Financial Management Practice Exam
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in the effective management of an organizations financial resources. The course covers key topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Students will learn how to evaluate investment opportunities, make financing decisions, and develop strategies to maximize shareholder value. Emphasis is placed on real-world applications, financial decision-making processes, and the use of analytical tools to solve complex financial problems. This course equips students with the essential skills needed for careers in corporate finance, investment banking, and financial planning.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The major difficulty in most insider-trading cases has been
A) that lenient judges have simply released the guilty individuals.
B) that insider trading, even though illegal, actually serves a beneficial economic and financial purpose.
C) that inside trades have not been legally well-defined.
D) that it is hard to figure out which owner(s) benefited from the trade.
Answer: C
Q2) The ultimate measure of performance is not what the firm profits, but how the profits are valued by the investor.
A)True
B)False Answer: True
Q3) Agency theory examines the relationship between companies and their customers. A)True
B)False Answer: False
Q4) Timing is not a particularly important consideration in financial decisions. A)True
B)False Answer: False
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Chapter 2: Review of Accounting
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Sample Questions
Q1) For corporations with low taxable income (less than $50,000), the effective tax rate can be as much as 40%.
A)True
B)False
Answer: False
Q2) A firm with earnings per share of $3 and a price-earnings (P/E) ratio of 24 will have a stock market price of
A) $72.00.
B) $15.00.
C) $6.67.
D) $3.00.
Answer: A
Q3) Increasing interest expense will have what effect on Earnings Before Interest and Taxes (EBIT)?
A) Increase it.
B) Decrease it.
C) It will have no effect.
D) There is not enough information to tell.
Answer: C
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) Ratio analysis can be useful for
A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of debt or equity financing.
D) All of the options are true.
Answer: D
Q2) Which of the following is not considered to be a profitability ratio?
A) Profit margin
B) Times interest earned
C) Return on equity
D) Return on assets (investment)
Answer: B
Q3) ABC Co. has an average collection period of 90 days for its accounts receivable. If total credit sales for the year were $6,000,000, what is the balance in accounts receivable at year-end? Assume a 360-day calendar year.
A) $150,000
B) $2,250,000
C) $1,500,000
D) $40,000
Answer: C
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) A pro forma balance sheet needs data from the prior balance sheet, pro forma income statement, and cash flow in order for it to be complete.
A)True
B)False
Q2) A higher growth rate in sales will often require more external funds.
A)True
B)False
Q3) The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding or excess funds to be invested.
A)True
B)False
Q4) Pro forma financial statements are
A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) All of the options are true.
Q5) The primary purpose of the cash budget is to forecast income. A)True B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) An example of an adjustment for a cash break-even analysis would be adding back increases in accounts receivable.
A)True
B)False
Q2) A weakness of break-even analysis is that it assumes
A) revenue and costs are a linear (constant) function of volume.
B) sales prices and costs increase when the economy is strong and confidence is high.
C) the cost of goods sold goes up as revenue increases.
D) None of the options are true.
Q3) Which of the following is true about the concept of leverage?
A) At the break-even point, operating leverage is equal to zero.
B) Combined leverage measures the impact of operating and financial leverage on EBIT.
C) Financial leverage measures the impact of fixed costs on earnings.
D) None of the options are true.
Q4) The lower a firm's break-even point, the better for the firm.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Many companies such as McDonald's have embraced supply chain management using Web-based procedures.
A)True
B)False
Q2) Generally, more use is made of short-term financing because
A) short-term interest rates are generally lower than long-term interest rates.
B) most firms do not have basic access to the capital markets.
C) short-term financing is usually more predictable than long-term financing.
D) short-term interest rates are generally lower than long-term interest rates and most firms do not have basic access to the capital markets.
Q3) Financial managers can accurately predict future interest rates beyond a few months by
A) calculating the anticipated inflation rate.
B) gauging the Fed's decision regarding the target federal funds rate.
C) measuring investor sentiment and consumer confidence indices.
D) None of the options are correct.
Q4) Working capital management primarily involves long-term planning.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) The use of "float" has dramatically increased since the Check Clearing for the 21<sup>st</sup> Century Act was passed.
A)True
B)False
Q2) One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future.
A)True
B)False
Q3) Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances.
A)True
B)False
Q4) Cash flow does not rely on which of the following?
A) The payment arrangements of customers.
