Financial Management
Practice Questions
Course Introduction
Financial Management is a foundational course that explores the principles and techniques required to make effective financial decisions within organizations. Students will learn about financial analysis, planning, and control, including topics such as time value of money, risk and return, capital budgeting, cost of capital, capital structure, and working capital management. Emphasizing both theoretical frameworks and practical applications, the course equips students with the skills necessary to evaluate investment opportunities, assess financial performance, and develop strategies for funding and growing enterprises in a dynamic business environment.
Recommended Textbook
Financial Management Core Concepts 2nd Edition by Raymond Brooks
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Page 2
Chapter 1: Financial Management
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Sample Questions
Q1) Why are sole proprietorships so much more popular in terms of the number of firms than corporations? (This answer should identify the significant advantages to the sole proprietorship versus those of other forms of business organization.)
Answer: Sole proprietorships are popular because they are easy to start up, with fewer regulations and reporting requirements than other forms of business organization. Sole proprietorships are also popular because they give individuals the opportunity to be their own boss, to make all of the decisions, and to realize 100% of the after-tax proceeds of the business.
Q2) ________ addresses the question of how to handle our day-to-day business needs.
A) Capital budgeting
B) Capital structure
C) Working capital management
D) Accounts receivable management
Answer: C
Q3) Auction markets consist of dealers buying and selling from their own portfolios.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Statements
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Sample Questions
Q1) The income statement begins with revenue and subtracts various operating expenses until arriving at ________.
A) earning after taxes
B) net income
C) taxable income
D) EBIT
Answer: D
Q2) Which of the statements below is TRUE?
A) Accounting Identity is: Assets Liabilities - Owners' Equity.
B) Accounting Identity is: Assets Liabilities + Owners' Equity.
C) Accounting Identity is: Assets Owners' Equity - Liabilities.
D) Accounting Identity is: Liabilities Assets + Owners' Equity.
Answer: B
Q3) EBIT (earnings before interest and taxes) is obtained by adding together revenue and operating expenses.
A)True
B)False
Answer: False
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Chapter 3: The Time Value of Money Part 1
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Sample Questions
Q1) Your trust fund will pay you $100,000 in six years when you turn 25. A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today. Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?
A) Use 8% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.
B) Use 10% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.
C) Use 8% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.
D) Use 10% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.
Answer: C
Q2) Other things remaining equal, the price today and the growth rate are inversely related.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Time Value of Money Part 2
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Sample Questions
Q1) An annuity is a series of
A) variable cash payments at regular intervals across time.
B) equal cash payments at regular intervals across time.
C) variable cash payments at different intervals across time.
D) equal cash payments at different intervals across time.
Q2) The first interest payment on a 5-year, 8%, $100,000, fully-amortized loan with annual payments will be less than the last interest payment.
A)True
B)False
Q3) A British consol bond can be considered a type of perpetuity. A)True
B)False
Q4) You currently have $67,000 in an interest-earning account. From this account, you wish to make 20 year-end payments of $5,000 each. What annual rate of return must you make on this account to meet your objective?
A) 4.16%
B) 5.03%
C) 6.42%
D) 7.32%
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Chapter 5: Interest Rates
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Sample Questions
Q1) Which of the statements below is FALSE?
A) Inflation has averaged 4.05% over the past 50 years.
B) The real rate has average 1.18% over the past 50 years.
C) The default premium has averaged 7.05% over the past 50 years.
D) The maturity premium has averaged 1.28% (for twenty-year maturity differences) over the past 50 years.
Q2) You pay down 10% on a home with a purchase price of $280,000. The bank will loan you the remaining balance of $252,000 at 8.23% APR. You have an option to make annual payments or monthly payments on the loan. Both options have a 30-year payment schedule. What are the annuity payments under the annual plan? What are the annuity payments under the monthly plan? In terms of the total cash outflows and the effective cost of borrowing, briefly compare both plans.
Q3) The default risk premium for U.S. corporate bonds was greater in the last 50 years of the 20th century than in the first decade if the 21st century.
A)True
B)False
Q4) Most consumer loans payments are monthly.
A)True
B)False
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Chapter 6: Bonds and Bond Valuation
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Sample Questions
Q1) Endicott Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 15%, what is the firm's current price per bond?
A) $934.20
B) $1,000.00
C) $934.34
D) $466.79
Q2) A bond may be issued by ________.
A) companies
B) state governments
C) the federal government
D) All of the above
Q3) Progressive Plastics Inc. issued 30-year 7% annual coupon bonds five years ago. Currently, the yield to maturity is 9.65% on these $1,000 par value bonds. What is the current price per bond?
