Financial Management
Mock Exam
Course Introduction
Financial Management is a comprehensive course that introduces students to the principles and techniques used to make sound financial decisions within organizations. Topics include the analysis of financial statements, time value of money, valuation of stocks and bonds, risk and return, capital budgeting, cost of capital, and working capital management. The course emphasizes practical skills in budgeting, financial planning, and control, equipping students with the knowledge necessary to optimize financial resources, assess investment opportunities, and enhance the value of a business in a dynamic economic environment.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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16 Chapters
1206 Verified Questions
1206 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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99 Verified Questions
99 Flashcards
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Sample Questions
Q1) Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation.
A)True
B)False
Answer: False
Q2) Identify the internal factor that influences the stock price of a firm.
A)Legal constraints
B)Capital structure
C)Tax laws
D)General level of economic activity
E)Conditions in the stock market
Answer: B
Q3) To properly maximize the value of the firm, the financial manager should execute his or her duties independent of the cash flow decisions made by other senior managers.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Analysis of Financial Statements
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110 Flashcards
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Sample Questions
Q1) Which of the following transactions will not affect the quick ratio of a company?
A)Inventory sold on credit
B)Cash purchase of equipment
C)Payment for accounts payable
D)Accounts receivable collected
E)Bank loan repaid
Answer: D
Q2) Which of the following is the formula to calculate a firm's inventory turnover ratio?
A)Inventory Turnover = Sales ÷ Inventory
B)Inventory Turnover = Cost of goods sold ÷ Inventory
C)Inventory Turnover = Inventory ÷ Current assets
D)Inventory Turnover = Inventory ÷ Accounts receivables
E)Inventory Turnover = (Sales - Cost of goods sold) ÷ Inventory Answer: B
Q3) A simple approach to trend analysis is to construct graphs.
A)True
B)False
Answer: True
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4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.
A)True
B)False
Answer: False
Q2) A money market is the market for trading in securities with maturities greater than one year and includes such financial assets as stocks and long-term corporate bonds.
A)True
B)False
Answer: False
Q3) Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not.
A)True
B)False
Answer: True
Q4) Dual listing of a stock leads to a decrease in the marketability of the stock.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Time Value of Money
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Sample Questions
Q1) A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?
A)8.16%
B)8.36%
C)8.56%
D)8.76%
E)8.96%
Q2) Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. What would be the difference between the future values of the two investments if Mira's investment horizon is seven years?
A)$4,204.52
B)$3,577.87
C)$1,152.34
D)$2,703.78
E)$3,250.22
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6
Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Following is information about three bonds: ?
? \(\begin{array} { l l c }
{ \text { Issuer } } & \text { Yield } & \text { Time to Maturity } \\\hline
\text { Treasury } & 2.0 \% & 6 \text { months } \\
\text { Company A } & 5.0 & 5 \text { years } \\
\text { Company B } & 5.3 & 8 \text { years } \end{array}\) ?
Although none of the bonds has a liquidity premium, any bond with a maturity equal to one year or greater has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the Company A and Company B bonds are the same (including their default risk). The average inflation rate is expected to remain constant during the next 10 years. What is the annual MRP?
A)0.1%
B)1.1%
C)1.0%
D)0.7%
E)4.1%
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Chapter 6: Bonds Debt Characteristics and Valuation
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Sample Questions
Q1) Assuming other things are held constant, which of the following is correct?
A)The change in the price of a bond due to a change in the interest rate is more significant in bonds with longer maturity periods.
B)For a bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital gain than the capital loss stemming from an identical decrease in the interest rate.
C)For any given maturity, a percentage point decrease in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical increase in the interest rate.
D)In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds purchased at a premium and the face value of the bonds.
E)A 20-year bond has more interest rate reinvestment risk than a two-year bond.
Q2) A 20-year original maturity bond with one year left to maturity has half the interest rate price risk of a 10-year original maturity bond with one year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates.)
A)True B)False
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) A call provision included with a sinking fund effectively adds a maturity option to a preferred stock issue.
A)True
B)False
Q2) A firm undertakes stock repurchase only if the price of its stock is overvalued.
A)True
B)False
Q3) The economic value added (EVA) of a firm is $6.25 million, and the firm has 2.78 million outstanding shares. What is the maximum amount of dividend that can be paid to shareholders without threatening the firm's current value?
A)$1.65
B)$2.25
C)$3.12
D)$3.89
E)$4.41
Q4) A typical common stock issue has a maturity period of 10 years. A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Other things held constant, if the expected inflation rate decreases at the same time investors become more risk averse, the Security Market Line (SML) would shift _____.
A)down and have a steeper slope
B)up and have a less steep slope
C)up and keep the same slope
D)down and keep the same slope
E)down and have a less steep slope
Q2) Steve Brickson currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta ( ) equal to 1.4. To earn higher returns, Steve wants to invest an additional $20,000 in a stock that has equal to 2.4. After Steve adds the new stock to his portfolio, what will the portfolio's beta be?
A)1.6
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) For a particular project, other things held constant, an increase in the firm's required rate of return will result in _____.
A)a decrease in the project's net present value (NPV)
B)a decrease in the project's internal rate of return (IRR)
C)a decrease in the project's discounted payback period (DPB)
D)an increase in the project's modified internal rate of return (MIRR)
E)a decrease in the project's traditional payback period
Q2) The net present value (NPV) of a project is negative when the discount rate used is:
A)equal to the project's internal rate of return (IRR).
