Financial Management Practice Exam
Course Introduction
Financial Management is a comprehensive course that introduces students to the fundamental principles and practices involved in the effective management of financial resources within an organization. Covering essential topics such as financial planning, capital budgeting, risk assessment, cost of capital, and working capital management, the course equips students with analytical tools to make informed financial decisions. Additionally, students learn about financial statement analysis, sources of financing, and strategies for maximizing shareholder value, preparing them for roles in corporate finance, investment analysis, and financial consulting.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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Sample Questions
Q1) Which of the following statements is not correct?
A) Prior to the late 1950s and early 1960s, finance was taught primarily as a descriptive, institutional subject viewed more from the standpoint of an outsider than from that of the management of the firm.
B) History has shown that the types of investments and methods used to analyze investment opportunities have changed as the attitudes of both investors and regulators have changed.
C) When managerial finance emerged as a separate field of study in the early 1900s, the emphasis was on evaluation and analysis of investments because the economy was in excellent condition at the time, so most individuals had large sums of funds to invest in corporate securities.
D) One of the responsibilities of the financial manager is to help determine which assets the firm should acquire and the best way to finance those assets.
E) Sustainability is a long-run concept that focuses on improving the quality of life of all stakeholders, both current and future.
Answer: C
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3
Chapter 2: Financial Assets Instruments
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Sample Questions
Q1) Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers.Such covenants are contained in the bond's indenture.
A)True
B)False Answer: True
Q2) From a social welfare perspective, common stock is a desirable form of financing in part because it involves no fixed charge payments.Its inclusion in a firm's capital structure makes the firm less vulnerable to the consequences of unanticipated declines in sales and earnings than if only debt were available.
A)True
B)False
Answer: True
Q3) A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.
A)True
B)False
Answer: True
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Chapter 3: Financial Markets and the Investment Banking Process
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Sample Questions
Q1) Students emerging from college and entering the work force typically consume ____ than their income resulting in ____.
A) less; saving
B) more; borrowing
C) less; borrowing
D) more; saving
Answer: B
Q2) Financial markets are important because they
A) allow individuals to transfer purchasing power over time.
B) provide for the efficient transfer funds to businesses.
C) facilitate exchanges between the providers and users of capital.
D) all of the above
Answer: D
Q3) Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares.
A)True
B)False
Answer: False
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) A decrease in reserve requirements should result in an increase in the total level of member bank reserves.
A)True
B)False
Q2) Individuals have greater expertise than financial intermediaries when it comes to gathering, verifying, and evaluating information concerning borrowers.
A)True
B)False
Q3) Until the passage of the International Bank Act of 1978, foreign banks enjoyed substantial operating advantages over domestic banks.
A)True
B)False
Q4) Savings and loan associations were established to provide commercial real estate financing.
A)True
B)False
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) The fundamental factors that affect the cost of money include
A) production opportunities
B) inflation
C) risk
D) time preference for consumption
E) all of the above
Q2) Assume that r* = 1.0%; the maturity risk premium is found as MRP = 0.2%(t 1) where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07%(t 1); the liquidity premium is 0.50% for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7%, 6%, and 5% during the next three years and then 4% thereafter.What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds?
A) 0.25%
B) 0.50%
C) 0.63%
D) 1.00%
E) 1.13%
Q3) Expectations of high inflation lead to low interest rates and vice versa.
A)True
B)False
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Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
Q2) Jane Doe, who has substantial personal wealth and income, is considering the possibility of opening a new business in the chemical waste management field.She will be the sole owner.The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years.However, the prospects for growth and positive future income look good, and Jane expects to realize substantial cash flows from dividends the firm will eventually pay out.Which of the legal forms of business organization would probably best suit her needs?
A) Proprietorship, because of ease of entry.
B) Regular corporation, because of the limited liability.
C) Partnership, if she needs additional capital.
D) S corporation, to enjoy tax advantages and gain limited liability.
E) In this situation, the various forms of organization seem equally desirable.
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Page 8
Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) Most annual reports include detailed financial data for the two most recent years, along with historical summaries of key accounting statistic for the past five or ten years.
A)True
B)False
Q2) From management's standpoint, financial statement analysis is useful
A) both as a way to anticipate future conditions and, more important, as a starting point for planning actions.
B) as a way to anticipate future conditions, but not for current planning.
C) for planning activities, but not as a way to anticipate future conditions.
D) For meeting government requirements, but not for anticipating future conditions or planning actions.
Q3) Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.
A)True
B)False
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Chapter 8: Financial Planning and Control
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Sample Questions
Q1) Errors in the sales forecast can be offset by similar errors in costs and income forecasts.Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.
A)True
B)False
Q2) Other things held constant, a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income.
A)True
B)False
Q3) Breakeven analysis is the method of determining the point at which sales will just cover ____ costs.
A) labor
B) inventory
C) operating
D) financing
Q4) 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 father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years.He wants a retirement income which has, in the first year, the same purchasing power as $40,000 has today.However, his retirement income will be of a fixed amount, so his real income will decline over time.His retirement income will start the day he retires, 2 years from today, and he will receive a total of 3 retirement payments.Inflation is expected to be constant at 5 percent.Your father has $100,000 in savings now, and he can earn 8 percent on savings now and in the future.How much must he save each year, starting today, to meet his retirement goals?
