Financial Management
Pre-Test Questions
Course Introduction
Financial Management is an essential course that introduces students to the principles and practices of managing an organizations financial resources. The course explores core concepts such as time value of money, financial statement analysis, risk and return, capital budgeting, cost of capital, and working capital management. Students will learn how to evaluate investment opportunities, make strategic financing decisions, and understand the overall financial planning process. Emphasizing both theory and practical application, this course prepares students to make informed financial decisions and equips them with analytical tools vital for careers in business and finance.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The internationalization of the financial markets has
A) allowed firms such as McDonald's to raise capital around the world.
B) raised the cost of capital.
C) forced companies to price everything in U.S. dollars.
D) All of the options are true.
Answer: A
Q2) Professors Harry Markowitz and William Sharpe received their Nobel Prize in Economics for their contributions to the A) options pricing model.
B) theories of working capital management.
C) theories of portfolio based management and the risk along with return on securities.
D) theories of international capital budgeting.
Answer: C
Q3) A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies accurately present their assets, liabilities, and income in their financial statements.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) The book value per share is based off of ________ data, while the market value per share is based off of ________ data.
A) short term; long term
B) future; historical
C) historical; future
D) long term; short term
Answer: C
Q2) Density Farms Inc. had sales of $750,000, cost of goods sold of $200,000, selling and administrative expense of $70,000, and operating profit of $150,000. What was the value of depreciation expense?
A) $150,000
B) $230,000
C) $330,000
D) $0
Answer: C
Q3) The investments account includes marketable securities.
A)True
B)False
Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) A quick ratio that is much smaller than the current ratio reflects
A) a small portion of current assets is in inventory.
B) a large portion of current assets is in inventory.
C) that the firm will have a high inventory turnover.
D) that the firm will have a high return on assets.
Answer: B
Q2) A current ratio of 2 to 1 is always acceptable for a company in any industry.
A)True
B)False
Answer: False
Q3) Ratios are not misleading by inflation.
A)True
B)False
Answer: False
Q4) Because ratios are historic, they have minimal value to an investor. A)True
B)False
Answer: False
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) The percent-of-sales method would not result in very accurate financials if used for a tourism company.
A)True
B)False
Q2) A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
A) $7,500
B) $8,000
C) $7,900
D) $8,100
Q3) A firm that is currently operating at 100% of capacity has an increase in sales. For every percentage increase in sales, the same percentage increase will be needed in current assets and current liabilities.
A)True
B)False
Q4) The balance sheet represents declining changes in the corporation over time.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) The degree of operating leverage may be defined as A) the percent change in operating income divided by the percent change in unit volume.
B) Q(P VC) divided by Q(P VC) FC.
C) S TVC divided by S TVC FC.
D) All of the options are true.
Q2) If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.
A)True
B)False
Q3) A high degree of operating leverage means
A) there are high labor costs.
B) there is high debt.
C) there is a large amount of equity.
D) there are high fixed costs.
Q4) Operating leverage emphasizes the impact of using fixed assets in the business.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) If we examine the ratio of working capital to sales, we can see that for the last several decades, firms' liquidity has been increasing.
A)True
B)False
Q2) The cash budget combines the cash receipts and cash payments schedules in determining cash flow.
A)True
B)False
Q3) Working capital management involves the financing and management of the current assets of the firm.
A)True
B)False
Q4) Heavy use of long-term financing generally leads to lower financing costs.
A)True
B)False
Q5) The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Stretching out the maturity of marketable securities can rarely result in a loss.
A)True B)False
Q2) Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to devise models predicting payment problems and the probability of bankruptcy 12 months in the future.
A)True B)False
Q3) All of the following are methods of controlling receivables except A) offering a cash discount.
B) reducing net terms.
C) using DBIS.
D) reducing cash sales.
Q4) Multinational firms find it difficult to shift funds from one country to another.
A)True B)False
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Page 9
Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Issuers of commercial paper can be divided into finance paper or direct paper, dealer paper, and asset-backed commercial paper.
A)True
B)False
Q2) Accounts receivable may be used as a source of financing by
A) pledging the receivables as loan collateral.
B) "factoring" the receivables to a finance company.
C) selling securities backed by the receivables.
D) All of these options are correct.
Q3) Commercial paper offers which of the following advantages to the issuer?
A) It may be issued below the prime rate.
B) It requires no compensating balances.
C) It is secured by corporate assets to protect the buyer.
D) It may be issued below the prime rate and requires no compensating balances.
Q4) Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.
A)True
B)False
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Page 10
Chapter 9: The Time Value of Money
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Sample Questions
Q1) In evaluating capital investment projects, current outlays must be judged against the current value of future benefits.
A)True
B)False
Q2) Dan would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest in each of the following years to achieve his goal?
A) $13,241
B) $133,239
C) $10,727
D) $52,450
Q3) The interest factor for a future value (FV<sub>IF</sub>) is equal to (1 + i)<sup>n</sup><sub>.</sub>
A)True
B)False
Q4) Higher interest rates reduce the present value amount.
A)True B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The higher the yield to maturity on a bond, the closer to par the bond will trade.
A)True
B)False
Q2) A 10-year bond pays 6% annual interest in semiannual payments. The current market yield to maturity is 4%. The appropriate interest factors used to calculate the sales price of this bond should be in the TVM tables under 2% for 20 periods.
A)True
B)False
Q3) The risk premium is likely to be highest for
A) U.S. government bonds investment.
B) corporate bonds investment.
C) utility company stock investment.
D) either corporate bonds or utility company stock investments.
Q4) When inflation rises, bond sales prices fall.
A)True B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm's stock is selling for $65. The dividend yield is 6%. A 7% growth rate is expected for the common stock. The firm's tax rate is 21%. What is the firm's cost of retained earnings?
