Financial Management
Question Bank
Course Introduction
Financial Management explores the fundamental principles and techniques required to make effective financial decisions within organizations. The course covers key topics such as financial statement analysis, time value of money, capital budgeting, risk and return analysis, cost of capital, and working capital management. Students will gain an understanding of how businesses raise and allocate funds, evaluate investment opportunities, and manage financial risks. Emphasis is placed on both theoretical frameworks and practical applications, preparing students to solve real-world financial problems and contribute to the financial sustainability and growth of enterprises.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which one of the following is a capital budgeting decision?
A)Deciding whether or not to open a new store
B)Determining how much inventory to keep on hand
C)Determining how much debt should be borrowed from a particular lender
D)Deciding if stock shares should be repurchased
E)Determining how much cash to keep on hand
Answer: A
Q2) The owners of a limited liability company prefer
A)being taxed like a corporation.
B)having liability exposure similar to that of a sole proprietor.
C)being taxed personally on all business income.
D)having liability exposure similar to that of a general partner.
E)being taxed like a corporation with liability like a partnership.
Answer: C
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3
Chapter 2: Financial Statements AMCQ Cash Flow
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Sample Questions
Q1) ________ refers to a firm's interest payments minus any net new borrowing.
A)Operating cash flow
B)Distributable cash flow
C)Net working capital
D)Cash flow to stockholders
E)Cash flow to creditors
Answer: E
Q2) Stockholders' equity is equal to
A)net working capital plus long-term liabilities.
B)current assets plus fixed assets minus long-term liabilities.
C)total assets plus total liabilities.
D)current assets minus total liabilities plus fixed assets.
E)net working capital plus total fixed assets.
Answer: D
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Chapter 3: Financial Statements Analysis Amcq Financial
Models
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Sample Questions
Q1) The return on equity can be calculated as
A)Profit margin × 1 / Total asset turnover × Equity multiplier
B)Return on assets × Profit margin
C)Profit margin × Capital intensity ratio × Debt-equity ratio
D)Profit margin × 1 / Equity multiplier × (1 + Debt-equity ratio)
E)Return on assets × (1 + Debt-equity ratio)
Answer: E
Q2) Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?
A)Inventory
B)Cash
C)Long-term debt
D)Accounts payable
E)Fixed assets
Answer: C
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) The Life Trust Co.purchased an investment that will pay $5,000 next year.Every year thereafter,the payment will increase by 1.25 percent.What is the value of this investment if the required rate of return is 8.3 percent?
A)$62,300.00
B)$60,993.98
C)$65,647.81
D)$70,921.99
E)$73,984.23
Q2) An investment will pay $3,000 every 3 years with the first payment occurring 3 years from today.The investment has a 12-year life.To compute the present value of this investment you need to calculate the
A)present value of a $3,000,12-year annuity,and divide the result by 4.
B)present value of a $1,000 annuity with 12 time periods.
C)rate of growth for each 3-year period.
D)present value of a $3,000 annual annuity with four payments and discount that value for 3 years.
E)interest rate for the 3-year period.
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Chapter 5: Interest Rates AMCQ Bomcq Valuation
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Sample Questions
Q1) Interest rate risk increases as A)the time to maturity decreases.
B)the coupon rate increases.
C)a bond matures.
D)the coupon payment decreases.
E)either the time to maturity or the coupon rate increases.
Q2) If the nominal rate of return on a bond is 7.47 percent and the real rate is 3.49 percent,what is the rate of inflation?
A)3)85%
B)3)92%
C)3)98%
D)10.96%
E)11.22%
Q3) For tax purposes,the implicit annual interest for any one year on a zero coupon bond is equal to A)zero.
B)the annual change in the bond's value as determined by amortizing the loan. C)the current yield.
D)the face value multiplied by the current market rate of interest.
E)the face value minus the current market value.
