Financial Management Review
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Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in making effective financial decisions within organizations. The course covers key topics such as financial statement analysis, capital budgeting, risk and return measurement, working capital management, and long-term financing strategies. Students will learn how to evaluate investment opportunities, manage company resources, and understand the implications of financial markets and instruments. Emphasis is placed on practical application through case studies and problem-solving exercises, equipping students with the skills necessary to optimize financial performance and support sustainable business growth.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer Available Study Resources on
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Q1) The major factors that determine the market value of a company's shares of stock include the .
A)risk of its cash flows
B)timing of its cash flows
C)book value of its assets
D)risk of its cash flows and the timing of its cash flows
Answer: D
Q2) Financial managers can take a variety of actions to influence the market value of a company's stock. All of the following are classifications of actions taken EXCEPT:
A)investing decisions
B)financing decisions
C)dividend decisions
D)tax implication decisions
Answer: D
Q3) What is the advantage of an LLC over an LLP business form?
Answer: An LLC (or limited liability company) has three advantages:
1.Has better access to capital to finance growth.
2.It enables broad employee ownership of the firm.
3.It enables the firm to engage in strategic acquisitions.
Page 3
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) Changes in the tax code that slow down depreciation, the present value of investment cash flows and, therefore, make the investment desirable.
A)decrease, more
B)decrease, less
C)increase, more
D)increase, less
Answer: B
Q2) All of the following contributed to the financial crisis of 2007-2010 EXCEPT:
A)the Gulf War
B)the securitization of mortgage loans
C)very low interest rates
D)foreign investment in the bond market
Answer: A
Q3) The Standard and Poor's 500 Stock Price Index is a index.
A)price weighted
B)market value weighted
C)price average
D)none of these answers is correct
Answer: B
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Chapter 3: Evaluation of Financial Performance
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Q1) Economic value added (EVA) is a measure of operating performance that indicates how successful a firm has been at:
A)increasing the growth in earnings
B)increasing the MVA of the enterprise in any given year
C)increasing the rate of return on investment
D)all of these
Answer: B
Q2) What is the net profit margin for TJX Inc.if the current ratio = 2;total asset turnover =1.5;total assets = $100,000;and EBIT = $30,000? Assume the marginal tax rate for TJX is 40% and that interest expenses are $10,000.
A)20%
B)8%
C)12%
D)6%
Answer: B
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Chapter 4: Financial Planning and Forecasting
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Q1) In using the percentage of sales forecasting method the assumption is that
A)there is a direct relationship between long-term debt and sales
B)inventories will increase proportionately with sales
C)there is a direct relationship between notes payable and sales
D)retained earnings will increase proportionately with sales
Q2) The percentage of sales forecasting method is used by management to forecast the amount of
A)profit expected for a given percentage increase in sales
B)capital financing needed to promote marketing efforts
C)cash needed to finance future sales growth
D)debt financing needed
Q3) Pro forma financial statements show the results of some event rather than a (an) event.
A)actual;assumed
B)assumed;actual
C)deterministic;probabilistic
D)none of the answers is correct
Q4) Why would a firm want to develop a cash budget since it is only a projection of cash inflows and outflows over some future period of time?
Q5) Explain the cash flow generation process:
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Chapter 5: The Time Value of Money
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Q1) John is 25 years old and wishes to retire in 30 years.His plan is to invest in a mutual fund earning a 12 percent annual return and have a $1 million retirement fund at age 55.How much must he invest at the end of each year to achieve this goal?
A)$7,499.96
B)$5,024.60
C)$4,143.65
D)$33,333.33
Q2) Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer.The loan requires five equal annual end of the year payments.If the loan provides the bank with a 12 percent return, what will be your annual payments?
A)$5,548
B)$3,148.12
C)$6,000
D)$1,666.67
Q3) Explain the sinking fund problem.
Q4) What is the difference between the nominal interest rate and the effective interest rate?
Q5) What is the net present value rule?
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Chapter 5: A: The Time Value of Money
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Q1) City Bank offers a 7 year CD with a nominal rate of interest of 7.0%.If compounding occurs continuously, what is the effective annual rate?
A)7.25%
B)6.77%
C)7.32%
D)7.00%
Q2) Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.
A)$6,886
B)$3,631
C)$4,616
D)None of these
Q3) Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly.What is the effective rate the bank is charging you?
A)12.68%
B)10.00%
C)10.47%
D)10.83%
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Q1) What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?
A)$250.00
B)$362.31
C)$335.62
D)$1000.00
Q2) Marko needs to raise capital through a zero-coupon bond debt offering.If the bonds will have 12 years to maturity and the rate of return on a bond in Marko's risk class is 11 percent, what will be the selling price of the bond?
A)$302.50
B)$335.50
C)$269.50
D)$286.00
Q3) The of a debt issue is equal to the difference between the and the .