Q4) If a bond is selling at a premium above the par value, that means that the yield to maturity is greater than the coupon rate.
A)True
B)False
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Chapter 7: Stocks and Stock Valuation
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Sample Questions
Q1) The dividend model requires that a firm has a cash dividend history and that the dividend history shows a ________.
A) constant dividend or a constant growth in price where constant growth can be either positive or negative
B) positive dividend or a negative growth in dividends
C) constant dividend or a positive growth in dividends
D) constant price or a positive growth in dividends
Q2) The shares that are available for public purchase and subsequent trading in a secondary market such as the NYSE or NASDAQ are the issued shares of the company.
A)True
B)False
Q3) The Belgium Bike Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?
A) $12.44
B) $12.94
C) $13.46
D) There is not enough information to answer this question.
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Chapter 8: Risk and Return
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Sample Questions
Q1) Explain how the statistical concepts of mean and standard deviation apply to the financial ideas of risk and return.
Q2) Which of the following statements about probabilities is INCORRECT?
A) The sum of all probabilities of a particular event must sum to 100%.
B) Each possible outcome must have a non-negative probability.
C) Probability is a statistical tool for estimating future outcomes.
D) Probability is associated with an ex-post view.
Q3) Stocks A, B, C, and D have returns of 10%, 20%, 30%, and 40%, respectively. What is their variance?
A) 66.67%
B) 166.67%
C) 4.08%
D) 2.15%
Q4) The measure of systematic risk is called ________.
A) correlation
B) covariance
C) variance
D) beta
Q5) Explain the difference in the two main measures of risk: the standard deviation and the beta.
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Chapter 9: Capital Budgeting Decision Models
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Sample Questions
Q1) Lennon, Inc. is considering a five-year project that has an initial outlay or cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000, and $55,000. Lennon uses the internal rate of return method to evaluate projects. What is Lennon's IRR?
A) The IRR is less than 22.50%.
B) The IRR is about 24.16%.
C) The IRR is about 26.16%.
D) The IRR is over 26.50%.
Q2) Two projects intersect, in terms of NPV, at a discount rate labeled the ________.
A) crossover rate
B) internal rate of return
C) discount rate
D) yield to maturity
Q3) Capital budgeting decisions are typically long-term decisions.
A)True
B)False
Q4) Name and describe three key observations that we can make about the capital budgeting decision.
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Page 11
Chapter 10: Cash Flow Estimation
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Sample Questions
Q1) A firm is considering purchasing an asset that will have a useful life of 10 years and cost $5 million; it will have installation costs of $500,000 and a salvage or residual value of $500,000. What is the annual straight-line depreciation for this asset?
A) $400,000 per year
B) $500,000 per year
C) $600,000 per year
D) $700,000 per year
Q2) The building of the ________ cash flow of a project is the cornerstone of the financial decision models.
A) depreciation
B) incremental
C) accounting
D) tax
Q3) Fully depreciated assets ________ , and so any proceeds from sale at disposal are taxable gains.
A) always have a market value of zero
B) have a positive book value
C) have a negative market value
D) have a book value of zero
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Page 12
Chapter 11: The Cost of Capital
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Q1) ________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.
A) Capital structure
B) Cost of capital
C) Working capital management
D) NPV
Q2) A firm's capital structure can be determined by examining which parts of the firm's balance sheet?
A) The long-term assets
B) The debt and equity
C) The short-term assets and liabilities
D) None of the above because a firm's capital structure is best observed on the income statement.
Q3) An investment banker's fees are part of the ________ realized for issuing new debt or equity.
A) flotation costs
B) opportunity costs
C) revenues
D) benefits
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Chapter 12: Forecasting and Short-Term Financial Planning
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Q1) The timing and the amount of cash flow is important to the financial manager and estimating these cash outflows is part of the ________ process
A) income forecasting
B) revenue forecasting
C) cash forecasting
D) cost forecasting
Q2) There are a variety of ways to produce pro formas, but they usually rely on two primary inputs. One of these primary inputs is ________.
A) the projected sales for the current year
B) the projected sales for the past year
C) the prior year's financial statements
D) this year's financial statements
Q3) A financial manager needs to know if any of the credit sales will not be paid by customers. This situation will entail a reduction in the estimate of the cash flow due to "bad debts."
A)True
B)False
Q4) What does a pro forma statement do? On what inputs does a pro forma statement rely?
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Chapter 13: Working Capital Management
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Q1) Your inventory reorder point should consider the natural lead-time for an order and unexpected order delays.
