Financial Management
Midterm Exam
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices involved in the effective acquisition, allocation, and control of financial resources within an organization. The course covers key topics such as financial analysis, budgeting, capital structure, risk management, investment decisions, and working capital management. Students will gain a solid understanding of how financial managers use analytical tools to make decisions that maximize shareholder value, ensure organizational sustainability, and strategically align financial goals with broader business objectives. Emphasis is placed on both theoretical frameworks and real-world applications, preparing students for roles in corporate finance, banking, investment, and other related fields.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley
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Page 2
Chapter 1: An Overview of Finance
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Sample Questions
Q1) The average American is knowledgeable about personal finance and tends to manage their retirement needs and debt levels responsibly.
A)True
B)False
Answer: False
Q2) In the early 1900s, the investments arena was dominated by a small group of very wealthy investors and opulent corporations.
A)True
B)False
Answer: True
Q3) Historically, in the United States, after the country has experienced economic or financial tragedy, cries for new, tougher regulations become abundant, and politicians are generally quick to enact new legislation to take what they think are corrective actions.
A)True
B)False Answer: True
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Chapter 2: Financial Assets Instruments
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Sample Questions
Q1) A zero coupon bond's value increases over time at a compounded (or exponential) rate, not at a constant (or linear) rate.The corporate issuer reports the annual increase as interest expense, and the owner of the bond reports the increase as interest income and pays taxes on it each year.
A)True
B)False
Answer: True
Q2) A(n) ____ is a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation.
A) coupon bond
B) income bond
C) convertible bond
D) zero coupon bond
E) callable bond
Answer: D
Q3) The owner of a convertible bond owns, in effect, both a bond and a call option.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Markets and the Investment Banking Process
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Sample Questions
Q1) Which of the following statements is correct?
A) Flotation costs under a best-efforts arrangement typically are less for a given new equity issue than the costs associated with an underwritten offering, and the corporation is more certain of getting the needed funds under a best-efforts offering.This is why best efforts deals are most common.
B) If a firm decides to issue securities through a direct (or private) placement, then the underwriting syndicate that is formed to distribute the securities to the public may, at its discretion, decide either to guarantee or not to guarantee the sale of the securities.
C) If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large amount of new equity funds for expansion than would be true if this demand curve were steeper.
D) It is possible for a firm to go public, and yet not raise any additional capital.
E) None of the above is a correct statement.
Answer: D
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) All else equal, the money supply should decrease when
A) banks withdraw currency from the Fed.
B) the Fed makes loans at the discount window.
C) the Fed sells securities on the open market.
D) the Fed buys securities on the open market.
E) None of the above
Q2) The primary responsibility of the Federal Open Market Committee (FOMC) is to
A) establish a level and growth of the money supply through open market operations to produce a stable economic environment.
B) supervise the examination of state member banks.
C) change the reserve requirements of banks.
D) determine the level of Federal Reserve notes allowed in circulation.
E) None of the above.
Q3) A fractional reserve banking system might be in trouble if
A) one depositor wanted his (her) money returned.
B) one borrowing customer paid off the loan.
C) all borrowing customers paid off their loans.
D) all deposit customers wanted to withdraw their money.
E) None of the above.
Page 6
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Assume that the expectations theory of term structure holds.If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%, what is the expected rate on a one-year Treasury bond in year three?
A) 8%
B) 7%
C) 6%
D) 5%
E) 4%
Q2) When the federal government runs a deficit the interest rates generally increases due to increased demand for funds.
A)True
B)False
Q3) Investors with a high time preference for current consumption would be willing to pay a higher price for the same investment than investors with a low time preference for current consumption.
A)True
B)False
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Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) If a firm has a single owner, we can say that the proper goal of a financial manager would be to maximize the firm's earnings per share.
A)True
B)False
Q2) Profit maximization does not always lead to wealth maximization because
A) it does not consider the riskiness of the cash flows.
B) it does not consider the timing of the cash flows.
C) it does not consider the size of the cash flows.
D) two of the above are correct.
E) all of the above are correct
Q3) The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.
A)True
B)False
Q4) An agency problem exists between stockholders and managers.A second agency problem arises between stockholders and creditors.
A)True
B)False
8
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Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0, while its quick ratio is 2.5.What are Nolan's current assets?
A) $200,000
B) $300,000
C) $400,000
D) $500,000
E) $600,000
Q2) A firm has a debt ratio of 40 percent.Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding, and a tax rate of 40 percent.If the firm's ROA is 6 percent, by how many percentage points is the firm's ROE greater than its ROA?
A) 0.0%
B) 4.0%
C) 5.8%
D) 7.4%
E) 10.0%
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9
Chapter 8: Financial Planning and Control
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Sample Questions
Q1) Financial control involves a feedback and adjustment process that (1) ensures that existing plans are followed, or (2) modifies existing plans in response to changes in the firm's operating environment.
A)True
B)False
Q2) Stromburg Corporation makes surveillance equipment for intelligence organizations.Its sales are $75,000,000.Fixed operating costs, including research and development, are $40,000,000, while variable costs amount to 30% of sales.Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25% of sales, and also permit sales to increase to $100,000,000.What is Stromburg's DOL at the new projected sales level?
A) 3.75
B) 4.20
C) 3.50
D) 4.67
E) 3.33
Q3) Operating costs include variable costs, depreciation and interest charges.
