Financial Management
Midterm Exam
Course Introduction
Financial Management is a comprehensive course that introduces students to the fundamental concepts and techniques necessary for effective management of financial resources within organizations. Topics covered include financial analysis, planning and forecasting, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. The course also explores financing decisions, dividend policies, and the impact of financial markets and institutions on business operations. Through case studies and problem-solving exercises, students develop skills to make informed financial decisions that contribute to organizational value and strategic objectives.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following statements is true of the terms under which companies compete?
A) The governments of subsidiary countries establish the terms of competition and trade on various transactions.
B) The terms under which companies compete is determined by the fluctuations in the exchange rate of the currencies of subsidiary countries.
C) The terms under which companies compete is determined by direct negotiation between the host government and the multinational corporation.
D) The ability to curtail unprofitable operations determines the terms under which companies compete.
E) The terms under which companies compete in a competitive marketplace are established by the host government.
Answer: C
Q2) The term multinational corporation is used to describe a firm that operates in two or more countries.
A)True
B)False
Answer: True
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Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) An analysis of a firm's financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.
A) sensitivity analysis
B) the DuPont chart
C) ratio analysis
D) benchmarking analysis
E) trend analysis
Answer: E
Q2) _____ is an example of cash flow from an investing activity in a cash flow statement.
A) Payment of dividends
B) Repurchase of stock
C) Purchase of equipment
D) Purchase of inventory
E) Repayment of debt
Answer: C
Q3) The book value of shares are often equal to their market value.
A)True
B)False
Answer: False
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) A stock with a dual listing is _____.
A) registered to be traded in more than one money market
B) registered to be traded in the money market as well as the capital market
C) registered to be traded in the debt market and the stock market
D) registered to be traded in more than one capital market
E) registered to be traded in the primary market as well as the secondary market
Answer: D
Q2) The debt markets are segmented based on the maturity of the debt instruments, the type of debt instruments, and the participants in the market.
A)True
B)False
Answer: True
Q3) Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time Value of Money
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Q1) Effective annual rate considers the effect of compounding, whereas annual percentage rate does not consider the effect of compounding.
A)True
B)False
Q2) Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? Use a financial calculator to make the calculation.
A) 12.36 years
B) 16.25 years
C) 15.19 years
D) 13.52 years
E) 14.12 years
Q3) If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3?
A) 7%
B) 8%
C) 9%
D) 17%
E) 18%
Q2) If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?
A) Investors expect interest rates to be constant over time.
B) Investors expect interest rates to increase in the future.
C) Investors expect interest rates to decrease in the future.
D) Investors require a positive maturity risk premium.
E) The maturity risk premium must be positive.
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Chapter 6: Bonds Debtcharacteristics and Valuation
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Sample Questions
Q1) If interest rates decline, bondholders will earn:
A) a lower rate of return on reinvested cash flows.
B) a higher current yield.
C) no capital gain on the bond's maturity.
D) a lower coupon interest on the bond.
E) a higher maturity value on the maturity date.
Q2) Banks that need additional funds to meet the reserve requirements of the Federal Reserve:
A) borrow from the state government of the state where their headquarters are located.
B) borrow from banks with excess reserves.
C) issue treasury bills to investors.
D) decrease the coupon interest rate on the bonds issued to raise funds.
E) exercise the call option on the loans extended to small businesses.
Q3) Federal funds represent:
A) funds collected from federal tax payment by banks.
B) loans from the federal government to banks.
C) loans from one bank to another bank.
D) funds with banks for the repayment of loans to the federal government.
E) funds collected from investors for investment in federal securities.
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) A call provision with a sinking fund will add a maturity option to a preferred stock issue.
A)True
B)False
Q2) The preferred dividend is generally stated as a percentage of the _____.
A) market value of the share
B) net sales
C) call premium
D) par value
E) sinking fund
Q3) In international markets, excluding stocks sold in the United States, what is a stock that is traded in a country other than the issuing company's home country called?
A) American depository receipts
B) Yankee stock
C) Euro stock
D) Class A stock
E) Preferred stock
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Chapter 8: Risk and Rates of Return
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Q1) Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.
A)True
B)False
Q2) Which of the following is the only risk that is relevant to a rational, diversified investor?
A) Diversifiable risk
B) Stand-alone risk
C) Market risk
D) Unsystematic risk
E) Firm-specific risk
Q3) The expected rate of return of an investment _____.
A) equals one of the possible rates of return for that investment
B) equals the required rate of return for the investment
C) is the mean value of the probability distribution of possible returns
D) is the median value of the probability distribution of possible returns
E) is the mode value of the probability distribution of possible returns
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Chapter 9: Capital Budgeting Techniques
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Q1) In capital budgeting analysis, the riskiness of a project is evaluated to:
A) determine the multiple internal rates of return from the project.
B) determine the appropriate rate of return to use for computing the present value of the estimated cash flows.
C) determine the duration of the project.
D) determine the role of management to ensure project completion within stipulated time.
E) determine the opportunity rate of return.