A)call price;market price;par value
B)call price;market price;call premium
C)call premium;call price;par value
D)call premium;market price;par value
Q4) Explain a sinking fund.
Page 9
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) Of the following common stock rights, which allows common stockholders to buy more shares of common stock in order to retain their pro-rata share of ownership in the company?
A)asset rights
B)preemptive rights
C)dividend rights
D)voting rights
Q2) Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year.Determine the implied growth rate for Phillips Industries dividends assuming that an investor's required rate of return on this stock is 14%.
A)6%
B)8%
C)14%
D)20%
Q3) result in what is known as treasury stock.
A)Stock dividends
B)Stock repurchases
C)Stock splits
D)Reverse stock splits
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Chapter 8: Analysis of Risk and Return
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Q1) The correlated the returns from two securities are, the will be the portfolio effects of risk reduction.
A)more positively, greater
B)greater, greater
C)less positively, greater
D)lower, lower
Q2) Which of the following statements regarding risk is/are correct?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q3) The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%.Determine the probability of earning a negative rate of return (i.e.less than 0%) on FTC common stock.(Note: Table V is required to work this problem.)
A)0.0228
B)2.00
C)0.5000
D)0.9772
Q4) What is an efficient portfolio?
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Q1) The net investment calculation for an project normally includes .
A)asset expansion;pretax proceeds from the sale of the old asset
B)asset replacement;pretax proceeds from the sale of the old asset
C)asset expansion;after-tax proceeds from the sale of the old asset
D)asset replacement;after-tax proceeds from the sale of the old asset
Q2) In estimating the net investment, an outlay that has already been made is known as a (n) .
A)sunk cost
B)cash outflow
C)opportunity cost
D)expansion cost
Q3) What is the marginal cost of capital and why does the MCC schedule increase as more funds are sought in the capital markets?
Q4) The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.
A)marginal cost of capital schedule
B)schedule of mutually exclusive projects
C)schedule of contingent projects
D)simplified capital budgeting model
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Q1) Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years.What is the IRR for this project?
A)16.76%
B)17.26%
C)18.13%
D)17.76%
Q2) What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.
A)$211,080
B)$392,580
C)$588,710
D)$160,920
Q3) Why are there differences in the capital expenditure analysis practice between large and entrepreneurial firms?
Q4) In working with capital budgeting, what does a post-audit do?
Q5) How does the profitability index differ from the net present value and when would each method be preferred?
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Q1) Quorex is evaluating two mutually exclusive projects.Project A has a net investment of $48,000 and net cash flows over a six year period of $12,500 per year.Project B also has a net investment of $48,000 but its net cash flows of $8,640 per year will occur over a 12 year period.If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen and what is its NPV?
A)A, $862
B)A, $1,800
C)B, $2,475
D)B, $902
Q2) The advantage(s) of the equivalent annual annuity method over the replacement chain technique in evaluating mutually exclusive investments having unequal lives include
A)the equivalent annual annuity method is often computationally simpler
B)the equivalent annual annuity method simplifies the handling of the time discrepancies that frequently arise in the replacement chain method
C)the equivalent annual annuity method is theoretically superior
D)a and b only
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
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Chapter 11: Capital Budgeting and Risk
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Q1) The approach is widely used by firms that attempt to consider differential project risk in their capital budgeting procedures.
A)net present value
B)internal rate of return
C)risk-adjusted discount rate
D)certainty equivalent
Q2) M-tel is financed entirely with equity and the firm's stock has a beta of 0.85.M-tel is considering investing in a project that is expected to have a beta of 1.3.The project requires an initial outlay of $6 million and is expected to generate after-tax net cash flows of $1.3 million each year for 8 years.Calculate the NPV of the project.Assume the risk-free rate is 7% and the expected market return is 14%.(Note: Problem requires either calculator use or interpolation from the tables.The suggested solutions use calculator accuracy.)
A)$249,685
B)-$371,484
C)$238,700
D)-$352,800
Q3) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Q1) Northeast Airlines (NA) has a current dividend of $1.80.Dividends are expected to grow at a rate of 7 percent a year into the foreseeable future.What is NA's cost of external equity if its stock can be sold to net $46 a share?
A)10.9%
B)11.2%
C)7.2%
D)21.0%
Q2) A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity.Above $700 million, the firm must issue new common stock.Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be the marginal cost of capital for amounts over $700 million.
A)less than B)equal to C)greater than D)cannot be determined from the information given
Q3) Explain how the investment opportunity curve is determined.
Q4) What is the investment opportunity curve and how is it accomplished?
Q5) What does the optimal capital budget maximize? How it is determined?
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Chapter 13: Capital Structure Concepts
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Q1) When a corporation must get external financing, the first place to look for funds is with debt.There are various reasons for this preference.List the reasons why debt is generally issued first.
