Financial Management
Question Bank
Course Introduction
Financial Management is an essential course that explores the principles and practices involved in effectively managing an organization's financial resources. The course covers key topics such as financial analysis, planning and forecasting, capital budgeting, risk assessment, working capital management, and the sources of financing. Students will gain a comprehensive understanding of how financial decisions impact the value of a firm, the tools used for evaluating investment opportunities, and strategies for optimizing profitability while mitigating financial risks. Emphasis is placed on practical applications, ethical considerations, and the role of financial managers in achieving organizational objectives in a dynamic economic environment.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Ediiton by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The goal of financial management focuses on the fact that
A)the company will grow in size.
B)employee salaries should increase over time.
C)the current stockholders are the owners of the corporation.
D)the firm should expand faster than its competitors.
E)the current corporate officers should be highly compensated.
Answer: C
Q2) Which one of the following actions by a financial manager least meets the goal of financial management?
A)Increasing current costs in order to increase the market value of the stockholders' equity
B)Agreeing to expand the company at the expense of stockholders' value
C)Refusing to lower selling prices if doing so will reduce the net profits
D)Agreeing to pay bonuses based on the market value of the company stock
E)Refusing to borrow money when doing so will create losses for the firm
Answer: B
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) A firm starts its year with positive net working capital.During the year,the firm acquires more short-term debt than it does short-term assets.This means that
A)the ending net working capital might be positive,negative,or equal to zero.
B)both accounts receivable and inventory decreased during the year.
C)the beginning current assets were less than the beginning current liabilities.
D)accounts payable increased and inventory decreased during the year.
E)the ending net working capital will be negative.
Answer: A
Q2) ________ refers to the difference between a firm's current assets and its current liabilities.
A)Operating cash flow
B)Capital spending
C)Net working capital
D)Cash flow from assets
E)Cash flow to creditors
Answer: C
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Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) Ratios that measure how efficiently a firm uses its assets to generate sales are known as ________ ratios.
A)profitability
B)long-term solvency
C)short-term solvency
D)utilization
E)market value
Answer: D
Q2) Patti's has net income of $87,300,a price-earnings ratio of 11.8,and earnings per share of $1.13.How many shares of stock are outstanding?
A)6,547 shares
B)38,690 shares
C)77,257 shares
D)93,590 shares
E)8,750 shares
Answer: C
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) What is the effective annual rate if a firm charges you 7.75 percent,compounded daily,based on a 360-day year?
A)7.928%
B)7.994%
C)8.057%
D)7.582%
E)8.109%
Q2) Erickson's is considering a project with an initial cost of $623,000.The project will produce cash inflows of $33,500 monthly for 21 months.What is the annual rate of return on this project?
A)11.57%
B)13.59%
C)16.59%
D)17.47%
E)18.44%
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Chapter 5: Interest Rates and Bond Valuation
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Sample Questions
Q1) Interest rate risk ________ as the time to maturity increases.
A)increases at an increasing rate
B)increases at a decreasing rate
C)increases at a constant rate
D)decreases at an increasing rate
E)decreases at a decreasing rate
Q2) Roy's Welding's bond has an annual rate of return of 5.97 percent and a face value of $1,000.The current rate of inflation is 3.02 percent.What is the real rate of return on these bonds?
A)3.31%
B)2.86%
C)3.09%
D)3.48%
E)2.94%
Q3) Newspaper bond quotes are least apt to list a bond's
A)coupon rate.
B)maturity date.
C)bid price.
D)par value.
E)asked price.
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Chapter 6: Stock Valuation
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Sample Questions
Q1) Denver Wool is owned by a group of shareholders who all vote independently and who all want personal control over the firm.There are three open seats and Danielle is one of six contenders.If straight voting is utilized and Danielle is a current shareholder,then he
A)is only permitted to elect one director,regardless of the number of shares he owns.
B)will be assured of his election if he owns at least one-sixth,plus one,of the outstanding shares.
C)must own at least two-thirds of the shares,plus one,to exercise control over the elections.
D)can only be assured of his election if he owns sufficient shares to control the entire election.
E)can be assured of his election provided he owns more shares than any other single shareholder.
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Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) Assume a project has an initial cost of $48,000 and will produce net income for 5 years.The project will use straight-line depreciation over the life of the project.The AAR of this project can be computed as
A)(Sum of all net income / 5)/ ($48,000 / 2)
B)(Sum of all net income / 2)/ ($48,000 / 2)
C)($48,000 / 5)/ (Sum of all net income / 5)
D)($48,000 / 2)/ (Sum of all net income / 2)
E)(Sum of all net income / 5)/ $48,000
Q2) A project has an initial cost of $51,900 and cash flows of $18,700,$56,500,and -$9,100 for Years 1 to 3,respectively.If the required rate of return for this investment is 17 percent,should you accept it based solely on the internal rate of return rule? Why or why not?
A)Yes,because the IRR exceeds the required return.
B)Yes,because the IRR is a positive rate of return.
C)You cannot apply the IRR rule in this case because there are multiple IRRs.