Q2) Which of the following statements is true of a project with a long payback period?
A) A long payback period increases the project's risk.
B) A long payback period ensures enough liquidity for the firm.
C) A long payback period ensures positive net present value of the project.
D) A long payback period results in the expected rate of return being more than the internal rate of return.
E) A long payback period results in the terminal value of the project being higher than the present value of its cash outflows.
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Chapter 10: Project Cash Flows and Risk
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Q1) If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?
A) If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
B) If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
C) If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
D) If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
E) If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta.
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Chapter 11: The Cost of Capital
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Q1) The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
A)True
B)False
Q2) The target capital structure of a firm is the capital structure that:
A) minimizes the operating risk of the firm's assets.
B) maximizes the tax shield created by debt.
C) minimizes the default risk of long-term debt.
D) maximizes the price of the firm's stock.
E) minimizes the risk premium paid on long-term debt.
Q3) The before-tax cost of debt, rd, is the same as the:
A) average yield to maturity (YTM) associated with the firm's bonds.
B) dividend yield associated with the firm's common stock.
C) average coupon rate of the firm's bonds.
D) return on equity if the firm has no preferred stock.
E) the firm's marginal tax rate.
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Page 13
Chapter 12: Capital Structure
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Q1) The lower the times-interest-earned ratio, the lower the probability that a firm will default on its debt.
A)True
B)False
Q2) If a firm with favorable prospects sells new shares, _____.
A) the debt/assets ratio of the firm will increase
B) the marginal bankruptcy-related costs of the firm will increase
C) the retained earnings of the firm will decrease
D) the tax payable by the firm will decrease
E) the value of the firm's stock will decrease.
Q3) Companies in Italy and Japan use less debt in their capital structures than companies in the United States or Canada.
A)True
B)False
Q4) Which of the following is an advantage of debt financing?
A) Interest charges on debt is very minimal.
B) Interest charges on debt are tax deductible.
C) Interest charges on debt are based on the net income of the firm.
D) The higher the interest charges, the lower the bankruptcy costs.
E) Firms that are entirely debt financed have to pay very minimal taxes.
Page 14
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) The distribution of earnings by a firm to stockholders by buying shares of its stock in the financial markets is known as a _____.
A) stock dividend
B) stock split
C) stock ratio
D) stock repurchase
E) stock effect
Q2) Firms following the constant payout ratio dividend policy:
A) will have a stable dividend payment when earnings fluctuate.
B) will have a fluctuating dividend payment when earnings are stable.
C) will have a higher cost of equity when earnings are stable compared to other similar firms.
D) will have a lower cost of equity when earnings are stable compared to other similar firms.
E) will have a fluctuating dividend payment when earnings fluctuate.
Q3) According to the information content hypothesis, a lower-than-expected dividend increase, or an unexpected reduction, generally would result in a price decline.
A)True
B)False
Page 15
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Chapter 14: Managing Short-Term Financing Liabilities
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Q1) The inventory conversion period refers to the average length of time required:
A) to convert raw materials into finished goods.
B) to sell all the finished goods.
C) to convert materials into finished goods and then to sell those goods.
D) to collect cash following the sale of inventory.
E) to provide payment in cash for the purchase of raw materials and labor.
Q2) The following information relates to LoGo Corporation. Accounts payable $650,000
Credit purchases $21,000,000
Assuming there are 360 days in a year, the payables deferral period for the company is:
A) 21.45 days.
B) 11.14 days.
C) 18.56 days.
D) 25.42 days.
E) 15.89 days.
Q3) The inventory conversion period of a firm is equivalent to the average age of its inventory.
A)True
B)False
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Chapter 15: Managing Short-Term Assets
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Q1) Which of the following statements is true about multinational working capital management?
A) Exchange rate changes influence the credit policies of multinational companies.
B) Foreign governments often encourage cash to be taken out of their countries.
C) If the probability of expropriation is large, the inventory holdings will be maximized.
D) Most multinational corporations prefer banking with the local banks where they operate.
E) The political and legal environments of foreign countries are conducive to collect defaulted accounts.
Q2) The lower the level of current assets that is required to support operations, the closer the firm can follow a _____ current asset investment policy.
A) relaxed
B) restricted
C) moderate
D) lean-and-mean
E) precautionary
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Chapter 16: Financial Planning and Control
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Q1) If the forecasted sales level is not met, which of the following will lead to a lower than expected addition to retained earnings?
A) A decrease in production facilities
B) An increase in fixed charges on external financing
C) Assets being turned over quickly
D) A significant increase in income
E) Inventories being built up quickly
Q2) The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.
A) net operating income (NOI)
B) retained earnings
C) degree of financial leverage (DFL)
D) net income
E) gross profit
Q3) At the financial control phase, a firm is concerned with:
A) the amount of funds generated internally.
B) determining how much money it will need during a given period.
C) determining its financial breakeven point.
D) the degree of financial leverage that is acceptable.
E) implementing financial plans and dealing with feedback.
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