Financial Management
Question Bank
Course Introduction
Financial Management is a comprehensive course that explores the fundamental principles and practices involved in managing an organization's financial resources. Students are introduced to key concepts such as financial analysis, planning, forecasting, capital budgeting, risk assessment, and working capital management. The course also covers topics like cost of capital, capital structure, dividend policy, and financial markets, focusing on how managerial decisions impact a firms value. Through case studies and practical exercises, students develop the analytical skills necessary to make informed financial decisions and contribute to the overall strategic objectives of an organization.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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21 Chapters
2224 Verified Questions
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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119 Verified Questions
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Sample Questions
Q1) The higher the profit of a firm, the higher the value the firm is in the market.
A)True
B)False
Answer: False
Q2) Professor Merton Miller received the Nobel Prize in Economics for his work on A) dividend policy.
B) investment theory.
C) working capital management.
D) capital structure theory.
Answer: D
Q3) Corporate governance issues have become less important to the financial community during the first decade of the new millennium.
A)True
B)False
Answer: False
Q4) The Internet is responsible for many new business models.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Book value per share of stock is of greater concern to the financial manager than market value per share of stock.
A)True
B)False
Answer: False
Q2) Which of the following would represent a use of funds and, indirectly, a reduction in cash balances?
A) An increase in inventories
B) A decrease in marketable securities
C) An increase in accounts payable
D) The sale of new bonds by the firm
Answer: A
Q3) Interest expense is deductible before taxes and therefore has an after-tax cost equal to the interest paid times (1 - tax rate).
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) If ABC's sales are $1,000,000, while accounts receivable is $100,000, inventory is $45,000, and fixed assets are $132,000, what is ABC's fixed asset turnover?
A) 7.58
B) 10.00
C) 0.13
D) 22.22
Answer: A
Q2) ABC Co. has an average collection period of 90 days for its accounts receivable. If total credit sales for the year were $6,000,000, what is the balance in accounts receivable at year-end? Assume a 360-day calendar year.
A) $150,000
B) $2,250,000
C) $1,500,000
D) $40,000
Answer: C
Q3) Ratios are used to compare different firms in the same industry.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that
A) all sales were from the current production.
B) all sales were from the beginning inventory.
C) sales were from the current production until current production was depleted, and then sales were from the beginning inventory.
D) all sales were for cash.
Q2) Pro forma financial statements are
A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) All of the options are true.
Q3) The pro forma income statement is important to the overall process of constructing the pro forma balance sheet because it allows us to determine a value for A) change in retained earnings.
B) gross profit.
C) interest expense.
D) prepaid expenses.
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6
Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) 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.
Q2) Linear break-even analysis and operating leverage are only valid within a relevant range of unit production.
A)True
B)False
Q3) Managers who are risk-averse and uncertain about the future would most likely minimize combined leverage.
A)True
B)False
Q4) If sales units exceeds the break-even point in units, the firm will experience
A) an operating loss.
B) an operating profit.
C) an increase in plant and equipment.
D) an increase in stock price.
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate) and 70% with short-term financing (7%) rate. Assuming a 40% tax rate, what will its annual after-tax interest costs be?
A) $78,000
B) $126,000
C) $182,400
D) $304,000
Q2) Firms with predictable cash-flow patterns should assume relatively low levels of risk. A)True
B)False
Q3) According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline.
A)True
B)False
Q4) Many companies such as McDonald's have embraced supply chain management using Web-based procedures.
A)True
B)False
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8
Chapter 7: Current Asset Management
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Sample Questions
Q1) Float is the difference between the cash balance on the corporate books and the amount currently credited to the corporation by the bank.
A)True
B)False
Q2) Which of the following is not a valid quantitative measure for accounts receivable collection policies?
A) Average collection period
B) Aging of accounts receivables
C) Ratio of debt to equity
D) Ratio of bad debts to credit sales
Q3) For most modern corporations, the more cash they have, the better off they are.
A)True
B)False
Q4) Which of the following should require the lowest rate of return?
