Financial Management Practice Exam
Course Introduction
Financial Management explores the principles and practices essential for effective planning, acquisition, allocation, and control of financial resources in organizations. The course covers key topics such as financial analysis, budgeting, forecasting, capital structure, risk management, valuation, and the time value of money. Students will learn to apply quantitative and qualitative tools to make informed financial decisions, assess investment opportunities, and understand the impact of financial markets and instruments on an organizations strategic objectives. The course provides a foundation for understanding how financial managers contribute to organizational success by maximizing value and ensuring sustainable financial health.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) Rewarding executives for increasing quarterly earnings will motivate them to act in the long-term best interests of shareholders.
A)True
B)False
Answer: False
Q2) Assume that you are starting a business.Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon.What type of business organization would you choose?
A)Corporation
B)General Partnership
C)Sole proprietorship
D)Limited partnership
Answer: A
Q3) One of the problems associated with profit maximization is that it ignores the timing of a project's return.
A)True
B)False
Answer: True
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) A stock's market value is dependent on investors' expectations of future cash flows to the firm.
A)True
B)False
Answer: True
Q2) Each of the following is true of Mutual Funds EXCEPT
A)Funds can be classified as load or no-load funds.
B)Mutual Fund shares must be bought from or sold to the Fund by investors.
C)An index fund is the fund with the highest expenses payable by investors.
D)The NAV is the total value of stock held by the fund divided by the number of outstanding shares in the mutual fund.
Answer: C
Q3) Venture capital funds play an important role in the initial financing of new businesses.
A)True
B)False
Answer: True
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4
Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) When analyzing the cash flows from a new project proposal,a company should always use its marginal tax rate.
A)True
B)False Answer: True
Q2) Total equity on the balance sheet increases as dividends paid increases.
A)True
B)False Answer: False
Q3) Which of the following does NOT represent cash outflows to the firm?
A)Taxes
B)Interest payments
C)Dividends
D)Depreciation Answer: D
Q4) The cash flow statement shows amounts that the company has earned but for which it has not yet received cash.
A)True
B)False Answer: False
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) In 1996,Snout and Smith,Inc.had a gross profit of $27,000 on sales of $110,000.S & S's operating expenses for 1996 were $13,000,and its net profit margin was .0585.Snout and Smith had no interest expense in 1996.Using this information,what was S & S's operating profit margin for 1996?
A)0.245
B)0.118
C)0.127
D)0.157
Q2) Differences in accounting practices limit the use of ratio analysis.
A)True
B)False
Q3) The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments. A)True
B)False
Q4) The current ratio and the acid test ratio are both measures of financial leverage. A)True
B)False
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6
Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?
A)$1,048
B)$1,010
C)$1,038
D)$808
Q2) You are considering two investments.Investment A yields 10% compounded quarterly.Investment B yields r% compounded semiannually.Both investments have equal annual yields.Find r.
A)19.875%
B)10%
C)10.38%
D)10.125%
Q3) How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?
A)8 years
B)10 years
C)11 years
D)13 years
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12.The annual interest rate is
A)24%.
B)8%.
C)18%.
D)12%.
Q2) What is the present value of $27 received at the end of each year for five years? Assume a discount rate of 9%.The first payment will be received one year from today (round to the nearest $1).
A)$42
B)$114
C)$88
D)$105
Q3) ________ annuities involve depositing money at the end of the period and allowing it to grow.
A)Discount
B)Compound
C)Annuity due
D)Both B and C
Page 8
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Chapter 7: An Introduction to Risk and Return-History of Financial
Market Returns
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Sample Questions
Q1) How much will Susan's stock be worth if she sells it five years from today?
A)$71,423.85
B)$73,419.66
C)$75,628.75
D)$80,333.40
Q2) The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.
A)True
B)False
Q3) The difference between returns on stocks and government bonds is known as A)the equity risk premium.
B)the risk and return tradeoff.
C)the maturity premium.
D)the risk/reward paradox.
Q4) What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%
Q5) Under the efficient market hypothesis,would securities be properly priced.
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The S&P 500 Index is commonly used to estimate the market rate of return.
A)True
B)False
Q2) U.S.Treasury bills can be used to approximate the risk-free rate.
A)True
B)False
Q3) The market (systematic)risk associated with an individual stock is most closely identified with the
A)variance of the returns of the stock.
