Financial Management
Pre-Test Questions
Course Introduction
Financial Management provides an in-depth introduction to the principles and practices of managing a firm's financial resources. The course covers fundamental topics such as financial analysis, planning and forecasting, capital structure, working capital management, and investment decision-making. Students will learn how to evaluate financial statements, assess the cost of capital, analyze risk and return, and make informed financial decisions to maximize shareholder value. Emphasis is placed on real-world applications, financial markets, and the use of quantitative tools to support strategic planning.
Recommended Textbook
Essentials of Corporate Finance 9th Edition by Stephen Ross
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18 Chapters
1640 Verified Questions
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Limited liability companies are primarily designed to:
A)allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity.
B)provide the benefits of the corporate structure only to foreign-based entities.
C)spin off a wholly owned subsidiary.
D)allow companies to reorganize themselves through the bankruptcy process.
E)provide limited liability while avoiding double taxation.
Answer: E
Q2) Probably the least effective means of aligning management goals with shareholder interests is:
A)the potential for a proxy fight by an unhappy segment of shareholders.
B)basing all management bonuses on performance goals.
C)holding management salaries steady while increasing stock option grants.
D)the threat of a takeover of the firm.
E)automatically increasing management salaries on an annual basis.
Answer: E
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3
Chapter 2: Financial Statements,Taxes,and Cash Flow
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Sample Questions
Q1) W.S.Movers had $138,600 in net fixed assets at the beginning of the year.During the year,the company purchased $27,400 in new equipment.It also sold,at a price of $5,300,some old equipment that had a book value of $2,100.The depreciation expense for the year was $6,700.What is the net fixed asset balance at the end of the year?
A)$146,900
B)$159,300
C)$163,900
D)$157,200
E)$148,400
Answer: D
Q2) Dockside Warehouse has net working capital of $42,400,total assets of $519,300,and net fixed assets of $380,200.What is the value of the current liabilities?
A)$61,700
B)$88,40000
C)$102,900
D)$96,700
E)$111,500
Answer: D
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Wilberton's has total assets of $537,800,net fixed assets of $412,400,long-term debt of $323,900,and total debt of $388,700.If inventory is $173,900,what is the current ratio?
A)2.01
Answer: E
Q2) Oil Field Services has net income of $120,400,total assets of $1,219,000,total equity of $694,100,and total sales of $1,521,700.What is the common-size percentage for the net income?
A)9.00 percent
B)7.91 percent
C)15.53 percent
D)12.10 percent
E)8.62 percent
Answer: B
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) Your coin collection contains ten 1949 silver dollars.If your grandparents purchased the coins for their face value when they were new,how much will your collection be worth when you retire in 2065,assuming the coins appreciate at an annual rate of 5.1 percent?
A)$3,440.63
B)$2,329.29
C)$3,348.98
D)$3,205.64
E)$2,644.29
Q2) What is the future value of $5,700 invested for 18 years at 9 percent compounded annually?
A)$26,397.74
B)$26,887.59
C)$28,511.15
D)$27,513.06
E)$27,520.22
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6
Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) McClary Tires plans to save $20,000,$25,000,$27,500,and $30,000 at the end of each year for Years 1 to 4,respectively.If itearns 3.3 percent on its savings,how much will the firm have saved at the end of Year 4?
A)$107,525.40
B)$108,392.69
C)$111,860.57
D)$107,130.78
E)$110,426.41
Q2) Hometown Builders is borrowing $195,000 today for four years.The loan is an interest-only loan with an APR of 7.65 percent.Payments are to be made annually.What is the amount of the first annual payment?
A)$14,917.50
B)$20,610.90
C)$18,029.18
D)$58,416.55
E)$63,667.50
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A bond? s annual interest divided by its face value is referred to as the:
A)market rate.
B)call rate.
C)coupon rate.
D)current yield.
E)yield-to-maturity.
Q2) Last year,Forest Products issued both 5-year and 10-year bonds at par.The bonds each have a coupon rate of 5.5 percent,paid semiannually,and a face value of $1,000.Assume the yield to maturity on each of these bonds is now 7.4 percent.What is the percentage change in the price of the 5-year bond since it was issued? The 10-year bond?