B) The monetary policy of the Federal Reserve.
C) The quickness at which suppliers and creditors process checks.
D) The efficiency of the banking system.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) At historically low interest rate levels, compensating balances increase.
A)True
B)False
Q2) A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of the manufacturing firm?
A) Decreased receivables
B) Increased receivables
C) Increased payables
D) Decreased payables
Q3) Leontief's Wigs can take a cash discount but has to borrow money from the bank to do so. The bank offers a 16% interest rate. The terms of the cash discount are 2/10, net 60. Because of this; Leontief's should borrow from the bank to take the discount.
A)True
B)False
Q4) Compensating balances represent unfair hidden costs of borrowing.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) You are to receive $12,000 at the end of each of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?
A) Present value of an annuity of $1
B) Future value of an annuity of $1
C) Present value of $1
D) Future value of $1
Q2) To save for her newborn son 's college education, Lea Wilson will invest $1,000 at the end of each year for the next 20 years. The interest rate is 10%. What is the future value?
A) $8,514
B) $2,980
C) $63,440
D) $57,275
Q3) Calculation of the yield of an investment provides the total return over multiple years.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) An increase in the yield of a bond compared to the coupon rate would be associated with an increase in the price of a bond.
Since the interest rates on a bond are fixed, an increase in yields available on similar bonds means that this bond is less desirable, and would lower its price.
A)True
B)False
Q2) When inflation rises, preferred stock prices fall.
A)True
B)False
Q3) A 20-year bond pays 9% on a face value of $1,000. If similar bonds are currently yielding 6%, what is the market value of the bond? Use annual analysis.
A) Under $1,300
B) Exactly $1,000
C) Over $1,300
D) Not enough information is given to tell.
Q4) An increase in inflation will cause a bond's required return to rise.
A)True
B)False
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12
Chapter 11: Cost of Capital
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Sample Questions
Q1) Retained earnings represent an internal source of funds that is raised without the payment of interest or cost to the firm's stockholders. "Opportunity cost" must be considered since earnings could be issued to shareholders in the form of dividends.
A)True
B)False
Q2) All of the following are important considerations for minimizing the cost of capital EXCEPT:
A) future inflation rates
B) industry debt ratios
C) future economic conditions
D) current coupon rates of outstanding debt
Q3) In computing the cost of common equity, if the dividend (D<sub>1</sub>) goes downward and market price (P<sub>0</sub>) goes up, required rate of return (K<sub>e</sub>) will
A) go up.
B) go down.
C) stay the same.
D) slowly increase.
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Page 13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) The internal rate of return and net present value methods
A) always give the same investment decision answer.
B) never give the same investment decision answer.
C) usually give the same investment decision answer.
D) always give conclusions different from the payback method.
Q2) Using higher discount rates,
A) accelerated cost recovery depreciation is more valuable than straight line.
B) straight-line depreciation is more valuable than the accelerated cost recovery system of depreciation.
C) depreciation policy makes no difference.
D) later year depreciation has a higher net present value.
Q3) For MACRS depreciation, automobiles and light trucks fit into the A) 3-year MACRS category.
B) 5-year MACRS category.
C) 7-year MACRS category.
D) 10-year MACRS category.
Q4) Under the net present value method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital.
A)True
B)False
Page 14
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) A tool that helps to organize the decision process by presenting a graphical comparison of investment choices is called a
A) module hierarchy diagram.
B) "what if" simulation.
C) decision tree.
D) None of these options are correct.
Q2) Place the following investment decisions in order from the lowest risk to the highest risk
a. purchase of replacement machinery
b. new product in a foreign market
c. new product in the local market
d. repair of existing machinery
A) b, c, a, d
B) d, a, b, c
C) d, b, a, c
D) d, a, c, b
Q3) The highest possible value for positive correlation is +1.
A)True
B)False
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Page 15
Chapter 14: Capital Markets
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Sample Questions
Q1) Capital markets are becoming increasingly international as investors and issuers seek out the best risk-return opportunities.
A)True
B)False
Q2) Which of the following is not an example of indirect investment by a household?
A) Investment in a mutual fund's shares
B) Investment in an original offering of corporate securities
C) Investment in life insurance
D) A savings deposit in a commercial bank
Q3) During the next several years, the major threat to the dominance of the U.S. money and capital markets is expected to come from
A) Russia's difficulty in transforming its economy into a capitalistic one.
