Financial Management
Pre-Test Questions
Course Introduction
Financial Management is a foundational course that explores the principles and practices essential for effective financial decision-making within organizations. The course covers topics such as financial statement analysis, budgeting, capital structure, cost of capital, investment evaluation, and working capital management. Through case studies and practical examples, students learn how to assess financial health, plan for future growth, and make strategic decisions that maximize the value of a firm. Emphasis is placed on understanding risk and return, time value of money, and the impact of financial decisions on overall organizational performance.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Which of the following is/are an advantage of incorporation?
A)Access to capital markets
B)Limited liability
C)Unlimited life
D)All of the above
Answer: D
Q2) A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
A)shareholder proposal
B)leveraged buyout
C)shareholder action
D)hostile takeover
Answer: D
Q3) The distinguishing feature of a corporation is that:
A)their is no legal difference between the corporation and its owners.
B)it is a legally defined,artificial being,separate from its owners.
C)it spreads liability for its corporate obligations to all shareholders.
D)provides limited liability only to small shareholders.
Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Luther's price - earnings ratio (P/E)for the year ending December 31,2009 is closest to:
A)7.9
B)10.1
C)15.4
D)16.0
Answer: C
Q2) Accounts payable is a:
A)long-term liability.
B)current asset.
C)long-term asset.
D)current liability.
Answer: D
Q3) Perrigo's enterprise value is closest to:
A)$952.16 million
B)$3580.14 million
C)$4168.06 million
D)$4425.15 million
Answer: C
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Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) Suppose that Bondi Inc.is a holding company that owns both Pizza Hut and Kentucky Fried Chicken Franchised Restaurants.If the value of Bondi is $130 million,and the Pizza Hut Franchises are worth $70 million,then what is the value of the Kentucky Fried Chicken Franchises?
A)$60 million
B)$70 million
C)$130 million
D)Unable to determine with the information provided
Answer: A
Q2) Which of the following statements regarding Net Present Value (NPV)is INCORRECT?
A)The NPV represents the value of the project in terms of cash today.
B)Good projects will have a positive NPV.
C)The NPV of a project is the difference between the present value of its benefits and the present value of its costs.
D)When faced with a set of alternatives,choose the one with the lowest NPV in order to minimize the present value of costs.
Answer: D
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
Page 5
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) Which of the following statements regarding the timeline is FALSE?
A)Date 1 is the end of the first year.
B)Date 0 is the beginning of the first year.
C)The space between date 0 and date 1 represents the time period between two specific dates.
D)You will find the timeline most useful in tracking cash flows if you interpret each point on the timeline as a period or interval of time.
Q2) The Internal Rate of return of this project is closest to:
A)10.2%
B)12.2%
C)14.2%
D)16.2%
Q3) Which of the following statements regarding the timeline is FALSE?
A)Date 1 is one year from now.
B)The $5000 below date 1 is the payment you will receive at the end of the first year.
C)The $5000 below date 2 is the payment you will receive at the beginning of the second year.
D)Date 0 represents today.
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Chapter 5: Interest Rates
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Q1) Which of the following statements is FALSE?
A)The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.
B)Interest rates we observe in the market will vary based on quoting conventions,the term of investment,and risk.
C)The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.
D)For a risk-free project,the opportunity cost of capital will typically be greater than the interest rate of U.S.Treasury securities with a similar term.
Q2) The total amount of interest that Dagny will pay during the first month of her mortgage is closest to:
A)$1110
B)$1785
C)$1800
D)$2245
Q3) Should you purchase the delivery truck or lease it? Why?
Q4) What is the effective after-tax rate of each instrument,expressed as an EAR?
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Page 7
Chapter 6: Valuing Bonds
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Sample Questions
Q1) Consider a zero coupon bond with 20 years to maturity.The amount that the price of the bond will change if its yield to maturity decreases from 7% to 5% is closest to:
A)$120
B)-$53
C)$53
D)$673
Q2) Consider a four-year,default-free bond with an annual coupon rate of 4.5% and a face value of $1000.The YTM on this bond is closest to:
A)3.85%
B)4.20%
C)4.35%
D)4.40%
Q3) The likely effect of a country printing additional currency to pay its debts is:
A)high inflation
B)devaluation of the currency
C)appreciation of the currency
D)A and B
Q4) If its YTM does not change,how does a bond's cash price change between coupon payments?