D)No,because the IRR is a negative rate of return.
E)No,because the IRR is less than the required return.
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) The Market is considering a project that will require the purchase of $1.27 million in new equipment.The equipment will be depreciated straight-line to zero over the 6-year life of the project.What is the value of the depreciation tax shield in Year 2 of the project if the tax rate is 35 percent?
A)$64,209.11
B)$121,012.12
C)$74,083.33
D)$81,028.40
E)$137,583.33
Q2) Kurt's Kabinets is looking at a 4-year project that will require $76,000 in fixed assets and another $20,000 in net working capital.Annual sales are projected at $142,800 with costs of $79,600.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 35 percent.What is the annual operating cash flow for this project?
A)$42,240
B)$60,440
C)$40,440
D)$47,730
E)$67,730
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Page 10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) The accounting breakeven production quantity for a project is 7,209 units.The fixed costs are $34,780,and the contribution margin is $11.Assume a zero tax rate.What is the projected depreciation expense?
A)$43,600
B)$45,050
C)$44,519
D)$47,053
E)$47,143
Q2) Arvin's is analyzing a project with an initial cost of $212,000 that would be depreciated straight-line to zero over the project's 3-year life.Estimates include fixed costs of $48,280,variable costs per unit of $13.12,and a selling price of $26.50 per unit.The discount rate is set at 16 percent with a tax rate of 35 percent.What is the financial breakeven point?
A)10,749 units
B)13,067 units
C)11,618 units
D)10,117 units
E)11,199 units
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) The average compound return earned per year over a multiyear period is called the ________ average return.
A)real
B)standard
C)arithmetic
D)variant
E)geometric
Q2) Based on historical performance from 1900-2010,the U.S.equity risk premium was approximately
A)6.1 percent.
B)5.4 percent.
C)7.2 percent.
D)9.0 percent.
E)8.3 percent.
Q3) How is the Sharpe ratio defined as it applies to security returns?
A)Average return / Risk premium
B)Standard deviation / Risk premium
C)Average return / Standard deviation
D)Risk premium / Average return
E)Risk premium / Standard deviation
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Chapter 11: Return and Risk: The Capital Asset Pricing Model
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Sample Questions
Q1) A portfolio consists of 33 percent of Stock X,52 percent of Stock Y,and 15 percent of Stock Z.Stock X has a beta of 0.94,Stock Y has a beta of 1.21,and Stock Z has a beta of 1.08.What is the portfolio beta?
A)1.012
B)1.111
C)1.117
D)1.124
E)1.101
Q2) You plotted the monthly rate of return for two securities against time for the past 48 months.If the pattern of the movements of these two sets of returns rose and fell together the majority,but not all,of the time,then the securities have A)no correlation at all.
B)a weak negative correlation.
C)a strong negative correlation.
D)a strong positive correlation.
E)a perfect positive correlation.
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) A stock portfolio consists of 27 percent Stock A,38 percent Stock B,and the remainder is invested in Stock C.The security betas are 1.09,0.84,and 1.33 for Stocks A,B,and C,respectively.What is the portfolio beta?
A)1.072
B)1.106
C)1.079
D)1.103
E)1.084
Q2) Which one of these formulas will provide an estimate of the growth rate of a security's dividends?
A)Beta × Return on equity
B)Retention ratio × Weighted average cost of capital
C)Retention ratio × Return on equity
D)Beta × Return on assets
E)Retention ratio × Return on assets
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14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) If the market is fully efficient,then an announcement by a firm of a new product with a high net present value will cause the market price of that firm's stock to A)remain constant.
B)rise gradually over the next few days.
C)decline gradually over the next few days.
D)immediately increase to a new level equivalent to the increased value of the firm.
E)immediately decline to a new level equivalent to the decreased value of the firm.
Q2) Stock prices fluctuate daily.In relation to the efficient market hypothesis,these fluctuations are
A)inconsistent with the semistrong form of efficiency because prices should be stable.
B)inconsistent with all forms of market efficiency.
C)consistent with the semistrong form because new information arrives daily.
D)consistent with the strong form because prices and information are controlled by insiders.
E)consistent with all forms of market efficiency provided the prices do fluctuate on a daily basis.
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) When selecting a capital structure,managers should aim to maximize the A)tax deductions that are available to the company.
B)value of the firm for its managers and employees.
C)size of the firm.
D)value of the firm for its shareholders.
E)growth rate of the company.
Q2) The Studio is currently an all-equity firm that has 68,000 shares of stock outstanding with a market price of $36.80 a share.The current cost of equity is 11.7 percent,and the tax rate is 35 percent.The firm is considering adding $750,000 of debt with a coupon rate of 5.8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?
A)$2,014,900
B)$3,035,500
C)$1,785,000
D)$2,005,200
E)$1,806,400
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Corporations in the U.S.tend to
A)have extremely high debt-equity ratios.
B)rely less on equity financing than they should.
C)minimize taxes.
D)underutilize debt.
E)rely more heavily on bonds than stocks as the major source of financing.