A) 90 day Certificate of deposit
B) Money market that can be liquidated at anytime
C) 120 day Treasury bill
D) Accounts receivable usually collected in 30 days
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.
A)True
B)False
Q2) Von Hayek's Kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the effective rate of interest?
A) 8.3%
B) 9.8%
C) 10.6%
D) 1.8%
Q3) Leontief's Wigs can take a cash discount but has to borrow money from the bank to do so. The bank offers a 16% interest rate. The terms of the cash discount are 2/10, net 60. Because of this; Leontief's should borrow from the bank to take the discount.
A)True B)False
Q4) Larger firms tend to be net users of trade credit, rather than net providers.
A)True B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account?
A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1
Q2) Time value of money considers many changes to the value of the dollar such as interest, inflation, deflation, etc.
A)True
B)False
Q3) Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?
A) Above 10%
B) Between 8% to 10%
C) Exactly 10%
D) Below 8%
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Risk premiums are higher for riskier securities, but the risk premium cannot be higher than the required rate of return.
A)True
B)False
Q2) Future stock value is equal to P<sub>0</sub> = D<sub>1</sub>/(K<sub>e</sub>g)assuming a constant growth in dividends. This formula develops CURRENT stock value, not future.
A)True
B)False
Q3) The required return by investors is important to financial managers except for which of the following reasons?
A) It influences the firm's cost of financing.
B) It influences their stock price.
C) It is the primary driver of their financial ratios.
D) It helps when pricing new issues of securities
Q4) An increase in inflation will cause a bond's required return to rise.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) The cost of retained earnings is considered to be equal to the required rate of return on a firm's outstanding common stock.
A)True
B)False
Q2) The cost of debt is equal to the current bond yield on bonds of similar risk class, adjusted for the corporate tax rate.
A)True
B)False
Q3) A firm is paying an annual dividend of $2.65 for its preferred stock that is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%?
A) 3.30%
B) 4.93%
C) 5.79%
D) 6.11%
Q4) All firms within particular industries have similar optimum capital structures. A)True B)False
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Page 13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) If the capital budgeting decision includes a replacement analysis, then
A) a gain from the sale of the old asset will represent a tax savings inflow.
B) only incremental cash flows should be considered.
C) the sale price and tax savings will increase the cash inflows throughout the asset's life.
D) net present value can no longer be measured in replacement analysis.
Q2) The net present value profile
A) doesn't work if projects have a negative net present value.
B) is a substitute for the internal rate of return method.
C) graphically portrays the relationship between the discount rate and the net present value.
D) measures the initial cost to the present value of all future earnings.
Q3) It is more likely for financial managers to focus on cash flow and corporate executives to focus on earnings of the company.
A)True
B)False
Q4) A rapid payback may be important to firms having rapid technological development.
A)True
B)False
Page 14
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The higher the risk of an investment, the lower the required rate of return by investors. The higher the risk, the higher the consequent required rate of return.
A)True
B)False
Q2) If one project has a higher standard deviation than another,
A) it may have a lower risk.
B) it may have a lower expected value.
C) it has fewer possible outcomes.
D) it may be riskier, but this can only be determined by the coefficient of variation.
Q3) The expected value is a weighted average of the outcomes multiplied by their probabilities of occurrence.
A)True
B)False
Q4) A common stock with a beta of 1.0 is said to be of equal risk with the market.
A)True
B)False
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Page 15
Chapter 14: Capital Markets
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Sample Questions
Q1) Money markets are the simplest form of capital markets because they involve trading in U.S. dollars.
By definition, "money markets" comprise securities with maturities of one year or less.
A)True
B)False
Q2) If a subscriber wants to buy a stock through an ECN with no sell order, the order will be executed and then matched after a sell order arrives.
Absent a sell order, the transaction cannot be executed. It can, however, wait for a matching sell order, or can sometimes be rerouted to another exchange.
A)True
B)False
Q3) Which of the following was NOT a major supplier of funds to credit markets in 2008?
A) Households
B) Government sponsored agencies
C) Mutual funds and ETFs
D) All of the options were major suppliers of funds
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Chapter 15: Investment Banking
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Sample Questions
Q1) Google's IPO was controversial because Google used a Dutch investment banking firm to underwrite the IPO.
