by the volatility of returns.
Q2) You purchased 200 shares of stock at a price of $36.72 per share.Over the last year, you have received total dividend income of $322.What is the dividend yield?
A)3.2%
B)4.4%
C)6.8%
D)9.2%
E)11.4%
Q3) A capital gain occurs when:
A)the selling price is less than the purchase price.
B)the purchase price is less than the selling price.
C)there is no dividend paid.
D)there is no income component of return.
E)never, as they can not exist.
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Page 12
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z.Stock X has a beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04.What is the beta of your portfolio?
A)1.01
B)1.05
C)1.09
D)1.14
E)1.18
Q2) A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in
Security D.Security C has an expected return of 8% and a standard deviation of 6%.Security D has an expected return of 10% and a standard deviation of 10%.The securities have a coefficient of correlation of 0.6.Which of the following values is closest to portfolio return and variance?
A).090; .0081
B).095; .001675
C).095; .0072
D).100; .00849
E)Cannot calculate without the number of covariance terms.
Q3) Explain in words what beta is and why it is important.
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Page 13
Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Systematic risk is defined as:
A)a risk that specifically affects an asset or small group of assets.
B)any risk that affects a large number of assets.
C)any risk that has a huge impact on the return of a security.
D)the random component of return.
E)None of the above.
Q2) The unexpected return on a security, U, is made up of:
A)market risk and systematic risk.
B)systematic risk and unsystematic risk.
C)idiosyncratic risk and unsystematic risk.
D)expected return and market risk.
E)expected return and idiosyncratic risk.
Q3) Suppose the JumpStart Corporation's common stock has a beta of 0.8.If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is:
A)3.2%.
B)4.0%.
C)7.2%.
D)8.0%.
E)9.0%.
Page 14
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Chapter 13: Risk, Cost of Capital, and Capital Budgeting
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Sample Questions
Q1) The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:
A)Security Market Line.
B)Capital Market Line.
C)characteristic line.
D)risk line.
E)None of the above.
Q2) Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index, calculate Top Black's covariance and beta.
Q3) A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________.
A)low fixed cost of production; low fixed financial costs
B)high variable cost of production; high variable financial costs
C)high fixed costs of production; high fixed financial costs
D)low costs of production; high fixed financial costs
E)high fixed costs of production; low variable financial costs
Q4) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) If a market is strong form efficient, it also implies that:
A)semistrong form efficiency holds.
B)weak form efficiency holds.
C)one cannot earn abnormal returns with inside information.
D)Both A and C.
E)A, B and C.
Q2) Do you think the lessons from capital market history will hold for each year in the future?
That is, as an example, if you buy small stocks will your investment always outperform U.S.Treasury bonds?
Q3) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
Q4) Efficient capital markets are financial markets:
A)in which current market prices reflect available information.
B)in which current market prices reflect the present value of securities.
C)in which there is no excess profit from using available information.
D)All of the above.
E)None of the above.
Q5) Define the three forms of market efficiency.
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) If cumulative voting is permitted:
A)the total number of votes a shareholder has is equal to the number of shares owned.
B)the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.
C)the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.
D)the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.
E)None of the above.
Q2) Michael's Motor Scooters has 1,000 shares outstanding each with a par value of $0.05.If they are sold to shareholders at $5 each, what would the capital surplus be?
A)$4,400
B)$4,500
C)$4,750
D)$4,950
E)$5,000
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17
Chapter 16: Capital Structure: Basic Concepts
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Q1) The increase in risk to equityholders when financial leverage is introduced is evidenced by:
A)higher EPS as EBIT increases.
B)a higher variability of EPS with debt than all equity.
C)increased use of homemade leverage.
D)equivalence value between levered and unlevered firms in the presence of taxes.
E)None of the above.
Q2) In each of the theories of capital structure the cost of equity rises as the amount of debt increases.So why don't financial managers use as little debt as possible to keep the cost of equity down? After all, isn't the goal of the firm to maximize share value and minimize shareholder costs?
Q3) The interest tax shield is a key reason why:
A)the required rate of return on assets rises when debt is added to the capital structure.
B)the value of an unlevered firm is equal to the value of a levered firm.
C)the net cost of debt to a firm is generally less than the cost of equity.
D)the cost of debt is equal to the cost of equity for a levered firm.
E)firms prefer equity financing over debt financing.
Q4) Explain homemade leverage and why it matters.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) The Aggie Company has EBIT of $50,000 and market value debt of $100,000 outstanding with a 9% coupon rate.The cost of equity for an all equity firm would be 14%.Aggie has a 35% corporate tax rate.Investors face a 20% tax rate on debt receipts and a 15% rate on equity.Determine the value of Aggie.
A)$120,000
B)$162,948
C)$258,537
D)$263,080
E)$332,143
Q2) Conflicts of interest between stockholders and bondholders are known as:
A)trustee costs.
B)financial distress costs.
C)dealer costs.
D)agency costs.
E)underwriting costs.