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Chapter 6: Stock Valuation
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Sample Questions
Q1) Duncan Street Mills is an all-equity firm with 32,000 shares of stock outstanding.The firm expects sales of $520,000 next year.Sales are expected to grow by 8 percent for the following 2 years and then level off to a constant 3 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 16 percent of sales.The required return is 17 percent.What is the estimated current value of one share of stock?
A)$20.10
B)$22.03
C)$18.94
D)$19.76
E)$18.01
Q2) A stock report contains the following information: P/E 21.4,closing price 28.16,dividend 1.10,net chg .06,and an ask of 28.22 × 300.Which one of the following statements is correct given this information?
A)The stock price has increased by 6 percent thus far this year.
B)The closing price on the previous trading day was $28.10.
C)The earnings per share are approximately $2.
D)The dividend yield is 21.4 percent.
E)The bid-ask spread is $.300.
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Page 8
Chapter 7: Net Present Value AMCQ Other Investment Rules
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Sample Questions
Q1) A project produces annual net income of $10,500,$15,700,and $16,200 over its 3-year life and requires an initial investment in fixed assets of $210,000.The book value of these assets will be $140,007,$46,662,and $15,561 at the end of Years 1 to 3,respectively.What is the average accounting rate of return if the required discount rate is 14.5 percent?
A)13.46%
B)14.32%
C)13.98%
D)13.71%
E)14.62%
Q2) An independent,financing type project has an IRR of 11.4 percent and a required rate of return of 10.6 percent.Given this,you know the
A)initial cash flow is negative.
B)net present value is positive.
C)cash flows are conventional.
D)accept/reject decision cannot be based on the IRR.
E)project should be rejected.
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) A project will increase sales by $92,800 and cash expenses by $53,200.The project will cost $89,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The tax rate is 35 percent.What is the operating cash flow of the project using the tax shield approach?
A)$42,350.50
B)$28,650.00
C)$33,527.50
D)$35,170.50
E)$37,672.50
Q2) Outdoor Gear is purchasing equipment costing $485,900 that will lower manufacturing costs by $132,000 a year.The equipment will be depreciated over 8 years using straight-line depreciation to a zero book value.After 8 years,the equipment will be worthless.The discount rate is 16 percent and the tax rate is 34 percent.What is the annual net income from this purchase?
A)$51,428.57
B)$47,033.25
C)$87,120.00
D) $38,527.11
E) $127,206.75
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Page 10
Chapter 9: Risk Analysis, Real Options, AMCQ Capital Budgeting
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Sample Questions
Q1) At a production level of 7,500 units,a project has earnings before interest and taxes of $48,310.Depreciation is $9,700,and fixed costs are $12,200.What is the variable cost per unit if the sales price per unit is $29.50?
A)$21.43
B)$24.07
C)$17.76
D)$18.92
E)$20.14
Q2) Rosita's is considering a project with a discount rate of 9 percent.If the firm starts the project today,it will incur an initial cost of $32,260 and will receive cash inflows of $18,320 a year for 4 years.If the firm waits 1 year to start the project,the initial cost will decrease to $30,500,the cash flows will increase to $18,640 a year for 4 years,and the discount rate will decrease to 8.5 percent.What is the value of the option to wait?
A)$848.29
B)$1,471.42
C)$1,489.20
D)$681.04
E)$1,071.58
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Chapter 10: Risk Amcq Return: Lessons From Market History
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Sample Questions
Q1) What conclusion should you draw from the performance of stocks and bonds over the period 1926 to 2015?
A)Bonds have greater volatility than stocks.
B)Stock returns have a lower standard deviation than bond returns.
C)In any year,stocks will outperform bonds.
D)Stock returns have a smaller risk premium than bond returns.
E)Stocks are riskier than bonds.
Q2) Past performance
A)does not guarantee future performance.
B)is totally unrelated to future performance.
C)guarantees future performance.
D)is a perfect representation of future performance for the same length of time.
E)will be duplicated in the near future.
Q3) Over the past 3 years,a stock had annual returns of 6.4 percent,11.9 percent,and 14.8 percent.What is the mean return?