A)True
B)False
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Page 10
Chapter 9: Time Value of Money
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Sample Questions
Q1) Your company must make payments of $100,000 each year for 10 years, with the first payment to be made 10 years from today.To prepare for these payments, your company must make 10 equal annual deposits into an account which pays a simple interest rate of 7 percent, daily compounding (360-day year).Funds will remain in the account during both the accumulation period (the first 10 years) and the distribution period (the last 10 years), and the same interest rate will be earned throughout the entire 20 years.The first deposit will be made immediately.How large must each deposit be?
A) $47,821.11
B) $49,661.86
C) $51,234.67
D) $52,497.33
E) $53,262.39
Q2) When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan.
A)True
B)False
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Page 11
Chapter 10: Valuation Concepts
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Sample Questions
Q1) You have a chance to purchase a perpetual security that has a stated annual payment (cash flow) of $50.However, this is an unusual security in that the payment will increase at an annual rate of 5 percent per year; this increase is designed to help you keep up with inflation.The next payment to be received (your first payment, due in 1 year) will be $52.50.If your required rate of return is 15 percent, how much should you be willing to pay for this security?
A) $350
B) $482
C) $525
D) $556
E) $610
Q2) All else equal, a higher required rate of return on a financial asset results in a higher price for that asset.
A)True
B)False
Q3) The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.
A)True
B)False
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Page 12
Chapter 11: Risk and Rates of Return
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Sample Questions
Q1) Which of the following statements is correct?
A) A complete probability distribution is always an objective listing of all possible events.Since it is impossible to list all the possible outcomes from a single event, probability distributions are of limited benefit in assessing risk.
B) A peaked probability distribution centered around the expected value will make a stock more desirable, thereby increasing its expected return.
C) In the real world, there are an infinite number of possible states or outcomes that can occur.Thus, probability distributions actually are continuous; however, for simplicity, financial managers typically reduce the number of states for analysis to a manageable number.
D) Risk refers to the chance that some unfavorable event will occur while a probability distribution is completely described as a listing of the likelihood of unfavorable events.
E) The higher the probability that the return from an investment will pay off its average promised value the lower will be the expected return, regardless of the distribution of the investment's returns.
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13
Chapter 12: The Cost of Capital
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Sample Questions
Q1) Refer to Becker Glass Corporation.What is Becker's cost of newly issued stock?
A) 16.0%
B) 16.5%
C) 17.0%
D) 17.5%
E) 18.0%
Q2) Refer to Rollins Corporation.What is Rollins' lowest WACC?
13.6%
Q3) The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock.
A)True
B)False
Q4) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.
A)True
B)False
Page 14
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Chapter 13: Capital Budgeting
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Sample Questions
Q1) When calculating the cash flows for a project, you should include interest payments.
A)True
B)False
Q2) Using the same risk-adjusted discount rate to discount all cash flows ignores the fact that the more distant cash flows are riskier.
A)True
B)False
Q3) When considering two mutually exclusive projects, the financial manager should always select that project whose internal rate of return is the highest provided the projects have the same initial cost.
A)True
B)False
Q4) Estimating the cash flows in a capital project is the easiest and least important part of the capital budgeting process.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock, it signals that the firm has very good prospects.
A)True
B)False
Q2) A decrease in the debt-to-assets ratio will generally have no effect on ____ risk.
A) Financial
B) Total
C) Business
D) Systematic, or market
E) None of the above (it will affect each type of risk above).
Q3) The optimal capital structure is the one that maximizes the price of the stock, which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.
A)True
B)False
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16
Chapter 15: Working Capital Management
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Sample Questions
Q1) Net working capital is defined as current assets divided by current liabilities.
A)True
B)False
Q2) The ____ is the average length of time to convert the firm's receivables into cash.
A) payables deferral period
B) receivables collection period
C) cash conversion period
D) inventory conversion period
Q3) If the current ratio is equal to four and we double the current liabilities and half the current assets, what will the new current ratio equal?
A) 1
B) 2
C) 8
D) 16
Q4) Accruals represent a spontaneous source of funding but, unfortunately, due to economic forces, firms have little control over the level of these accounts.
A)True
B)False
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Chapter 16: Investment Concepts
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Sample Questions
Q1) Refer to Foxy Ladies Investment Club.What is the portfolio's three-year holding period return (from January 2010 through December 2012)?
A) 71.8%
B) 23.9%
C) 68.3%
D) 22.8%
E) None of the above.
Q2) People who view investments as instruments that produce growth over a long period of time are referred to as
A) Speculators.
B) Investors.
C) Brokers.
D) Analysts.
E) None of the above.
Q3) The simple arithmetic average return differs from the geometric average return in that the geometric average takes into consideration compounding, or reinvestment, while the arithmetic average does not.
A)True
B)False
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Page 18
Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) Technical analysts would argue that the stock market is ____ form efficient.
A) Weak
B) Semistrong
C) Strong
D) None of the above, because most technicians would argue the stock market is not efficient.
Q2) Florida Sports Magazine is a publicly traded company.The next dividend will be paid in one year and is expected to be $1.25 per share.Dividends are expected to grow at 10 percent a year for the next three years, and then grow at 8 percent a year thereafter.The appropriate discount rate for investing in this firm is 15 percent.What should be the current stock price?
A) $21.27
B) $10.76
C) $22.40
D) $17.33
E) $18.75
Q3) The fiscal policy of the United States is formulated and carried out by the Federal Reserve.
A)True
B)False
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