A)True
B)False
Q2) When using the ABC Inventory Management System, Type A items are ________.
A) small-dollar items
B) nonessential inventory items
C) large-dollar or critical inventory items
D) moderate-dollar items
Q3) Estimating ________ is one part of managing short-term cash needs. The second part is estimating ________.
A) cash inflow, accounts payable
B) cash inflow, cash outflow
C) accounts receivable, cash outflow
D) accounts receivable, cash inflow
Q4) When a company deals only in cash, the cash conversion cycle becomes
A) the collection cycle
B) the payable cycle
C) the production cycle
D) the collection cycle - the payable cycle
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Chapter 14: Financial Ratios and Firm Performance
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Sample Questions
Q1) The revenue is $10,000, the cost of goods sold is $2,000, the selling, general and administrative expenses are $3,000, and depreciation is $1,000. What is the EBIT?
A) -$1,000
B) $2,000
C) $3,000
D) $4,000
Q2) An example of a financial statement is ________.
A) the Income Statement
B) the Sources and Uses of Cash
C) the Statement of Financial Position (Balance Sheet)
D) All of these
Q3) One way to measure a company's financial performance is to benchmark against that of its competition. Which of the below is NOT a problem a company faces when benchmarking this way?
A) A problem arises when we use financial statements of different firms.
B) Firms are of different sizes, and thus comparisons may be troubling
C) We cannot restate common-size financial statements for different firms.
D) All of these are problems.
Q4) Name and describe two primary financial statements produced by a company.
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Chapter 15: Raising Capital
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Sample Questions
Q1) The two chapters for commercial businesses to handle financial difficulties under the Bankruptcy Reform Act of 1978 are ________.
A) chapters 7 and 11
B) chapters 7 and 13
C) chapters 9 and 11
D) chapters 11 and 13
Q2) With a line of credit, a company can borrow money at a preset rate from the bank at any time, without seeking additional approval of the loan each time funds are needed.
A)True
B)False
Q3) Syndicated loans are generally reserved for large and mature businesses, and are for the long term rather than the short term.
A)True
B)False
Q4) A typical banker's acceptance would involve two firms and their commercial banks. A)True
B)False
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Chapter 16: Capital Structure
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Q1) Investors Bill and Maggie lend $60,000 to each new idea. Bill picks low-risk projects that are successful 60% of the time. Maggie takes on high-risk projects that that are successful 20% of the time. What rate of return must each successful project pay Bill and Maggie for them to break even?
Q2) Although the work of Modigliani and Miller produced a near-100% debt mix for firms in a world of taxes, the actual debt-to-equity ratio for most firms falls far short of 100% debt financing.
A)True
B)False
Q3) Garson Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each share of stock is $6.00. The CEO of Garson is thinking of leveraging the firm by selling $600,000 of debt financing and retiring 100,000 shares, leaving 100,000 outstanding. The cost of debt is 10% annually, and the current corporate tax rate for Garson is 30%. If the CEO believes that Garson will earn $100,000 per year before interest and taxes, should she leverage the firm? Explain.
Q4) Summarize the Modigliani and Miller contribution to the debate on the optimal capital structure.
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Page 18
Chapter 17: Dividends, Dividend Policy, and Stock Splits
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Q1) Optimal dividend policy will differ among shareholders for reasons including personal income tax status and future expectations for the firm.
A)True
B)False
Q2) According to the text, which of the following four cash flows should be LAST in order of priority for a firm?
A) Cash to pay off debts in a timely fashion
B) Cash to maintain operations
C) Cash dividends
D) Cash for reinvesting
Q3) A residual dividend policy is one in which
A) leftover funds are paid out to stockholders as dividends after all other capital requirements are met.
B) a conservative dividend payment is made each period to stockholders.
C) no dividends are paid to stockholders because they will reap their benefits when the firm ceases operations.
D) bondholders receive extra cash flows when available after paying dividends to shareholders.
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Chapter 18: International Financial Management
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Q1) In regard to the cultural risks related to ownership structure, which of the statements below is FALSE?
A) Cultural norms work their way into laws and regulations so that the interests of the host country will take precedence over the interest of the foreign country, the original home of the business.
B) In order to start a business operation in a foreign country, it may be necessary to utilize a joint venture business form.
C) Today, there are practically no industries protected against foreign ownership in host countries.
D) The ownership structure of a business can be restricted once the business ventures overseas and faces the additional constraint of meeting ownership requirements of more than one government.
Q2) ________ arise(s) from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in a host country.
A) Cultural risk
B) Political risk
C) Social fads
D) Similarities in business beliefs
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