Financial Management
Question Bank
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices essential for effective management of a firms financial resources. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students learn tools and techniques for making informed financial decisions, evaluating investment opportunities, and optimizing the allocation of assets to maximize shareholder value. Through case studies and real-world examples, the course equips learners with practical skills necessary for financial planning, analysis, and strategic decision-making in a dynamic business environment.
Recommended Textbook
Finance Applications and Theory 3rd Edition by Marcia Millon Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) This subarea of finance helps facilitate the capital flows between investors and companies.
A)Investments
B)Financial management
C)Treasury management
D)Financial institutions and markets
Answer: D
Q2) Explain Adam Smith's argument regarding the invisible hand of the market.
Answer: Acting through competition and the free price system,(Smith argued)would ensure that only those activities most efficient and beneficial to society as a whole would survive in the long run.When companies try to implement a goal other than profit maximization,their efforts tend to backfire.
Q3) This subarea of finance looks at firm decisions in acquiring and utilizing cash received from investors or from retained earnings.
A)Investments
B)Financial management
C)Treasury management
D)None of these
Answer: B
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Free Cash Flow Catering Corp.reported free cash flows for 2013 of $8 million and investment in operating capital of $2 million.Catering listed $1 million in depreciation expense and $2 million in taxes on its 2008 income statement.What was Catering's 2013 EBIT?
A)$7 million
B)$10 million
C)$11 million
D)$13 million
Answer: C
Q2) On which of the four major financial statements would you find net plant and equipment?
A)Balance sheet
B)Income statement
C)Statement of cash flows
D)Statement of retained earnings
Answer: A
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Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Which is true? Ratio analysis:
A)can provide useful information on a firm's current position but should never be used to forecast future performance.
B)can provide useful information on a firm's current position and hint at future performance.
C)can provide useful information on a firm's past but not current position.
D)can provide useful information on a firm's past and current position, but should never be used to forecast future performance.
Answer: B
Q2) DuPont Analysis You are considering investing in Totally Tire Services.You have been able to locate the following information on the firm: total assets = $50 million,accounts receivable = $10 million,ACP = 15 days,net income = $4.5 million,and debt-to-equity ratio = 0.75 times.What is the ROE for the firm?
A)1.58 percent
B)9.00 percent
C)15.75 percent
D)28.81 percent
Answer: C
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Moving Cash Flows What is the value in year 6 of a $900 cash flow made in year 4 when the interest rates are 8 percent?
A)$1,044.00
B)$1,049.76
C)$1,332.00
D)$1,428.19
Q2) You want to retire in 40 years and you have $40,000 saved in your retirement account.You believe you will need $1,500,000 upon retirement.What rate will you need to earn on the account to achieve this goal?
A)6.75 percent
B)7.48 percent
C)9.13 percent
D)9.48 percent
Q3) What is the present value of a $600 payment in one year when the discount rate is 8 percent?
A)$498.61
B)$525.87
C)$555.56
D)$575.09
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Compound Frequency Say that you own a small business,which you plan to expand.Your expansion plans include borrowing $100,000 from the bank with a five-year,amortized loan.The bank has given you three loan choices:
Annual payments at 8.85 percent APR
Quarterly payments at 8.75 percent APR
Monthly payments at 8.65 percent APR
Q2) Compound Frequency Payday loans are very short-term loans that charge very high interest rates.You can borrow $500 today and repay $550 in two weeks.What is the compound annual rate implied by this 10 percent rate charged for only two weeks?
A)10.50 percent
B)12.00 percent
C)1091.78 percent
D)110.50 percent
Q3) Describe how compounding affects the future value computation of an annuity.
Q4) Which of the following will increase the present value of an annuity?
A)The number of periods decreases.
B)The interest rate decreases.
C)The amortization schedule decreases.
D)The effective rate is calculated over fewer years.