B)variance of the returns of the market.
C)beta of the stock.
D)standard deviation of the stock.
Q4) Asset A has a required return of 18% and a beta of 1.4.The expected market return is 14%.What is the risk-free rate? Plot the security market line.
Q5) Firm B's risk premium is
A)2.66%.
B)4.8%.
C)6.3%.
D)8.1%.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) A bond's "spread" refers to the difference between it's Moody's rating and its Standard & Poors rating.
A)True
B)False
Q2) The issuance of bonds to raise capital for a corporation
A)magnifies the returns to the stockholders.
B)increases risk to the stockholders.
C)is a cheaper form of capital than the issuance of common stock.
D)all of the above.
Q3) Bond ratings measure the interest rate risk of a given bond issue.
A)True
B)False
Q4) The yield on a corporate bond with a 20 year maturity would include
A)only the real rate of interest and expected inflation.
B)the risk-free rate multiplied by 1+ default rate.
C)the risk-free rate plus a default risk premium,a liquidity risk premium and a maturity risk premium.
D)the real rate of interest,the expected inflation rate and a default risk premium.
Q5) What elements determine what the yield to maturity will be for a bond?
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Chapter 10: Stock Valuation
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Sample Questions
Q1) The value of preferred shares is affected by changes in interest rates.
A)True
B)False
Q2) The growth rate of future earnings is determined by return on equity and the profit-retention rate.
A)True
B)False
Q3) Stock valuation is more precise than bond valuation as stock cash flows are more certain.
A)True
B)False
Q4) Common stock represents a claim on residual income.
A)True
B)False
Q5) Common stockholders expect greater returns than bondholders because A)they have no legal right to receive dividends.
B)they bear greater risk.
C)in the event of liquidation,they are only entitled to receive any cash that is left after all creditors are paid.
D)all of the above.
Page 12
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) You are considering investing in a project with the following year-end after-tax cash flows:
Year 1: $5,000
Year 2: $3,200
Year 3: $7,800
If the initial outlay for the project is $12,113,compute the project's IRR.
A)14%
B)10%
C)32%
D)24%
Q2) Project EH! requires an initial investment of $50,000,and has a net present value of $12,000.Project BE requires an initial investment of $100,000,and has a net present value of $13,000.The projects are mutually exclusive.The firm should accept A)project EH!.
B)project BE.
C)both projects.
D)neither project.
Q3) Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.
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Page 13
Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Which of the following would increase the net working capital for a project? An increase in
A)accounts receivable.
B)fixed assets.
C)accounts payable.
D)common stock.
Q2) LaVigne Wineries is purchasing a new wine press.The equipment will cost $250,000.Transportation and installation will cost another $35,000.Because of increased production,inventories will increase by $15,000.The press will be depreciated using the straight line method to a book value of $0.00 over its useful life of 7 years.Compute depreciation for each year of the project.
Q3) Incremental cash flows from a project =
A)Firm cash flows without the project plus or minus changes in net income.
B)Firm cash flows with the project plus firm cash flows without the project.
C)Firm cash flows with the project minus firm cash flows without the project.
D)Firm cash flows without the project plus or minus changes in revenue with the project.
Q4) What is meant by "real dollars" and the "real" discount rate? How can they be used to account for inflation when evaluating capital budgeting proposals?
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Page 14
Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) When evaluating projects with real options,businesses must consider the probability that the option will be exercised.
A)True
B)False
Q2) Economists at PHE Llc estimate a 20% probability of a recession next year,a 50% probability of an average economy,and a 30% probability of a rapid expansion.If there is a recession,the NPV of project O will be $20 million;if the economy is average,it will be $45 million and in case of a rapid expansion,it will be $75 million.What is the expected NPV of the project?
A)$57.5 million
B)$49 million
C)$46.67 million
D)$45 million
Q3) What is the project's NPV if success is modest and it is not expanded?
A)$10,000
B)($10,000)
C)$110,000
D)The present value of a perpetual cash flow cannot be determined.
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Most large firms use individual costs of capital to evaluate all projects.
A)True
B)False
Q2) The amount of debt in the firm's capital structure should include all interest-bearing debt,both long-term and short-term.
