Financial Management
Final Test Solutions
Course Introduction
Financial Management is a comprehensive course that introduces students to the principles and practices essential for effective financial decision-making within organizations. The course covers key topics such as financial analysis, planning, and control; valuation of assets; capital budgeting; risk and return; cost of capital; and issues related to working capital management. Through practical applications and case studies, students develop a foundational understanding of how financial managers use quantitative data to maximize firm value, allocate resources efficiently, and ensure long-term organizational sustainability in a dynamic economic environment.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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18 Chapters
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which one of the following statements correctly applies to a sole proprietorship?
A)The business entity has an unlimited life.
B)The ownership can easily be transferred to another individual.
C)The owner enjoys limited liability for the firm's debts.
D)Debt financing is easy to arrange in the firm's name.
E)Obtaining additional equity is dependent on the owner's personal finances.
Answer: E
Q2) Which one of the following is a capital structure decision?
A)determining the optimal inventory level
B)establishing the preferred debt-equity level
C)selecting new equipment to purchase
D)setting the terms of sale for credit sales
E)determining when suppliers should be paid
Answer: B
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3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) The market value of land is equal to:
A)the anticipated selling price if the land were sold today
B)the cost of the land at the time the current owner acquired it
C)the initial cost plus the value of all improvements added
D)the book value as recorded on the latest financial statement
E)the historical cost adjusted for annual depreciation
Answer: A
Q2) Delivery trucks are classified as:
A)noncash expenses
B)current liabilities
C)current assets
D)tangible fixed assets
E)intangible fixed assets
Answer: D
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Which of the following are determinants of a firm's sustainable rate of growth?
I.amount of sales generated from each dollar invested in assets
II.amount of debt per dollar of equity
III.amount of current assets per dollar of current liabilities
IV.percentage of net income distributed as dividends
A)I and III only
B)II and IV only
C)I,II and IV only
D)II,III and IV only
E)I,II,III and IV
Answer: C
Q2) Manly Manufacturers Pty Ltd has a profit margin of 7.5 per cent and a dividend payout ratio of 30 per cent.What is the retention ratio?
A)10.66 per cent
B)27.33 per cent
C)54.60 per cent
D)70.00 per cent
E)78.20 per cent
Answer: D
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Page 5
Chapter 4: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Today,Courtney wants to invest less than $5000 with the goal of receiving $5000 back some time in the future.Which one of the following statements is correct?
A)The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.
B)The lower the rate of interest she earns,the shorter the time she will have to wait to reach her goal.
C)She will have to wait longer if she earns 6 per cent compound interest instead of 6 per cent simple interest.
D)The length of time she has to wait to reach her goal is directly related to the interest rate she earns.
E)The period of time she has to wait decreases as the amount she invests today increases.
Q2) The value of an investment after one or more periods of time is called the:
A)simple value
B)present value
C)discounted value
D)future value
E)interest on interest value
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) Which one of the following is the correct formula for computing the future value of an annuity?
A)C \(\times\) (Future value factor - 1)/ r
B)C \(\times\) (Future value factor + 1)/ r
C)C / (Future value factor - 1)+ r
D)C \(\times\) (Future value factor + 1) \(\times\) r
E)C - (Future value factor - 1)/ r
Q2) Peter borrowed $10 000 from his bank and agreed to pay $1000 on the principal plus interest each year.This is an example of a(n):
A)interest-only loan
B)amortised loan
C)perpetuity loan
D)pure discount loan
E)lump sum loan
Q3) The effective annual rate is defined as the interest rate that is:
A)compounded at regular intervals throughout the year
B)equal to a monthly rate multiplied by twelve
C)computed by multiplying the rate per period by the number of periods per year
D)expressed as if it were compounded once per year
E)compounded only once over a multi-year period
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) When interest payments on a bond are made directly to the owner of record,the bond is said to be in _______ form.
A)registered
B)secure
C)street
D)coupon
E)bearer
Q2) On which one of the following dates is the principal amount of a bond repaid?