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) A 5.5 percent coupon municipal bond has 16 years left to maturity and has a price quote of 92.55.The bond can be called in nine years.The call premium is one year of coupon payments.Compute the bond's current yield.Assume interest payments are paid semi-annually and a par value of $5,000.
A)5.94 percent
B)11.89 percent
C)12.19 percent
D)13.14 percent
Q2) Explain how a bond's interest rate can change over time even if interest rates in the economy do not change.
Q3) Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent.(Assume annual compounding and a par value of $1,000.)
A)$90.29
B)$195.62
C)$1,195.62
D)$995.62
Q4) Provide the definitions of a discount bond and a premium bond.Give examples.
Q5) Explain what credit quality risk measures.
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Chapter 8: Valuing Stockspart
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Sample Questions
Q1) A firm does not pay any dividends at this point in time.Which valuation method should be used on this stock?
A)Residual Claimant Model
B)Variable Growth Model
C)P/E Ratio Model
D)Capital Gain Model
Q2) The Dow Jones Industrial Average (DJIA)includes:
A)all of the stock listed on the New York Stock Exchange.
B)30 of the largest (market capitalization) and most active companies in the U.S.economy.
C)500 firms that are the largest in their respective economic sectors.
D)500 firms that are the largest as ranked by Fortune Magazine.
Q3) Many companies grow very fast at first,but slower future growth can be expected.Such companies are called:
A)Fortune 500 companies.
B)blue chip companies.
C)variable growth rate firms.
D)constant growth rate firms.
Q4) Explain how important a firm's growth is by creating an example of a growth and no-growth stock.
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Describe the diversification potential of two assets with a -0.7 correlation.What is the potential if the correlation is +0.7?
Q2) Which of these statements is true?
A)When people purchase a stock, they know exactly what their dollar and percent return are going to be.
B)Many people purchase stocks as they find comfort in the certainty for this safe form of investing.
C)When people purchase a stock, they know the short-term return, but not the long term return.
D)When people purchase a stock, they do not know what their return is going to be-either short term or in the long run.
Q3) The optimal portfolio for you will be:
A)the one that offers the lowest correlation.
B)the one that offers the highest returns.
C)the one that reflects the amount of risk that you are willing to take.
D)the one that offers the most diversification.
Q4) What is the source of firm-specific risk? What is the source of market risk?
Q5) How do we define risk in this chapter and how do we measure it?
Q6) Why is the percentage return a more useful measure than the dollar return?
Page 10
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Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) Stock Market Bubble If the NASDAQ stock market bubble peaked at 3,750,and two and a half years later it had fallen to 2,200,what would be the percentage decline?
A)-15.87 percent
B)-17.05 percent
C)-41.33 percent
D)-58.67 percent
Q2) Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return next year.His firm has a beta of 2,the expected return on the market is 5 percent,and the risk-free rate is 2 percent.Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.
A)8 percent, undervalued
B)8 percent, overvalued
C)12 percent, undervalued
D)12 percent, overvalued
Q3) Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.
Q4) List and describe the three basic levels of market efficiency.
Q5) What is required to use the constant-growth model to compute required return?
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) A firm has 5,000,000 shares of common stock outstanding,each with a market price of $8.00 per share.It has 25,000 bonds outstanding,each selling for $1,100 with a $1,000 face value.The bonds mature in 12 years,have a coupon rate of 9 percent,and pay coupons semi-annually.The firm's equity has a beta of 1.4,and the expected market return is 15 percent.The tax rate is 35 percent and the WACC is 14 percent.Calculate the risk-free rate.
A)2.05 percent
B)15.27 percent
C)20.18 percent
D)1.19 percent
Q2) Accessory Industries has 2 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 100 thousand bonds.If the common shares are selling for $22 per share,the preferred shares are selling for $10.50 per share,and the bonds are selling for 96 percent of par ($1,000),what would be the weights used in the calculation of Accessory's WACC for common stock,preferred stock,and bonds,respectively?