A) $1,863
B) $2,034
C) $2,716
D) $5,350
E) $6,102
Q2) The savings rate of individuals in the U.S.has trended higher since the 1980s and it is now higher than the savings rate of most other developed countries.
A)True
B)False
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Page 11
Chapter 10: Valuation Concepts
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Sample Questions
Q1) All else equal, a higher coupon rate on a bond results in a higher market price for the bond.
A)True
B)False
Q2) You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months.You plan to hold this bond for only 10 years, at which time you will sell it in the marketplace.You require a 12 percent annual return, but you believe the market will require only an 8 percent return when you sell the bond 10 years hence.Assuming you are a rational investor, how much should you be willing to pay for the bond today?
A) $1,126.85
B) $1,081.43
C) $737.50
D) $927.68
E) $856.91
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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Chapter 11: Risk and Rates of Return
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Sample Questions
Q1) We will generally find that the beta of a diversified portfolio is more stable over time than the beta of a single security.
A)True
B)False
Q2) The only condition under which risk can be reduced to zero is to find securities that are perfectly negatively correlated ( = 1.0) with each other.
A)True B)False
Q3) Which of the following statements about risk is false?
A) Risk requires the possibility of at least one outcome less favorable than the expected value.
B) Risk requires the possibility of more than one outcome.
C) Risk is one of the determinants of the required return.
D) Risk aversion generally is assumed in finance to be a characteristic of the "marginal investor."
E) All of the above statements are true.
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) Refer to Rollins Corporation.What is Rollins' retained earnings break point?
A) $600,000
B) $800,000
C) $1,000,000
D) $1,200,000
E) $1,400,000
Q2) The steeper the demand curve for a firm's stock, the closer the values of r<sub>s</sub> and r<sub>e</sub> are to one another, other things held constant.
A)True
B)False
Q3) Refer to Gulf Electric Company.Assume now that GEC needs to raise $300 million in new capital.What is GEC's marginal cost of capital for evaluating the $300 million in capital projects and any others that might arise during the year?
A) 6.00%
B) 13.77%
C) 12.66%
D) 9.50%
E) 9.00%
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Chapter 13: Capital Budgeting
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Sample Questions
Q1) The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects which have different lives are being compared.
A)True
B)False
Q2) One problem with Monte Carlo simulation analysis is that, while the simulation may provide some insights into the riskiness of a project, the analysis does not lead to a clear-cut accept versus reject decision.
A)True
B)False
Q3) Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.
A)True
B)False
Q4) If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.
A)True
B)False
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Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used.
A)True
B)False
Q2) When a firm conducts a seasoned equity offering and uses the proceeds to purchase a portion of the firm's outstanding debt, then the firm's
A) financial risk increases.
B) financial risk decreases.
C) business risk increases.
D) business risk decreases.
Q3) Business risk will not affect a firm's beta, because beta is determined by the market and thus is outside the control of the firm.
A)True
B)False
Q4) An increase in the financial leverage of a firm will generally increase the variability in EPS for the firm.
A)True
B)False
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Page 16
Chapter 15: Working Capital Management
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Sample Questions
Q1) Firms generally choose to finance temporary assets with short-term debt because A) Matching the maturities of assets and liabilities reduces risk.
B) Short-term interest rates traditionally have been more stable than long-term interest rates.
C) A firm that borrows heavily long-term is more apt to be unable to repay the debt than the firm that borrows heavily short-term.
D) The yield curve traditionally has been downward sloping.
E) Sales remain constant over the year, and financing requirements also remain constant.
Q2) Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.
A)True
B)False
Q3) As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.
A)True
B)False
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17
Chapter 16: Investment Concepts
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Sample Questions
Q1) The total value of a firm's stock which can be computed by multiplying the number of shares outstanding by the market price per share is called what?
A) Market weighted
B) Market capitalization
C) Market beta
D) Market return
Q2) An investor who wants to have a "hands on" approach to managing his or her investment portfolio in order to take advantage of market anomalies would want to follow the passive management style of investing.
A)True
B)False
Q3) A middleman, or agent, who helps investors trade financial instruments such as stocks, bonds, and derivatives is called a(n)
A) Analyst.
B) Broker.
C) Investment banker.
D) Speculator.
E) None of the above.
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Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) Increased deficit spending by the government is likely to result in
A) higher than normal interest rates.
B) no change in the interest rate.
C) lower than normal interest rates.
D) lower expected inflation.
Q2) Ace Incorporated has just paid a dividend of $4.00 per share.They have a retention ratio of 20 percent.They have a P/E ratio of 14.What should be the current price of the stock?
A) $56.00
B) $11.20
C) $70.00
D) $46.67
E) There is not enough information to answer this question.
Q3) Investments professionals agree that individuals should be disciplined with their investment strategy.Their advice would be: "don't change approaches just because results aren't immediate."
A)True
B)False
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