A)True
B)False
Q3) Given the following information,determine the risk-free rate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 6%
A)6.0%
B)3.0%
C)9.0%
D)6.5%
Q4) The after-tax cost of debt is
A)6.20%.
B)5.40%.
C)4.60%.
D)3.80%.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The original form of the Modigliani and Miller Capital Structure Theorem
A)ignores the effect of taxes.
B)ignores the relationship between firm value and cost of capital.
C)ignores transaction costs.
D)both A and C are true.
Q2) Cheshire Corporation is now financed 100% with equity.The cost of equity is 15%.Cheshire is considering a proposal to borrow enough money at 7% to buy back half of its common stock.It would then be financed 50% with debt and 50% with equity.Assume that this does not affect the cost of equity.Cheshire's tax rate is 40%.What is Cheshire's cost of capital without and with the stock repurchase?
Q3) Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.
A)True
B)False
Q4) An optimal capital structure is achieved
A)when a firm's expected profits are maximized.
B)when a firm's expected EPS are maximized.
C)when a firm's break-even point is achieved.
D)when a firm's weighted average cost of capital is minimized.
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Chapter 16: Dividend Policy
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Sample Questions
Q1) The timing of dividend payments will not matter if the firm's rate of return on equity and the investor's required rate of return are the same.
A)True
B)False
Q2) When a firm begins to pay dividends,it is signalling that it always expects to have enough cash flow to maintain and increase its dividend payout.
A)True
B)False
Q3) The residual dividend theory indicates that a firm would never pay dividends unless the firm's profits were larger than its equity financing needs.
A)True
B)False
Q4) Which of the following would result from payment of the stock dividend?
A)Total equity would remain at $50,000,000.
B)Total equity would increase to $57,500,000.
C)Total equity would decrease to $43,478,261.
D)The effect on the equity account would depend on the market's reaction to the dividend.
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18
Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) One disadvantage of long-term plans is a loss of flexibility in responding to unexpected events.
A)True
B)False
Q2) What is meant by spontaneous financing?
Q3) Based on the information in Table 1,what is Dorian's projected cumulative short-term borrowing as of April 30,2014?
A)$15,000
B)$60,000
C)$35,150
D)$75,000
Q4) What is meant by discretionary financing?
Q5) When fixed expenses increase relative to sales,it indicates that there is not enough productive capacity to absorb an increase in sales.
A)True
B)False
Q6) What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?
Q7) Discuss the basic functions that budgets perform for a firm.
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Chapter 18: Working Capital Management
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Sample Questions
Q1) The Stant Shoe Company established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $100,000 at an annual rate of 5%.A compensating balance of 10% of the amount borrowed is required.What is the largest amount of money Stant will actually be able to use from the line of credit?
A)$90,909
B)$90,000
C)$111,111
D)$100,000
Q2) Spontaneous sources of financing may be either short-term or long-term.
A)True
B)False
Q3) When faced with a surplus of cash,most firms should stretch their trade accounts. A)True
B)False
Q4) Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.
A)True
B)False
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Chapter 19: International Business Finance
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Sample Questions
Q1) The 1 year interest rate in the U.S.is 1%.The spot exchange rate for yen is 84.81 to the dollar.The 6 months forward rate is 84.78 to the dollar.These prices indicate that interest rates in Japan,on an annualized basis,are about
A).07% lower.
B).07% higher.
C).035% higher.
D).7% lower.
Q2) After the U.S.dollar,the most widely traded currency is A)the Saudi riyal.
B)the euro.
C)the Swiss franc.
D)the Canadian dollar.
Q3) Transactions carried out in the foreign exchange markets can include direct or indirect exchange rate quotes.
A)True
B)False
Q4) What is the difference between and "ask" quote and a "bid" quote.
Q5) What is the difference between forward rates and spot rates? What is the purpose of forward contracts?
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Customers who took advantage of the offer prepurchased 400,000 gallons of oil at $3.50 per gallon.Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $3.00 per gallon.If the November spot price is $3.85 per gallon,Swenson's gross profit on the heating oil sold in June will be
A)$100,000.
B)($100,000).
C)$200,000.
D)$0.00.
Q2) Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?
A)$2.50
B)$75
C)$0
D)$36.50
Q3) (Business of Life)What guidelines should determine whether or not an individual should buy life insurance?
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Page 22