Q3) Assume that all earnings are paid out as dividends.Now consider the fact that Louis must pay personal tax on the firm's cash flow.Louis pays taxes on interest at a rate of 33%, but pays taxes on dividends at a rate of 28%.Calculate the total cash flow to Louis after he pays personal taxes.
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Sample Questions
Q1) Quick-Link has debt outstanding with a market value of $200 million, and equity outstanding with a market value of $800 million.Quick-Link is in the 34% tax bracket, and its debt is considered risk free.Merrill Lynch has provided an equity beta of 1.50.Given a risk free rate of 3% and an expected market return of 12%, calculate the discount rate for a scale enhancing project in the hypothetical case that Quick-Link is all equity financed.
Q2) An appropriate guideline to adopt when determining the valuation formula to use is:
A)never use the APV approach.
B)use APV if the project is far different from scale enhancing.
C)use WACC if the project is close to being scale enhancing.
D)Both A and C.
E)Both B and C.
Q3) Using APV, the analysis can be tricky in examples of:
A)tax subsidy to debt.
B)interest subsidy.
C)flotation costs.
D)All of the above.
E)Both A and C.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy.Explain the logic behind this conclusion.Next, describe three real-world factors that may cause one dividend policy to be preferable to another.
Q2) A firm has a market value equal to its book value.Currently, the firm has excess cash of $800 and other assets of $5,200.Equity is worth $6,000.The firm has 600 shares of stock outstanding and net income of $700.The firm has decided to spend all of its excess cash on a share repurchase program.How many shares of stock will be outstanding after the stock repurchase is completed?
A)480 shares
B)500 shares
C)520 shares
D)540 shares
E)560 shares
Q3) Schaeffer Shippers announced on May 1, 2009, that it will pay a dividend of $5.00 per share on June 15 to all holders on record as of May 31<sup>st</sup>.The firm's stock price is currently at $70 per share.Assume that all investors are in the 33% tax bracket.Given that the ex-dividend date is May 29, what should happen to Schaeffer's stock price on May 29?
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Page 21
Chapter 20: Issuing Securities to the Public
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Q1) Potential investors learn of the information concerning the firm and its new issue from the:
A)pre-underwriting negotiating meeting.
B)red herring.
C)letter of commitment.
D)emails from their former finance professor.
E)rights offering.
Q2) Explain the advantages of a shelf-registration to an issuer.How can timeliness of disclosure and a potential market overhang work against a shelf-registration?
Q3) The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share.The stock is now selling ex-rights for $26.The price rights-on is:
A)$22.00
B)$24.00
C)$26.00
D)$28.00
E)impossible to determine without the cum-rights price.
Q4) Discuss what a Dutch auction is and how it works.
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Page 22
Chapter 21: Leasing
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Q1) For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?
A)The lessee can purchase the asset below fair market value at the end of the lease.
B)The lease transfers ownership of the asset to the lessee by the end of the lease.
C)The lease term is more than 75% of the asset's economic life.
D)The present value of the lease payments is more than 90% of the asset's market value at lease inception.
E)All of the above would lead to the lease being considered a capital lease.
Q2) The appropriate discount rate for valuing a financial lease is:
A)the firm's after-tax weighted average cost of capital.
B)the after-tax required return on assets of risks similar to the leased asset.
C)the after-tax cost of secured borrowing.
D)Either A or B.
E)All of the above.
Q3) What are some of the advantages and disadvantages of leasing?
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Chapter 22: Options and Corporate Finance
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Q1) A _____ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.
A)futures contract
B)call option
C)put option
D)swap
E)forward contract
Q2) Which of the following statements are correct concerning option values?
I.The value of a call increases as the price of the underlying stock increases.
II.The value of a call decreases as the exercise price increases.
III.The value of a put increases as the price of the underlying stock increases.
IV.The value of a put decreases as the exercise price increases.
A)I and III only
B)II and IV only
C)I and II only
D)II and III only
E)I, II, and IV only
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 24
Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) The option to abandon is:
A)a real option.
B)usually of little value because of the cost associated with abandonment.
C)irrelevant in capital budgeting analysis.
D)nearly always less relevant the option to expand.
E)All of the above.
Q2) Rejecting an investment today forever may not be a good choice because:
A)the size of the firm will decline.
B)there are always errors in the estimation of NPVs.
C)the option value is negative.
D)the company's foregoing the future rights or option to the investment.
E)None of the above.
Q3) The most correct method to determine the current value of future payoffs would be to:
A)take the discounted expected value at the risk-free rate.
B)take the expected value using the probabilities.
C)take the discounted expected value using the risk-neutral probabilities and the risk free rate.
D)sum the payoffs discounted at the risk free rate.
E)None of the above.
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:
A)the effects of risk are opposite on the two value components and tend to cancel each other out.
B)if the firm is high risk, the option premium will be higher while the straight bond value is fixed.
C)only risky companies issue these instruments.
D)the equity value is dependent on current risks only, not the future risk at conversion.
E)None of the above.
Q2) A convertible preferred stock is similar to a convertible bond except:
A)the conversion ratio is fixed (given).
B)the conversion price is fixed (given).
C)the time to maturity is infinite.