A)33.33 percent, 33.33 percent, 33.33 percent
B)29.23 percent, 6.98 percent, 63.79 percent
C)64.52 percent, 32.26 percent, 3.22 percent
D)17.12 percent, 8.17 percent, 74.71 percent
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) Your company is considering a project that will cost $100.The project will generate after-tax cash flows of $37.50 per year for five years.The WACC is 10 percent and the firm's D/A ratio is 0.70.The flotation cost for equity is 6 percent,the flotation cost for debt is 3 percent,and your firm does not plan on issuing any preferred stock within its capital structure.If your firm follows the practice of incorporating flotation costs into the project's initial investment,what is the weighted-average flotation cost for the firm?
A)2.90 percent
B)3.90 percent
C)3.30 percent
D)4.30 percent
Q2) A financial analyst calculated that the after-tax salvage value for a machine was $10,200.The current book value of the asset is $12,000 and the firm's tax rate is 30 percent.How much could the machine be sold for today?
A)$6,953.07
B)$7,151.63
C)$9,428.57
D)$9,103.49
Q3) How do replacement projects' cash flows differ from new projects' cash flows?
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) Which of the following tools is suitable for choosing between mutually exclusive projects?
A)NPV
B)IRR
C)MIRR
D)None are suitable
Q2) Suppose two projects with normal cash flows,X and Y,have exactly the same required initial investment,but X has a longer payback.Can we say anything about X's IRR versus that of Y?
Q3) Rank the capital budgeting tools from best to worst.
Q4) Which of the following statements is correct regarding the NPV profile?
A)The IRR appears as the intersection of the NPV profile with the x-axis.
B)The IRR appears at the crossover point or where the two profiles intersect.
C)NPV profiles for independent projects with normal cash flows will intersect.
D)All of these statements are correct.
Q5) For a project with normal cash flows,what would you expect the relationship to be between the MIRR and the IRR?
Page 14
Q6) Compare and contrast the IRR and the MIRR statistic.
Q7) Explain the Rule of Signs as it pertains to IRR.
Q8) Explain the differing reinvestment rate assumptions of NPV and IRR.
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Chapter 14: Working Capital and Policies
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Sample Questions
Q1) "The net amount of current assets that the firm has to fund,above and beyond those that someone else funds for them" is referred to as:
A)net working capital.
B)excess capacity.
C)safety stock.
D)unfunded assets.
Q2) Which of these is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand?
A)Liquid current assets
B)Safety stock
C)Overnight securities
D)Float
Q3) If a firm has a cash cycle of 25 days and an operating cycle of 80 days,what is its average payment period?
A)25
B)80
C)55
D)105
Q4) List and explain the "five C's" of credit analysis.
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Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) How is the capital intensity ratio calculated? How is it used in the AFN formula?
Q2) Which of the following can be computed as: necessary increase in assets minus spontaneous increase in liabilities minus projected increase in retained earnings?
A)Additional funds needed
B)Capital intensity ratio
C)Current ratio
D)Spontaneous assets
Q3) Goldilochs Inc.reported sales of $8 million and net income of $2 million.The firm has a total asset turnover of 3.2.The firm's chief financial officer is projecting a $5 million increase in sales and that spontaneous liabilities will increase by $350,000 automatically.The firm currently pays out 80 percent of its net income to shareholders.Assuming that all assets and current liabilities are expected to grow with sales,how much in additional funds will Goldilochs need from external sources to fund the expected growth?
A)$501,900
B)$562,500
C)$601,800
D)$446,600
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Chapter 16: Assessing Long-Term Debt, equity, and Capital Structure
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Q1) An all-equity financed firm has $650 in assets and the stock price is $20.If the firm restructures with 40 percent debt which creates interest expense of $17 per year and the firm's tax rate is 40 percent,what is the break-even EBIT?