A)-3.39; -6.08
B)-6.08; -6.33
C)-6.48; -12.33
D)-6.48; -10.87
E)-3.39; -5.77
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Blasco International has sales of $389,700 and costs of $413,210. The company has 120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of $19.20 per share and a market value per share of $8.60?
A) 2.65
B) 1.89
C) 2.23 D) 2.48 E) 2.37
Q2) Today's stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount?
A) $.66
B) $1.08
C) $1.13
D) $1.28
E) $1.33
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9
Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
A)Internal rate of return
B)Profitability index
C)Net present value
D)Modified internal rate of return
E)Average accounting return
Q2) The Tool Box needs to purchase a new machine costing $1.46 million.Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years.If management requires a minimum 12 percent rate of return,should the firm purchase this particular machine based on its IRR? Why or why not?
A)Yes, because the IRR is 10.75 percent
B)Yes, because the IRR is 12.74 percent
C)No, because the IRR is 10.75 percent
D)No, because the IRR is 12.74 percent
E)The answer cannot be determined as there are multiple IRRs
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) The Book Store is considering a new four-year expansion project that requires an initial fixed asset investment of $2.1 illion.The fixed asset will be depreciated straight-line to zero over its four-year life,after which time it will be worthless.The project is estimated to generate $.98 million in annual sales,with costs of $.79 million.If the tax rate is 34 percent,what is the OCF for this project?
A)$303,900
B)$650,400
C)$284,280
D)$325,400
E)$291,640
Q2) A debt-free firm has net income of $107,400,taxes of $38,700,and depreciation of $19,300.What is the operating cash flow?
A)$88,000
B)$123,500
C)$127,100
D)$126,700
E)$118,900
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11
Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) Assume large-company stocks returned 12.1 percent on average over the past 88 years.The risk premium on these stocks was 8.6 percent and the inflation rate was 3.0 percent.What was the average nominal risk-free rate of return for those 88 years?
A)3.5 percent
B)9.1 percent
C)4.6 percent
D)5 percent
E)6.5 percent58
Q2) Hercules Movers pays a constant annual dividend of $1.48 per share on its stock.Last year at this time,the market rate of return on this stock was 15.7 percent.Today,the market rate has fallen to 13.3 percent.What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?
A)-15.29 percent
B)-22.03 percent
C)16 percent
D)16.47 percent
E)18.05 percent
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Chapter 11: Risk and Return
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Sample Questions
Q1) Stock A comprises 28 percent of Susan's portfolio.Which one of the following terms applies to the 28 percent?
A)Portfolio variance
B)Portfolio standard deviation
C)Portfolio weight
D)Portfolio expected return
E)Portfolio beta
Q2) Which statement is true?
A)The expected rate of return on any portfolio must be positive.
B)The arithmetic average of the betas for each security held in a portfolio must equal 1.0.
C)The beta of any portfolio must be 1.0.
D)The weights of the securities held in any portfolio must equal 1.0.
E)The standard deviation of any portfolio must equal 1.0.
Q3) Which one of these represents systematic risk?
A)Major layoff by a regional manufacturer of power boats
B)Increase in consumption created by a reduction in personal tax rates
C)Surprise firing of a firm's chief financial officer
D)Closure of a major retail chain of stores
E)Product recall by one manufacturer
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Page 13
Chapter 12: Cost of Capital
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Sample Questions
Q1) Which statement is correct,all else held constant?
A)Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred.
B)A decrease in a firm's WACC will increase the attractiveness of the firm's investment options.
C)The aftertax cost of debt increases when the market price of a bond increases.
D)If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC.
E)WACC is applicable only to firms that issue both common and preferred stock
Q2) The market rate of return is 11.8 percent and the risk-free rate is 3.45 percent.Galaxy Co.has 36 percent more systematic risk than the overall market and has a dividend growth rate of 3.5 percent.The firm's stock is currently selling for $42 a share and has a dividend yield of 2.8 percent.What is the firm's cost of equity?
A)10.55 percent
B)15.31 percent
C)19.82 percent
D)16.28 percent
E)21.11 percent
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Southern Foods has a $13 million bond issue outstanding with a coupon rate of 7.15 percent and a yield to maturity of 7.39 percent.What is the present value of the tax shield if the tax rate is 34 percent?