A)discount date
B)issue date
C)coupon date
D)maturity date
E)face date
Q3) Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?
A)real rate of return
B)default risk premium
C)taxability risk premium
D)interest rate risk premium
E)bond premium
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) If shareholders are granted a preemptive right they will be:
A)granted shares that receive additional voting privileges
B)given the choice of receiving dividends in cash or in additional shares of stock
C)paid dividends prior to the preferred shareholders during the pre-emptive period
D)able to determine who the candidates should be for any open seats on the board
E)given the first right to purchase any new shares that are issued
Q2) Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years.Yesterday,the firm announced the dividend will increase next year by 10 per cent and will stay at the level through year three,after which time the dividends will increase by 2 per cent annually.The required return on this stock is 12 per cent.What is the current value per share?
A)$25.51
B)$26.02
C)$24.57
D)$26.84
E)$26.08
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) The internal rate of return identifies:
A)the minimum acceptable discount rate
B)the benefit-cost ratio
C)the average profit from a project
D)none of the given answers
E)all of the given answers
Q2) The Bondi Pizza Palace is considering opening a new store at a start-up cost of $700 000.The initial investment will be depreciated straight line to zero over the 15-year life of the project.Based on the income projections shown below what is the average accounting rate of return?
A)13.05 per cent
B)13.68 per cent
C)14.01 per cent
D)14.59 per cent
E)14.76 per cent
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10
Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) An opportunity cost is defined as:
A)the increased cost incurred when a new project is accepted
B)the increased sales of an existing product if a new product is added to a firm's offerings
C)a cost that has been incurred and cannot be recouped
D)the potential lost sales that are forfeited when a project is rejected
E)the most valuable alternative that is given up if a particular investment is undertaken
Q2) Kate's Store is considering three mutually exclusive options for the use of the new addition to her facility.Kate can either expand the women's clothing section,add a new footwear section,or expand into home linens.She estimates annual profits of either $120 000 from the clothing,$104 000 from the footwear,or $98 000 from the home linens section,should that section be chosen for the expansion.What is the opportunity cost of her most profitable option?
A)$98 000
B)$104 000
C)$120 000
D)$202 000
E)$224 000
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11
Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) The Reserve Bank of Australia expects the inflation rate in Australia to be 4.50% and financial analysts evaluate the risk-premium on small company shares to be 3.70% for the year.The Commonwealth Government's T-notes yield is expected to be 8% for the next year.What rate of return is expected to be earned on small-company stocks over the next year?
A)8.20%
B)4.50%
C)11.20%
D)11.70%
E)12.23%
Q2) The standard deviation measures the _____ of a security's returns over time.
A)average value
B)frequency
C)volatility
D)mean
E)arithmetic average
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Chapter 11: Risk and Return
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Sample Questions
Q1) Northern Wear stock has an expected return of 14.6 per cent.Given the information below,what is the expected return on this stock if the economy is normal?
A)16 per cent
B)13 per cent
C)23 per cent
D)21 per cent
E)18 per cent
Q2) The risk associated with the overall market is referred to as _____ risk.
A)portfolio
B)total
C)diversified
D)unsystematic
E)systematic
Q3) Which one of the following best describes a portfolio?
A)investment in a risk-free security
B)security equally as risky as the overall market
C)group of assets held by an investor
D)risky security
E)new issue of stock
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Page 13
Chapter 12: Long-Term Financing
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Sample Questions
Q1) The 7 per cent preferred stock of Winslow and Winslow is selling for $54 a share.What is the firm's cost of preferred shares (face value $100)?
A)12.96 per cent
B)17.56 per cent
C)3.78 per cent
D)7.71 per cent
E)18.52 per cent
Q2) An increase in the market value of a preferred share will _____ the cost of the preferred share.
A)increase
B)not affect
C)either increase or decrease
D)decrease
E)either not affect or increase
Q3) Which one of the following statements is accurate for a levered firm?
A)A firm's WACC will decrease whenever the firm's tax rate decreases.
B)The subjective approach totally ignores a firm's own WACC.