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Chapter 7: Investment Decision Rules
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Sample Questions
Q1) Which of the following statements is FALSE?
A)The incremental IRR need not exist.
B)If a change in the timing of the cash flows does not affect the NPV,then the change in timing will not impact the IRR.
C)Although the incremental IRR rule can provide a reliable method for choosing among projects,it can be difficult to apply correctly.
D)When projects are mutually exclusive,it is not enough to determine which projects have positive NPVs.
Q2) The payback period for project Alpha is closest to:
A)3.2 years
B)2.9 years
C)3.1 years
D)2.6 years
Q3) The internal rate of return rule can result in the wrong decision if the projects being compared have:
A)differences in scale.
B)differences in timing.
C)differences in NPV.
D)A and B are correct.
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Chapter 8: Fundamentals of Capital Budgeting
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Sample Questions
Q1) You are considering investing $600,000 in a new automated inventory system that will provide after-tax cost savings of $50,000 next year.These cost savings are expected to grow at the same rate as sales.If sales are expected to grow at 5% per year and your cost of capital is 10%,then what is the NPV of the automated inventory system?
A)$400,000
B)$500,000
C)-$100,000
D)$1,000,000
Q2) Which of the following questions is FALSE?
A)Net Working Capital = Current Assets - Current Liabilities.
B)Because depreciation is not a cash flow,we do not include it in the cash flow forecast.
C)Tax loss carry backs allow corporations to take losses during the current year and use them to offset income in future years.
D)Earnings are an accounting measure of firm performance.
Q3) Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5000 at the end of year three.What is the after-tax salvage value of this project?
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Chapter 9: Valuing Stocks
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Sample Questions
Q1) Assuming that Defenestration's dividend payout rate and expected growth rate remain constant,and Defenestration does not issue or repurchase shares,then Defenestration's stock price is closest to:
A)$50.00
B)$32.30
C)$22.25
D)$30.75
Q2) NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:
A)$10.00
B)$15.00
C)$14.00
D)$12.50
Q3) Taggart's stock price is closest to:
A)$12.50
B)$15.40
C)$20.00
D)$25.00
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Chapter 10: Capital Markets and the Pricing of Risk
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Expected return should rise proportionately with volatility.
B)Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return.
C)Smaller stocks have lower volatility than larger stocks.
D)The largest stocks are typically more volatile than a portfolio of large stocks.
Q2) Which of the following statements is FALSE?
A)In exchange for bearing systematic risk,investors want to be compensated by earning a higher return.
B)A key step to measuring systematic risk is finding a portfolio that contains only unsystematic risk.
C)When evaluating the risk of an investment,an investor will care about its systematic risk,which cannot be eliminated through diversification.
D)To measure the systematic risk of a stock,we must determine how much of the variability of its return is due to systematic,market-wide risks versus diversifiable,firm specific risks.
Q3) What is the market portfolio?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset
Pricing Model
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Sample Questions
Q1) The beta for the portfolio of the three stocks is closest to:
A)0.92
B)0.94
C)1.00
D)1.02
Q2) Which of the following statements is FALSE?
A)A portfolio that consists of a long position in the risk-free investment is known as a levered portfolio.
B)The optimal portfolio will not depend on the investor's personal tradeoff between risk and return.
C)The volatility of the risk-free investment is zero.
D)Our total volatility is only a fraction of the volatility of the efficient portfolio,based on the amount we invest in the risk free asset.
Q3) The variance on a portfolio that is made up of equal investments in Stock X and Stock Z is closest to:
A)0.62
B)0.05
C)0.12
D)0.06
13
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Chapter 12: Estimating the Cost of Capital
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Sample Questions
Q1) Suppose that you are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental.The number of shares of Rearden Metal that you hold is closest to:
A)780 shares
B)925 shares
C)1730 shares
D)2075 shares
Q2) Which of the following statements is FALSE?
A)If investors have homogeneous expectations,then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy.
B)Homogeneous expectations are when all investors have the same estimates concerning future investments and returns.