A) 8.16%
B) 13.00%
C) 12.35%
D) 7.8%.
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) The after-tax cost of debt will almost always be below
A) the before-tax cost of debt.
B) the weighted average cost of capital.
C) the cost of equity.
D) all of these options are true.
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) 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.
Q2) In a replacement decision, a book loss on an old asset can be a valuable feature.
A)True
B)False
Q3) The reason cash flow is used in capital budgeting is because
A) cash rather than income is used to purchase new machines.
B) cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.
C) to ignore the tax shield provided from depreciation would ignore the cash flow provided by the machine, which should be reinvested to replace older machines.
D) All of these options are true.
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14
Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) In order to reduce risk in a firm, the firm would seek to enter a business that
A) has a high positive correlation with its present business.
B) has a zero correlation with its present business.
C) has a high negative correlation with its present business.
D) has a high negative variation with its present business.
Q2) When considering the efficient frontier, financial managers should adhere to all of the following guidelines EXCEPT
A) Select the projects on the leftmost and uppermost sector of the possible projects.
B) Prefer the project on the far right side of the efficient frontier because it offers the highest return.
C) Maximize return for a given level of risk.
D) Minimize risk for a given level of return.
Q3) Investment A may have a higher standard deviation than investment B and still have less risk.
A)True
B)False
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15
Chapter 14: Capital Markets
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Sample Questions
Q1) Foreign investors have preferred to invest in the United States EXCEPT for which of the following reasons?
A) Less stringent regulation of securities markets.
B) The political stability of the U.S. government.
C) The U.S. dollar is the world's international currency.
D) All of these options are reasons that foreign investors prefer to invest in the United States.
Q2) The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the accuracy of their firm's financial statements.
A)True
B)False
Q3) Dark pools are considered:
A) areas in the market that securities are considered worthless.
B) areas in the market where securities are traded and concealed from the public market.
C) areas in the market where an investor would generally not make any money.
D) trades that hedge fund, mutual fund, and insurance companies tend to stay away from.
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16
Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Which investment bank underwrote the most bonds in 2013 and 2014?
A) Merrill Lynch
B) J.P. Morgan
C) Deutsche Bank
D) Citigroup
Q2) Large well-established investment bankers often distribute new issues on a best-efforts basis.
A)True
B)False
Q3) The "best efforts" method of underwriting is the most common method used in issuances.
A)True
B)False
Q4) All of the following are advantages of going public EXCEPT
A) More funds are available to publicly traded firms.
B) The fact that a company is public helps in bank negotiations and marketing.
C) Publicly traded stocks afford the stockholders more liquidity.
D) The firm must disseminate more information to the public on corporate affairs.
Page 17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Which of the following bonds offers the most security to the bondholder?
A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bonds
D) Income bonds
Q2) An after-acquired property clause means that any new property acquired is placed under the original mortgage claim.
A)True
B)False
Q3) An advantage to the corporation of issuing zero coupon bonds is
A) lower interest rates than conventional bonds.
B) cash inflow with lower cash outflow than conventional bonds.
C) tax benefits due to amortization.
D) none of these options are advantages.
Q4) The higher the tax rate, the ________ the net underwriting cost on the new bond issue, from a cash flow point of view.
A) higher
B) lower
C) higher or lower
D) substantially higher
Page 18
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is Tricki's expected price when it begins trading ex-rights?
A) $47.23
B) $44.00
C) $44.09
D) $45.00
Q2) The ex-rights date usually takes place after the end of the subscription period.
A)True
B)False
Q3) Stock classes may differ in voting rights, dividend rights, and claims to income during company elimination.
A)True
B)False
Q4) Which of the following is NOT a primary investor in preferred stock?
A) Commercial banks
B) Corporations
C) Insurance companies
D) Pension funds
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Dobson's Auto earned $500,000 last year and had a 20% dividend payout ratio. How much did the firm add to its retained earnings?
A) $325,000
B) $425,000
C) $250,000
D) $400,000
Q2) One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets.
A)True
B)False
Q3) Dividend reinvestment plans provide the stockholder with an opportunity to buy additional shares of stock with the cash dividend paid by the company.
A)True
B)False
Q4) A firm will pay dividends as long as it has cash available.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) When a company has a convertible bond in its capital structure,
A) it can reduce its debt-to-equity ratio by calling the bond.
B) there is no effect on the firm's diluted earnings per share.
C) there is no advantage to the firm in forcing conversion of the bonds.
D) all of these options are correct.
Q2) The conversion value is equal to the conversion ratio times the conversion price.
A)True
B)False
Q3) A warrant is of huge benefit to the company when the stock rises far above the exercise price.
A)True
B)False
Q4) The floor value of a bond can change if market interest rates for competitive bonds change.
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) Synergy is the greatest and most easily measured nonfinancial benefit in a merger.
A)True
B)False
Q2) A "takeover tender offer" describes the attempted purchase of a firm with the consent of that firm's management.
A)True
B)False
Q3) Vertical integration usually represents acquisition of a competitor.
A)True
B)False
Q4) One potential advantage of a merger to the acquiring firm is the "portfolio effect," which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.
A)True
B)False
Q5) Mergers often improve the financing flexibility that a larger company has available.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) Currency exchange rates may be either floating or fixed.
A)True
B)False
Q2) The future rates of currency tend to increase for dates further in the future because of the increasing uncertainty over time.
A)True
B)False
Q3) The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country.
A)True
B)False
Q4) In the Eurobond market,
A) the interest rate is very high.
B) the security is denominated in a currency that is different from that of the nation in which the bonds are issued.
C) the Swiss franc is the most important currency.
D) disclosure requirements are very strict.
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