Google's use of the Dutch auction process deals with the manner in which a selling range is established, marketed, and executed... NOT with the nationality of the firms involved. Any controversy was because of the issue price falling short of the anticipated initial selling range.
A)True
B)False
Q2) The primary rationale for repealing the Glass-Steag all Act was that the U.S. Congress recognized the necessity for increased growth in the investment banking industry within the U.S.
Congress believed that the risks inherent in security lines of business could place the banking system at risk of default.
A)True
B)False
Q3) In 2011, IPOs rose tremendously since the market started to pick up. This happened in 2014.
A)True
B)False
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Page 17
Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Floating rate bonds
A) have interest payments based on some overall market rate.
B) have a better capacity for constant market value.
C) usually have very broad limits that interest payments cannot exceed.
D) All of these options are correct.
Q2) From the corporate issuer viewpoint, a zero-coupon bond allows the firm to A) receive deferred income for tax purposes.
B) reduce the multiplier of the initial investment.
C) defer payment obligations.
D) take advantage of low volatility.
Q3) The inclusion of leases on the balance sheet as an asset and liability has lowered firm's debt-to-equity ratio.
A)True
B)False
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
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) If the current market value of Markowitz Corp stock is $61 and 10 rights are required to buy one additional share of Markowitz at the subscription price of $50, then the rights are worth $1.00.
Based on Formula 17-3: (61 - 50)/(10 + 1) = $1
A)True
B)False
Q2) When comparing common stock of the same company, it is fair to say that A) all shares, no matter how many classes, are all created with the same equal rights. B) companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C) the Securities and Exchange Commission allows only one class of common stock. D) investors are indifferent between class A and class B shares.
Q3) Under majority voting, it is easier for minority stockholders to elect directors to the board.
A)True
B)False
Q4) Preferred stock generally carries a higher interest rate than debt.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Firms with extra money should always repurchase their own stock, thus increasing the value of the firm.
A)True
B)False
Q2) Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.
A)True
B)False
Q3) Dividends can only be distributed if the firm has positive income in the year the dividend is paid.
A)True
B)False
Q4) All of the following uses of annual earnings would contribute toward an increase in shareholder value EXCEPT:
A) To repurchase shares
B) To invest in projects with high profit potential, regardless of the risk
C) To pay off debt
D) all of these options increase shareholder value
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Conversion premiums are influenced heavily by expectations of future stock performance.
A)True
B)False
Q2) Mirrlees Corp. has $3,000,000 bonds convertible into 50 shares per $1,000 bond. Mirrlees has 1,000,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at the time of issue was 10%. Compute the "basic earnings per share" if after-tax earnings are $1,400,000.
A) $0.71
B) $1.25
C) $1.33
D) $1.40
Q3) A warrant is of huge benefit to the warrant holder when the stock rises far above the exercise price.
A)True
B)False
Q4) The conversion premium is equal to the market price minus the conversion value.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) A cash purchase of one company by another is similar to a capital budgeting decision.
A)True
B)False
Q2) If an acquiring firm's merger proposal was rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.
A)True
B)False
Q3) In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?
A) Active Corp. will have an immediate increase in EPS.
B) Active Corp. will have an immediate decrease in EPS.
C) Active Corp. will have an immediate increase in the growth rate of EPS.
D) Active Corp. will have an immediate decrease in the P/E ratio.
Q4) In a merger, two or more companies are combined to form an entirely new entity.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank.
A)True
B)False
Q2) For a U.S. company, foreign business operations are more complex because the A) host country's economy may be different from the domestic economy.
B) rules of taxation are different.
C) structure and operations of financial markets vary.
D) all of these options are true.
Q3) To minimize exposure to political risk, a multinational firm may establish a joint venture with a local entre preneura group of multinationals, or
A) purchase an insurance policy from the Foreign Credit Insurance Association (FCIA).
B) hedge in the Eurodollar market.
C) purchase an insurance policy from the Overseas Private Investment Corporation (OPIC).
D) any combination of the options.
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