A)11.03%
B)7)47%
C)8)28%
D)16.55%
E)12.60%
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Chapter 11: Return Amcq Risk: the Capital Asset Pricing
Model Capm
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Sample Questions
Q1) The market risk premium is computed by
A)adding the risk-free rate of return to the inflation rate.
B)adding the risk-free rate of return to the market rate of return.
C)subtracting the risk-free rate of return from the inflation rate.
D)subtracting the risk-free rate of return from the market rate of return.
E)multiplying the risk-free rate of return by a beta of one.
Q2) OLG stock has a beta of 0.98 and an expected return of 10.52 percent.The risk-free rate of return is 3.02 percent,and the market rate of return is 10.47 percent.Which one of the following statements is true given this information?
A)OLG stock is correctly priced.
B)The return on OLG stock will graph above the security market line.
C)The expected return on OLG stock based on the capital asset pricing model is 10.13 percent.
D)OLG stock has more systematic risk than the overall market.
E)OLG stock is overpriced.
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Page 13
Chapter 12: Risk, cost of Capital, AMCQ Valuation
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Sample Questions
Q1) Taylor's has a beta of 0.97 and a debt-to-equity ratio of 0.46.The market rate of return is 11.3 percent,the tax rate is 34 percent,and the risk-free rate is 2.2 percent.The pretax cost of debt is 6.4 percent.What is the firm's WACC?
A)8)39%
B)7)67%
C)8)16%
D)9)46%
E)8)88%
Q2) Which one of these statements is correct?
A)The asset beta will equal the equity beta for a levered firm.
B)Leverage increases the asset beta.
C)A portfolio beta is the summation of the betas of each of the individual securities held in the portfolio.
D)The equity beta refers to the beta of an all-equity firm.
E)Financial leverage refers to a firm's use of debt and its related fixed costs of finance.
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14
Chapter 13: Efficient Capital Markets Amcq Behavioral Challenges
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Sample Questions
Q1) In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that
A)the decision between LIFO and FIFO for inventory accounting can significantly affect stock prices.
B)a firm can affect its stock price if it either withholds information or provides incorrect information.
C)accounting changes that increase accounting earnings also increase stock prices.
D)switching depreciation methods can significantly affect stock prices.
E)the choice between the percentage-of-completion or the completed-contract method for construction projects affect stock prices.
Q2) Markets tend to be efficient when
A)arbitrage is unlawful.
B)amateurs dominate the market.
C)all investors are required to be rational.
D)professional arbitrage exceeds amateur speculation.
E)prices adjust to new information slowly.
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) The interest tax shield is a key reason why
A)the value of an unlevered firm is equal to the value of a levered firm.
B)the net cost of debt to a firm is generally less than the cost of equity.
C)firms tend to minimize their borrowing.
D)the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1.
E)firms prefer equity financing over debt financing.
Q2) DL Trucking has a cost of equity of 15.4 percent and an unlevered cost of capital of 13.2 percent.The company has $24,000 in debt that is selling at par value.The levered value of the firm is $59,000 and the tax rate is 34 percent.What is the pretax cost of debt?
A)8)75%
B)8)34%
C)7)38%
D)9)20%
E)9)69%
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Page 16
Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Miller Tool plans on closing its doors after one more year.During its last year in business,the firm expects to generate a cash flow of $76,000 if the economy booms and $58,000 if it does not.The probability of a boom is 15 percent.The firm has debt of $62,500 that is due in 1 year.That debt has a market value of $58,300 today.Ignore taxes.The current promised return on debt is ________ percent,and the expected return on debt is ________ percent.
A)7)20;8.13
B)8)18;1.03
C)8)18;9.12
D)7)20;0.64
E)8)36;1.98
Q2) The pecking order theory states that when external funds are required,a firm should
A)refund all monies pulled from internal sources with external funds.
B)only issue equity securities after the firm's debt capacity is reached.
C)never issue any convertible securities.
D)issue convertible bonds prior to straight bonds.