Q2) Which one of these is a payment of a nonmarketed claim on a firm's cash flows?
A)Dividend payment
B)Principal repayment of a bond
C)Repurchase of stock
D)Payment of a customer's liability claim
E)Payment of interest due on a bond
Q3) Conflicts of interest between stockholders and bondholders are known as A)trustee costs.
B)financial distress costs.
C)dealer costs.
D)agency costs.
E)underwriting costs.
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Chapter 16: Dividends and Other Payouts
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Sample Questions
Q1) Jensen's has 18,000 shares of stock outstanding with a par value of $1 per share and a market price of $32.30 a share.The balance sheet shows $18,000 in the common stock account,$109,600 in the capital in excess of par value account,and $78,200 in the retained earnings account.The firm just announced a stock split of five-for-three.What will be the balance in the capital in excess of par value account after the split?
A)$138,700
B)$94,560
C)$458,200
D)$109,600
E)$458,440
Q2) Payments made out of a firm's earnings to its owners in the form of cash or stock are called
A)stock splits.
B)distributions.
C)dividends.
D)payments-in-kind.
E)share repurchases.
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Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) Ed's Sheds has a $1,250 pure discount bond that comes due in 1 year.The risk-free rate of return is 3.1 percent.The firm's assets are expected to be worth either $1,100 or $1,500 in 1 year.Currently,these assets are worth $1,360.What is the current value of the firm's debt?
A)$1,287.48
B)$1,293.85
C)$1,212.52
D)$1,153.85
E)$1,176.83
Q2) If you consider the equity of a firm to be an option on the firm's assets,then the act of paying off debt is comparable to ________ on the assets of the firm.
A)purchasing a put option
B)purchasing a call option
C)exercising an in-the-money call option
D)exercising an in-the-money put option
E)selling a call option
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Jupiter stores had a Quarter 2 beginning cash balance of $647.Sales for Quarters 1 through 3 are estimated at $800,$950,and $1,200,respectively.The cost of goods sold is equal to 59 percent of sales.Goods are purchased one quarter prior to the month of sale.The accounts payable period is 30 days,and the accounts receivable period is 15 days.The firm had quarterly cash expenses of $210.What was the cash balance at the end of Quarter 2? Assume a 360-day year.
A)$674.47
B)$666.67
C)$703.17
D)$719.39
E)$680.00
Q2) Candy Corner has an inventory turnover rate of 14.6,an accounts payable period of 43.7 days,and an accounts receivable period of 32.4 days.What is the length of the cash cycle?
A)14.2 days
B)11.8 days
C)12.1 days
D)17.3 days
E)13.7 days
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Page 20
Chapter 19: Raising Capital
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Sample Questions
Q1) Butterfield's is an all-equity firm with 132,000 shares of stock outstanding.The book value per share is $14,and the market value per share is $31.The current net income is $301,000.The firm is considering a new project that will cost $1.4 million and increase net income by $87,000.The current earnings per share is ________ and it will be ________ if the project is accepted.
A)$2.24; $2.12
B)$2.24; $2.08
C)$2.24; $2.21
D)$2.28; $2.19
E)$2.28; $2.11
Q2) Disaster Cleanup stock sells for $29 a share.The firm has a rights offer outstanding for new equity shares.Antonio currently owns 400 shares.He just received one right for every share he owns.To purchase one new share he must submit five rights and $22.What is the value of one right?
A)$1.17
B)$1.33
C)$.91
D)$.84
E)$1.09
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Page 21
Chapter 20: International Corporate Finance
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Sample Questions
Q1) Relative purchasing power parity states that exchange rates vary in response to A)differences in interest rates between countries.
B)changes in the trade barriers between countries.
C)changes in the tax rates imposed by a country.
D)differences in the inflation rates between countries.
E)arbitrage trades involving the exchanged currencies.
Q2) The cross rate is the
A)exchange rate between the U.S.dollar and another currency.
B)implicit exchange rate between two currencies when both are quoted in a third currency.
C)rate converting the direct rate into the indirect rate.
D)difference between the official exchange rate and the rate that can be received locally.
E)difference between the spot rate and the forward rate.
Q3) Which two countries use the krone as their home currency?
A)Singapore and India
B)Switzerland and Sweden
C)Denmark and Norway
D)South Africa and Saudi Arabia
E)Kuwait and Iran
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Chapter 21: Mergers and Acquisitions Web Only
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Sample Questions
Q1) If the acquirer wants the target firm's managers to stay in place,at least for a stated period of time,the acquirer should employ the tactic known as a A)golden parachute.
B)crown jewel.
C)golden handcuff.
D)captured knight.
E)white knight.
Q2) Which one of these statements is true?
A)One disadvantage of a merger is that it requires the approval of both the target and bidder firm's shareholders.
B)Normally,the target firm's management is very cooperative during the merger process.
C)A consolidation is a complete absorption of a target firm by a bidder firm,which retains its name and identity.
D)An entirely new firm is created when any type of merger or consolidation occurs.
E)Mergers are legally complex and expensive.
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