C)WACC should be used as the required return for all proposed investments.
D)An increase in the market risk premium will decrease a firm's WACC.
E)A reduction in the risk level of a firm will tend to decrease the firm's WACC.
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) If we observe capital structures across the industries in Australia,what industry typically has the highest debt-equity ratios,excluding banks?
A)property trusts
B)capital goods
C)gold mining
D)food and staples retailing
E)utilities
Q2) Manly Manufacturing is comparing two different capital structures.Plan I would result in 23 000 shares and $320 000 in debt.Plan II would result in 17 000 shares and $260 000 in debt.The interest rate on the debt is 10 per cent.Ignoring taxes,EPS will be identical for Plans I and II when EBIT equals which one of the following?
A)$9000
B)$10 750
C)$8550
D)$10 400
E)$9600
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Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) Twelve days ago,ANZ bank declared a dividend of $1.34 a share.The ex-dividend date is tomorrow.All else constant,which one of the following is the best estimate of ANZ's opening share price tomorrow?
A)$1.34 lower than today's closing price
B)the same as today's closing price since the dividend is expected
C)today's closing price minus an amount approximately equal to the after-tax value of the dividend
D)$1.34 higher than today's closing price
E)today's closing price plus an amount approximately equal to the after-tax value of the dividend
Q2) A company has decided to rationalise its share structure.The current pre-split price is $25,and the company declares a five-for-three split.Calculate the theoretical ex-split share price.
A)$15
B)$23
C)$41.67
D)$17
E)$27
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) Lewis Materials recently offered 15 000 shares but only received payment for 12 500 shares since that was all the shares the underwriters could sell.What type of underwriting was this?
A)private placement
B)firm commitment
C)rights issue
D)best-efforts
E)syndicated
Q2) Sly's just arranged a three-year direct business loan with his bank.Which one of the following terms matches this loan arrangement?
A)new equity issue
B)rights offer
C)private placement
D)term loan
E)bond issue
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) Allison Adventures has the following estimated sales: Sales
Purchases are equal to 65 per cent of the following quarter's sales.The accounts receivable period is 30 days and the accounts payable period is 45 days.Assume that there are 30 days in each month.Allison Adventures will purchase _____ of goods in the third quarter and pay their suppliers _____ during the third quarter.
A)$2080;$2178
B)$1885;$2178
C)$2275;$2178
D)$1885;$1983
E)$2080;$1983
Q2) Which one of the following actions is indicative of a restrictive short-term financial policy?
A)expanding the number of inventory items carried
B)minimising the cash balances held by the firm
C)granting increasing amounts of credit to customers
D)investing relatively large amounts in marketable securities
E)increasing the firm's investment in the current accounts
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18
Chapter 17: Working Capital Management
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Sample Questions
Q1) Which one of the following is the graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy?
A)economic credit function
B)credit analysis
C)credit cost curve
D)accounts receivables aging
E)optimal credit curve
Q2) Which one of the following best illustrates the concept of derived demand?
A)Retail stores have higher sales around the holiday season than in other seasons of the year.
B)Restaurant sales are rising because unemployment is falling.
C)A windscreen company has to step up production because motor vehicle sales are increasing.
D)A grocery store is selling more fresh fruits and vegetables because people are improving their diets.
E)A minimum wage worker tends to buy more home-brand products than do more highly-paid professionals.
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) Which one of the following statements is correct?
A)New Zealand uses the same currency as Australia and that is the A$.
B)Exchange rates are adjusted each morning and held constant until the next morning.
C)All of South America uses the peso as their currency.
D)The foreign exchange market is the largest financial market in the world.
E)The four most common currencies traded in the foreign exchange market are the US dollar,franc,euro,and peso.
Q2) Currently,you can exchange 100 for A$132.66.The inflation rate in Europe is expected to be 3.1 per cent as compared to 3.6 per cent in Australia.Assuming that relative purchasing power parity exists,what should the exchange rate be 5 years from now?
A) 0.7351
B) 0.7367
C) 0.7298
D) 0.7405
E) 0.7423
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