E)limit its debt-equity ratio to no more than 0.5.
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Chapter 16: Dividemcqs AMCQ Other Payouts
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Sample Questions
Q1) Agency costs provide justification for
A)higher dividends over lower dividends.
B)stock repurchases over cash dividends.
C)stock splits rather the stock repurchases.
D)issuing shares rather than repurchasing shares.
E)stock dividends over cash dividends.
Q2) Observation and research shows that
A)dividends have almost been eliminated due to increased stock repurchases.
B)during the year 1979,about two-thirds of dividends were paid to individuals with a marginal tax rate of 15 percent or less.
C)the largest corporations have been holding their dividends constant over the last 20 years.
D)for the period 1980 to 2012,aggregate dividends averaged about 30 percent of aggregate earnings.
E)the percentage of corporations paying dividends has increased since the Year 2002.
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18
Chapter 17: Options Amcq Corporate Finance
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Sample Questions
Q1) 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
Q2) British Imports has a stock price of $38.62 a share.The $35 put is priced at $.15.The intrinsic value of the put is ________,and the time value is ________.
A)$0;$1.65
B)$3.62;$.15
C)$0;$.15
D)$0;$3.62
E)$3.62; $3.47
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19
Chapter 18: Short-Term Finance Amcq Planning
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Sample Questions
Q1) Which one of the following will increase the net working capital of a firm? Assume the current ratio is positive.
A)Selling a fixed asset
B)Selling inventory at cost for cash
C)Making a payment on a long-term debt
D)Buying inventory on credit
E)Paying an accounts payable
Q2) A supplier offers you credit terms of 1/5,net 20.What is the cost of forgoing the discount on a purchase of $1,250? Assume a 365-day year.
A)34.21%
B)37.79%
C)29.03%
D)32.33%
E)44.32%
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Chapter 19: Raising Capital
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Sample Questions
Q1) Which one of these statements is true concerning issue costs?
A)Issue costs tend to be higher for debt than for equity issues.
B)Underwriter spreads for IPOs tend to range from 10 to 15 percent.
C)The costs of SEOs generally exceed the costs of IPOs.
D)Convertible bonds generally have the lowest issue costs.
E)Underwriting spreads tend to decrease as issue size increases.
Q2) Which one of these is not a reason given for issuing shares without a rights offering?
A)The risk of the subscription price exceeding the market price is significant.
B)Underwriters provide a wider distribution of shares than would be possible with a rights offering.
C)Rights must be exercised by their original owner or forfeited.
D)Underwritten issues provide funds faster than rights offerings do.
E)Investment bankers provide valuable advice.
Q3) The cost of the time managers spend on an issue of securities is
A)considered to be part of the abnormal return.
B)a direct cost of the issue and must be reported on the prospectus.
C)reimbursed when the issuer invokes the Green Shoe option.
D)an indirect expense of the issue.
E)not considered an expense of the issue because it is a sunk cost.
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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) You want to import $62,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $.01606?
A)3,860,523RS
B)2,803,006RS
C)821,048RS
D)996RS
E)909RS
Q3) The foreign currency approach to capital budgeting analysis
A)is computationally harder to use than the home currency approach.
B)produces different results than the home currency approach.
C)computes the NPV of a project in both the foreign and the domestic currency.
D)relies on the international Fisher effect for the exchange rate.
E)relies on the uncovered interest rate parity to project multiple exchange rates.
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Page 22
Chapter 21: Mergers Amcq Acquisitions Web Only
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Sample Questions
Q1) Does diversification achieved through a merger create value? Why or why not?
A)Yes,diversification lowers the volatility of a firm's earnings which,increases the firm's value to shareholders.
B)Yes,diversification lowers the total risk of a firm which,provides a compensable benefit.
C)Yes,diversification increases a firm's earnings which,creates value for the firm.
D)No,diversification lowers unsystematic risk but has no real value to shareholders.
E)No,diversification lowers a firm's earnings and thus destroys value.
Q2) 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.
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