B) Japan's prolonged recession and banking crisis.
C) the Eurozone countries comprising the European Monetary Union and a single currency.
D) the huge Chinese economy and its billion-plus people.
Q4) Capital markets consist of securities having maturities greater than one year.
A)True
B)False
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Chapter 15: Investment Banking
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Sample Questions
Q1) The investment banking industry has shifted its emphasis from mergers and acquisitions to underwriting new securities. Investment bankers continue to play increasingly diverse roles as financial intermediaries.
A)True
B)False
Q2) When a company first goes public, a registration statement must be filed with the New York Stock Exchange.
The registration must be filed with the SEC.
A)True
B)False
Q3) An underpriced offering represents a permanent lost opportunity to the issuing firm.
A)True
B)False
Q4) In countries where stocks are publicly traded, IPOs are underpriced
A) in very few countries.
B) in less than half the countries.
C) in every country.
D) none of these options are true.
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Although the times interest earned ratio of many corporations went down tremendously during the 2007-2008 financial crisis, the ratio has been increasing steadily mainly because companies took advantage of the recent low interest rates.
A)True
B)False
Q2) From an investors' point of view, when is the best time to own a floating rate bond?
A) When the bond sells for a discount.
B) When interest rates are expected to fall.
C) When interest rates are expected to rise.
D) Any time, the interest rate fluctuations don't affect the floating rate bond.
Q3) A bond with a coupon rate of 6.5% (assume it is paid once annually), maturing in 10 years at a value of $1,000 and a current market price of $695, will have a current yield of A) 11.3%.
B) 10.2%.
C) 9.4%.
D) 8.5%.
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18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Investors are usually in favor of poison pills because they prevent takeovers.
A)True
B)False
Q2) An increasing proportion of shares in the U.S. are owned by
A) individual investors.
B) corporations (Treasury stock).
C) institutions.
D) governments.
Q3) Generally, the receipt of corporate bond interest is more valuable than preferred dividends to investors.
A)True
B)False
Q4) A rights offering is generally financially advantageous to the investor because it provides them with additional shares of stock.
A)True
B)False
Q5) Common stockholders have a legal claim to dividend income.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The dividend payout ratio includes both stock dividends and cash dividends.
A)True
B)False
Q2) To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend date.
A)True
B)False
Q3) Lucas Inc. earned $15 million last year and retained $6 million. Lucas has 5 million shares outstanding, and the current price of Lucas shares is $30 per share. What is the dividend payout ratio?
A) 2.67%
B) 4%
C) 40%
D) 60%
Q4) The "ex-dividend date" will typically be before the "holder of record date."
A)True
B)False
Q5) A stock split involves a reduction in the firm's retained earnings account. A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) If a $1,000 par value convertible bond has a conversion ratio of 1 bond to 70 shares, the bond conversion price is $14.29.
A)True
B)False
Q2) A warrant is of huge benefit to the company when the stock rises far above the exercise price.
A)True B)False
Q3) Most corporations include call provisions in agreements relating to the issue of warrants.
A)True
B)False
Q4) Forced conversions of convertible bonds occur when unethical corporate executives call corporate bonds prematurely.
A)True B)False
Q5) Basic earnings per share includes all convertible bonds outstanding. A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the facts provided, Aardvark should A) not purchase Zebra Computer Services.
B) purchase Zebra Computer Services.
C) purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
D) purchase Zebra only if Aardvark's cost of capital is above 10%.
Q2) Which one of the following types of mergers is most likely to lead to diversification benefits?
A) A horizontal merger
B) A vertical merger
C) A tax-free exchange
D) A conglomerate merger
Q3) Synergy effect is said to happen when the merged companies are able to work together and eliminate some of the repeated divisional tasks, proving that the company is better off being merged.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) forms the basis for the
A) purchasing power theory of exchange rates.
B) interest rate parity theory of exchange rates.
C) balance of payments theory of exchange rates.
D) government intervention theory of exchange rates.
Q2) One benefit in joining the "Eurozone" was to have easy access to borrowing.
A)True
B)False
Q3) Foreign exchange risk is the risk that a person or business will not be able to exchange currencies.
A)True
B)False
Q4) As inflation in any "Eurozone" country increases, while the U.S. experiences no change in inflation, the exchange rate of the euro to the dollar will increase.
A)True
B)False
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