C)There are many investors in the world,and each must have identical estimates of the volatilities,correlations,and expected returns of the available securities.
D)The combined portfolio of risky securities of all investors must equal the efficient portfolio.
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14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) According to a survey of 392 CFOs conducted by John Graham and Campbell Harvey,the most common method used in corporate America to estimate the cost of capital is:
A)the CAPM.
B)multifactor models.
C)characteristic models.
D)the dividend discount model.
Q2) Using the FFC four factor model and the historical average monthly returns,the expected monthly return for Wal-Mart is closest to:
A)0.71%
B)0.53%
C)1.38%
D)0.79%
Q3) If investors believe that others have superior information which they can take advantage of by copying their trades,this can lead to:
A)an informational cascade effect.
B)a disposition effect.
C)a sensation seeking effect.
D)an overconfidence bias.
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Page 15
Chapter 14: Capital Structure in a Perfect Market
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Q1) Equity in a firm with no debt is called:
A)levered equity.
B)unlevered equity.
C)riskless equity.
D)risky equity.
Q2) What is the conservation of value principle?
Q3) Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock? The number of shares of With stock you purchased is closest to:
A)100
B)425
C)1650
D)825
Q4) Based upon the three comparable firms,what asset beta would you recommend using for your firm's new project?
Q5) What is a market value balance sheet and how does it differ from a book value balance sheet?
Page 16
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Chapter 15: Debt and Taxes
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Q1) Rearden Metal has no debt,and maintains a policy of holding $50 million in excess cash reserves,invested in risk free treasury securities currently yielding 4%.If Rearden is in the 40% marginal tax bracket,the cost of permanently maintaining this $50 million reserve is closest to:
A)$0.8 million
B)$1.2 million
C)$20.0 million
D)$30.0 million
Q2) In 2000,assuming an average dividend payout ratio of 50%,the effective tax rate for equity holders was closest to:
A)69%
B)65%
C)55%
D)30%
Q3) The value of Shepard Industries with leverage is closest to:
A)$64 million
B)$100 million
C)$135 million
D)$114 million
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Page 17
Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) What is the expected payoff to equity holders under JR's new riskier business strategy?
A)$15 million
B)$11 million
C)$20 million
D)$4 million
Q2) The idea that when a seller has private information about the value of good,buyers will discount the price they are willing to pay due to adverse selection is known as the:
A)pecking order hypothesis.
B)signaling theory of debt.
C)lemons principle.
D)credibility principle.
Q3) Suppose that MI has zero-coupon debt with a $125 million face value due next year.The total value of MI with leverage is closest to:
A)$133 million
B)$140 million
C)$147 million
D)$125 million
Q4) List five general categories of indirect costs associated with bankruptcy.
Page 18
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Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:
A)1.0 million
B)1.2 million
C)1.1 million
D)0.9 million
Q2) A method to repurchase shares is the ________,in which the firm lists different prices at which it is prepared to buy shares,and shareholders in turn indicate how many shares they are willing to sell at each price.
A)tender offer
B)Dutch auction share repurchase
C)targeted repurchase
D)open market share repurchases
Q3) If Wyatt Oil distributes the $70 million as a share repurchase,then its stock price after the share repurchase will be closest to:
A)$11.00
B)$12.50
C)$14.00
D)$17.50
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19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) If Wyatt adjusts its debt continuously to maintain a constant debt-equity ratio of 50%,then the value of this new project is closest to:
A)$188 million
B)$188.5 million
C)$320 million
D)$340 million
Q2) The NPV for Iota's new project is closest to:
A)$25.25
B)$13.25
C)$9.00
D)$18.50
Q3) Assuming that to fund the investment Taggart will take on $250 million in permanent debt and assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,the NPV of Taggart's new rail line is closest to:
A)$195 million
B)$200 million
C)$235 million
D)$240 million
Q4) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2007?
A)1505 units
B)1323 units
C)1914 units
D)1115 units
Q2) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Nike is closest to:
A)14.7%
B)10.2%
C)9.1%
D)13.5%
Q3) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation equity value of Ideko in 2010 is closest to:
A)$152.8 million
B)$181.7 million
C)$301.7 million
D)$272.8 million
Q4) What is the purpose of the sensitivity analysis?
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