D)All of the above.
E)None of the above.
Q3) Why are warrants and convertibles issued?
Q4) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
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Chapter 25: Derivatives and Hedging Risk
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Q1) A potential disadvantage of forward contracts versus futures contracts is:
A)the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market.
B)the incentive for a particular party to default.
C)that the buyers and sellers don't know each other and never meet.
D)All of the above.
E)Both A and C.
Q2) Which of the following terms is not part of a forward contract?
A)Making delivery
B)Taking delivery
C)Delivery instrument
D)Cash transaction
E)None of the above.
Q3) Futures market transactions are used to reduce risk.Risk may not be totally offset if:
A)the two instruments have different maturities.
B)payoff schedules of the two instruments are different.
C)the volatility of the two instruments are different.
D)the price movements are not perfectly correlated.
E)All of the above.
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Page 27
Chapter 26: Short-Term Finance and Planning
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Q1) The manager responsible for the accounting information concerning cash flows is the:
A)controller.
B)payables manager.
C)credit manager.
D)purchasing manager.
E)production manager.
Q2) An increase in which one of the following will decrease the cash cycle, all else equal?
A)Payables turnover
B)Days sales in inventory
C)Operating cycle
D)Inventory turnover rate
E)Accounts receivable period
Q3) Which of the following decreases cash?
A)a decrease in current assets other than cash.
B)a decrease in fixed assets.
C)an increase in current liabilities.
D)A and C.
E)None of the above
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Chapter 27: Cash Management
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Q1) Firms would need to hold zero cash when transactions related needs are:
A)greater than cash inflows.
B)less than cash inflows.
C)not perfectly synchronized with cash inflows.
D)perfectly synchronized with cash inflows.
E)None of the above.
Q2) What is the firm's net float?
A)$-2,500
B)$-2,400
C)$2,400
D)$2,500
E)None of the above.
Q3) The major difference between a check and a draft is that:
A)the draft is not drawn on the bank but on the issuer.
B)the bank must present the draft to the firm for acceptance.
C)after acceptance of the draft the firm must deposit the funds to make payment.
D)All of the above.
E)None of the above.
Q4) Discuss the Check Clearing Act for the 21<sup>st</sup> Century, known as Check 21 and how it will impact floats.
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Chapter 28: Credit and Inventory Management
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Q1) Aging schedules are flawed because they:
A)do not identify specific customers.
B)show the percent of accounts that are past due.
C)only give the yearly or periodic average of account age.
D)All of the above.
E)None of the above.
Q2) On September 1, a firm grants credit with terms of 2/10 net 45.The creditor:
A)must pay a penalty of 2% when payment is made later than September 1<sup>st</sup>.
B)must pay a penalty of 10% when payment is made later than 2 days after September 1<sup>st</sup>.
C)receives a discount of 2% when payment is made at least 10 days before September 1<sup>st</sup>.
D)receives a discount of 2% when payment is made before September 1<sup>st</sup> and pays a penalty of 10% if payment is made after September 1<sup>st</sup>.
E)receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1<sup>st</sup>.
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Chapter 29: Mergers and Acquisitions
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Q1) Firm Q is being acquired by Firm S for $30,000 worth of Firm S stock.The incremental value of the acquisition is $2,000.Firm Q has 1,900 shares of stock outstanding at a price of $15 a share.Firm S has 1,500 shares of stock outstanding at a price of $40 a share.What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $30,167?
A)$167
B)$225
C)$333
D)$425
E)$433
Q2) Defensive merger tactics are designed to thwart unwanted takeovers and mergers.Do such activities work to the advantage of stockholders all of the time? Are these types of activities ethical? Who do you think benefits most from these activities?
Q3) Firm A and Firm B join to create Firm AB.This is an example of:
A)a tender offer.
B)an acquisition of assets.
C)an acquisition of stock.
D)a consolidation.
E)Both B and C.
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Page 31
Chapter 30: Financial Distress
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Q1) The absolute priority rule:
A)is set to ensure senior claims are paid first.
B)is the priority rule in liquidations.
C)distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.
D)All of the above.
E)None of the above.
Q2) Perhaps equally, if not more damaging are the indirect costs of financial distress.Some examples of indirect costs are:
A)loss of current customers.
B)loss of business reputation.
C)management consumed in survival and not on a strategic direction.
D)All of the above.
E)Both A and B.
Q3) Refer to the above scenario.How much should the secured creditors receive?
A)$1,000,000
B)$1,250,000
C)$1,333,333
D)$1,500,000
E)None of the above.
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Chapter 31: International Corporate Finance
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Q1) The idea that the exchange rate adjusts to keep buying power constant among currencies is called:
A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.
Q2) You are analyzing a very low-risk project with an initial cost of £120,000.The project is expected to return £40,000 the first year, £50,000 the second year and £60,000 the third and final year.The current spot rate is £.54.The nominal return relevant to the project is 4 percent in the U.K.and 3 percent in the U.S.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?
A)$33,232
B)$34,040
C)$34,067
D)$34,422
E)$35,009
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