A)$283,140
B)$316,030
C)$4,053,400
D)$3,960,000
E)$4,420,000
Q2) Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000.The current cost of equity is 17.6 percent and the tax rate is 35percent.The company is in the process of issuing $4.3 million of 8.3 percent annual coupon bonds at par.What is the levered value of the firm?
A)$3,824,318
B)$3,541,085
C)$3,422,225
D)$2,713,185
E)$3,385,695
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Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) KL Electronics has paid a quarterly dividend of $.42 per share for the past two years.This quarter,the firm plans to pay $.42 plus an additional $.05 per share.The firm has stated that it is uncertain whether it will pay $.42 or $.47 per share next quarter.Which one of the following is the best description of the additional $.05 that is being paid this quarter?
A)Liquidating dividend
B)Special dividend
C)Extra dividend
D)Stock dividend
E)Normal dividend
Q2) Normal cash dividends that are increased regularly tend to send which message?
A)The firm is attempting to reduce its tax bill.
B)The dividends are expected to increase the firm's agency costs.
C)The firm is planning on downsizing.
D)The firm is discontinuing all stock repurchases.
E)The firm expects to be profitable.
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Chapter 15: Raising Capital
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Sample Questions
Q1) When issuing securities,which of the following can occur prior to receiving the approval by the SEC of a registration statement?
I.Oral offer to buy shares
II.Written offer to buy shares
III.Final determination of the offer price
IV.Distribution of a preliminary prospectus
A)I only
B)III only
C)III and IV only
D)I and IV only
E)None of the listed activities can occur until after the SEC approval is received
Q2) Which statement is correct?
A)Rarely is debt issued privately in the U.S.
B)All U.S.debt issues, private and public, must be registered with the SEC.
C)Private placements generally have shorter maturities than term loans.
D)It is easier to renegotiate a public issue than it is a private issue of debt.
E)A direct placement of debt generally has more restrictive covenants than a public issue.
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) Kurt's Music has a line of credit with a local bank that permits it to borrow up to $650,000 at any time.The interest rate is .64 percent per month.The bank charges compound interest and also requires that 2 percent of the amount borrowed be deposited into a non-interest-bearing account.How much interest will the firm pay if it needs $200,000 of cash for three months to pay its operating expenses?
A)$3,943.50
B)$3,949.21
C)$4,017.02
D)$3,864.63
E)$3,902.11
Q2) Which statement is true?
A)A decrease in the accounts receivable turnover rate decreases the cash cycle.
B)Paying a supplier within the discount period rather than waiting until the end of the normal credit period will decrease the cash cycle.
C)The number of days in the cash cycle can be positive, negative, or equal to zero.
D)An increase in the inventory turnover rate must increase the cash cycle.
E)The payables period must be shorter than the receivables period.
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Page 18
Chapter 17: Working Capital Management
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Sample Questions
Q1) Which one of the following is a primary benefit of implementing zero-balance accounts into a cash management system?
A)Increased disbursements float
B)Total elimination of all safety stocks
C)Additional cash availability
D)Decreased collection float
E)Elimination of all float
Q2) The primary purpose of a cash discount is to:
A)compensate customers for an out-of-stock item.
B)compensate customers for faulty goods or services.
C)offset the interest charges on an account receivable.
D)induce customers to pay promptly.
E)induce customers to purchase specialty items.
Q3) Which report identifies the percentage of accounts receivable that are delinquent by 90 days or more?
A)Cash budget
B)5 C’s of credit
C)Credit analysis
D)Aging schedule
E)Credit scoring report
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) A good steak dinner in the U.S.costs 59USDwhile the exact meal costs 825MXN across the border in Mexico.Based on purchasing power parity,what is the implied MXN/USD exchange rate?
A)13.76MXN/1USD
B)13.98MXN/1USD
C)14.04MXN/1USD
D)14.23MXN/1USD
E)14.11MXN/1USD
Q2) The spot rate on the Norwegian kroner is 7.0305.The exchange rate one year from now is expected to be 7.0614 assuming that relative interest rate parity exists.Interest rates in Norway are 3.3 percent.What is the interest rate in the U.S.?
A)2.86 percent
B)3.02 percent
C)3.59 percent
D)4.54 percent
E)4.68 percent
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