B)equal to the yield to maturity of the bonds issued to finance the project.
C)greater than the project's internal rate of return (IRR).
D)lower than the return demanded by the firm's stockholders.
E)less than the project's internal rate of return.
Q3) When the discounted payback period (DPB) technique is used to evaluate a capital budgeting project, it should be accepted when its DPB is greater than the project's expected life.
A)True
B)False
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Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) A firm is considering the purchase of an asset whose stand-alone risk is greater than the average risk of its existing portfolio of assets. In evaluating this asset, the decision maker should:
A)increase the internal rate of return (IRR) used to evaluate the asset to reflect its higher risk.
B)increase the asset's net present value (NPV) to reflect its higher risk.
C)reject the asset because its acceptance would clearly decrease the value of the firm.
D)ignore the asset's higher risk if, after purchase, it will make up only a small fraction of the firm's total assets.
E)increase the required rate of return that is used to evaluate the asset to reflect its higher risk.
Q2) A sunk cost is a cash outlay that has already been incurred. But, it is a cost that can be recovered if a capital budgeting project is purchased. Consequently, these sunk costs are extremely important in capital budgeting analyses.
A)True
B)False
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) Omega Inc. expects its net income to be $525,000 this year. The firm's dividend payout ratio is 60 percent. The firm is financed with 30 percent debt, and it has no preferred stock outstanding. What is the retained earnings break point for Omega Inc.?
A)$315,000
B)$450,000
C)$210,000
D)$300,000
E)$700,000
Q2) Which of the following is a major assumption that is embedded in the capital asset pricing model (CAPM), which is often used to estimate the cost of retained earnings, r<sub>s</sub>?
A)All investors are well diversified.
B)The firm's dividends and earnings grow at a constant rate far into the future.
C)The firm's cost of equity and its cost of debt are always equal.
D)The firm's cost of retained earnings must be less than its cost of preferred stock for the CAPM to provide a reasonable estimate for r<sub>s</sub>.
E)Investors primarily purchase stocks with beta coefficients equal to zero.
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) A times-interest-earned (TIE) ratio that is less than 1 suggests that a firm _____.
A)is using a low proportion of debt financing in its capital structure
B)has a low probability of defaulting on its loans
C)might not be able to meet its annual interest obligations on its debt
D)is financed with equity only
E)has an extremely low debt/assets ratio
Q2) The degree of leverage concept is designed to show how changes in sales affect earnings before interest and taxes (EBIT) and earnings per share (EPS). If a 10 percent increase in sales causes EPS to increase from $1.00 to $1.50 and if the firm uses no debt, then what is its degree of operating leverage?
A)0.5×
B)1.5×
C)2.0×
D)5.0×
E)7.5×
Q3) The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.
A)True
B)False
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Page 14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) The primary factor that influences the dividend policies of companies around the world is the level of protection that exists for the rights of minority stockholders.
A)True
B)False
Q2) Which of the following hypotheses/theories suggests that investors regard a change in dividend payments as a signal that the firm's management expects future earnings to also change?
A)Information content hypothesis
B)Clientele effect theory
C)Constant payout ratio hypothesis
D)Dividend modification hypothesis
E)Projected earnings hypothesis
Q3) Everything else equal, if stockholders prefer current income to future income (i.e., capital gains), a firm's cost of equity will:
A)decrease if its dividend payout increases.
B)decrease if its eliminates all dividend payments.
C)decrease if its excess (free) cash increases.
D)decrease if management promotes its wishes to restrict ownership in the firm.
E)increase if debt restrictions decrease.
Page 15
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) Accruals are generally considered free debt in the sense that no explicit interest is paid on funds "raised" through them.
A)True
B)False
Q2) Bravo Corporation recently issued 270-day commercial paper with a face value of $2,000,000 and a simple interest rate of 11 percent. The company paid a transaction fee equal to 0.4 percent of the issue, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what is the commercial paper's effective annual rate (rEAR)?
A)17.51%
B)11.99%
C)12.56%
D)12.63%
E)12.82%
Q3) The effective annual rate (rEAR) it pays on a loan is lower whenever a firm must use some of the proceeds from the loan to meet the bank's compensating balance requirement.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) Fashion Clothier's economic ordering quantity (EOQ) for its dyes is 2,000 units. If the total demand is 100,000 units per period, the carrying cost per unit is 15 percent of the inventory value, the dyes purchase price is $10, and the fixed cost per order is $30, then Fashion's total inventory cost is_____.
A)$1,500
B)$4,500
C)$6,000
D)$11,500
E)$3,000
Q2) The aging schedule of a firm shows that 40 percent of the receivables are collected in 18 days and the remaining 60 percent of the receivables are collected in 50 days. As a result, the firm's days sales outstanding (DSO) is _____.
A)34.0 days
B)30.8 days
C)40.8 days
D)42.0 days
E)37.2 days
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) By performing a cost-volume-profit analysis, EZ Rentals discovered that its operating breakeven point, QOpBEP, is at sales equal to $180,000. If EZ wants to decrease its operating breakeven point, which of the following actions should be taken? Assume everything else is equal.
A)Increase fixed operating costs.
B)Decrease sales.
C)Increase the variable operating cost ratio.
D)Decrease fixed financial costs.
E)Increase the product's contribution margin.
Q2) Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are $720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is Citation's operating breakeven point?
A)8,000 components
B)1,200 components
C)1,412 components
D)$720,000 in sales
E)$389,189 in sales
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18