A)$37.50
B)$31.50
C)$49.50
D)$42.50
Q2) Explain how Irving Fisher's separation principle addresses the question of what will happen to a firm's WACC in M&Ms perfect world as the capital structure changes.
Q3) Which of the following is a true statement?
A)Sectors of the U.S.economy that tend to have quite variable income streams also carry the highest D/E ratios.
B)Sectors of the U.S.economy that tend to have quite variable income streams also carry the lowest D/E ratios.
C)Conglomerates tend to have high, unstable income streams.
D)Utilities have variable income streams and carry low D/E ratios.
Q4) Define the Modigliani-Miller (M&M)theorem and list the four features of their "perfect world."
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Chapter 17: Sharing Firm Wealth: Dividends, share
Repurchases and Other Payouts
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Q1) Why might a firm announce a reverse stock split?
Q2) JEN Corp.is expected to pay a dividend of $2.00 per year indefinitely.If the appropriate rate of return on this stock is 12 percent per year,and the stock consistently goes ex-dividend 25 days before dividend payment date,what will be the expected minimum price in light of the dividend payment logistics?
A)$1.14
B)$16.54
C)$16.67
D)$18.52
Q3) Suppose a firm has a retention ratio of 40 percent and net income of $10 million.How much does it pay out in dividends?
A)$4 million
B)$6 million
C)$10 million
D)$16.67 million
Q4) Show mathematically that,with a tax rate on both dividends and capital gains of 10 percent,it doesn't matter whether earnings are paid out as dividends or kept in the firm to cause g to grow for a constant-dividend stock.
Page 19
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Chapter 18: Issuing Capital and the Investment Banking Process
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Q1) A syndicate is:
A)a small group of institutional investors.
B)several investment banks working together to sell and distribute a new security issue.
C)several banks working together to lend a company money for a project or expansion.
D)a group of equity investors that infuse distressed firms with major amounts of capital.
Q2) Calculating Costs of Issuing Stock Video Games,Inc.,with the help of its investment bank recently issued 10 million shares of new stock.The offer price on the stock was $47.50 per share and Video Games received a total of $446,500,000 through this stock offering.Calculate the net proceeds and the underwriter's spread on the stock offering.What percentage of the gross price is the investment bank charging Video Games for underwriting the stock issue?
A)3 percent
B)30 percent
C)6 percent
D)9 percent
Q3) List the steps for getting shares of stock to the investing public.
Q4) How does a best effort underwriting differ from a firm commitment underwriting?
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Chapter 19: International Corporate Finance
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Q1) Which of these seeks to reduce,or even eliminate,trade restrictions and tariffs to ease trade between countries?
A)Commerce bureaus
B)Tariff agreements
C)Trade agreements
D)Economic analysts
Q2) Currency Exchange Compute the amount of foreign currency that can be purchased for $1,000,000:
1 Malaysian ringget = $0.2875
A)287,500 ringget
B)1,287,500 ringget
C)3,478,260.87 ringget
D)4,478,300 ringget
Q3) Which of the following is an economic principle that states all identical goods in different markets must have the same price?
A)Purchasing power parity
B)Interest rate parity
C)Law of one price
D)Price swap parity
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Q1) Economies of Scope A survey of a local market provided the following average cost data: Johnson Construction Corp.(JCC)has assets of $5 million and an average cost of 15 percent; Anderson Architects (AA)has assets of $8 million and an average cost of 20 percent; Cole Home Builders (CHB)has assets of $8 million and an average cost of 17 percent.For each firm,average costs are measured as a proportion of assets.JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services.If JCC plans to reduce operating costs by $300,000 after the merger,what will the average cost be for the new firm?
A)16.238 percent
B)15.00 percent
C)17.33 percent
D)17.667 percent
Q2) The main motive for a merger is:
A)product extension.
B)manager's personal incentives.
C)synergies.
D)none of these.
Q3) List the order for the distribution of the funds from asset liquidation in a bankruptcy.
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