Q2) The tax deductibility of the interest payments on corporate debt is known as:
A)the tax structure
B)the tax shield
C)the optimal capital structure
D)Section 402a of the IRS tax code.
Q3) Generally the a firm's business risk, the the amount of financial leverage that will be used in the optimal capital structure.
A)greater, greater
B)smaller, less
C)greater, less
D)smaller, greater
Q4) represents the permanent sources of the firm's financing.
A)Financial structure
B)Capital structure
C)Equity structure
D)Cost structure
Q5) How do signaling effects impact the firm's capital structure decision?
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Chapter 14: Capital Structure Management in Practice
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Q1) Twin City Printing is considering two financial alternatives for financing a major expansion program.Under either alternative EBIT is expected to be $15.6 million.Currently the firm's capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds.Under the debt financing alternative $10 million in 12% longĀ term bonds will be sold and under the equity financing alternative the firm would sell 500,000 shares of common stock.The PIE under the debt alternative would be 15 and the PIE under the equity alternative would be 16.The firm's marginal tax rate is 40%.Which alternative would produce the higher stock price?
A)debt-stock price of $23.70
B)debt-stock price of $32.29
C)equity-stock price of $25.12
D)equity-stock price of $33.28
Q2) A firm that employs a relatively large proportion of debt and preferred stock in its capital structure will have a relatively degree of financial leverage.
A)low
B)high
C)insignificant
D)constant
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Chapter 14: A: Capital Structure Management in Practice
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Q1) Another name for breakeven analysis is:
A)cost-volume-profit analysis
B)graphic analysis
C)EBIT-EPS analysis
D)degree of operating leverage
Q2) The difference between the selling price per unit and the variable cost per unit is the:
A)contribution to the bottom line
B)contribution to revenue
C)contribution margin
D)contribution to EBIT
Q3) The contribution margin per unit is the difference between:
A)the selling price per unit and fixed costs
B)the fixed costs and the variable costs
C)the variable cost per unit and the selling price per unit
D)the variable costs and the number of units sold
Q4) What are the possible uses for breakeven analysis?
Q5) List the limitations of breakeven analysis:
Q6) How can a firm have more than one breakeven output point?
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Chapter 15: Dividend Policy
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Q1) Nova earned $7.20 per share and maintains a stable payout ratio of 60 percent.Nova has 1,000,000 shares outstanding and a capital budget of $5 million.If Nova maintains a debt ratio of 0.50, what were the dividends per share?
A)$4.32
B)$2.88
C)$2.20
D)cannot be determined from the information provided
Q2) Zimmer Corp.has just declared a 5 for 4 stock split.If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)?
A)$30.00
B)$27,00
C)$28.80
D)$32.00
Q3) What effect does a stock split have on outstanding shares of stock and what is its purpose?
Q4) What is the signaling effect of dividend payments?
Q5) What is a DRIP and how does it work?
Q6) What are the factors that determine the dividend policy of a firm?
Page 20
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Chapter 16: Working Capital Management
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Q1) All other things being equal, a policy of holding a relatively proportion of the firm's total assets in the form of current assets will tend to result in a risk of the firm encountering financial difficulties.
A)large, higher
B)small, higher
C)constant, higher
D)constant, lower
Q2) Runners Ink, Inc.had sales last year of $700,000 and 35 percent of its sales are for cash, with the remainder buying on terms of net 30 days.If the receivables conversion period is actually 38 days, what is Runners Ink's accounts receivable?
A)$72,877
B)$25,507
C)$47,370
D)none of these
Q3) The length of the operating cycle is equal to the length of the
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements I and II are correct.
D)Neither statement I nor II is correct.
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Cash management involves the determination of:
A)the minimal size of a firm's asset balance
B)the maximum amount of dividends that should be paid
C)the optimal size of a firm's liquid asset balance
D)the range of long-term financial alternatives
Q2) All of the following portfolio criteria used in determining which securities to include in a portfolio are concerned with risk except:
A)rate of return
B)default risk
C)marketability
D)maturity date
Q3) The optimal amount of the firm's liquid asset balance to be invested in marketable securities is a function of
A)the interest earned over the expected holding period
B)the transaction cost involved in buying and selling the securities
C)the spread between long-term and short-term interest rates
D)the interest earned over the expected holding period and the transaction cost involved in buying and selling the securities
Q4) Name the three primary components (or sources) of float:
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) All of the following are components of carrying costs except:
A)insurance
B)storage costs
C)handling costs
D)set-up costs
Q2) Maximizing shareholder wealth by investing in accounts receivables is considered when:
A)I only
B)II only
C)Both I and II
D)Neither I nor II
Q3) The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be
A)decreased accounts receivable
B)increased accounts receivable
C)decreased accounts payable
D)increased accounts payable
Q4) How does an optimal credit extension policy impact a company's accounts receivables?
Q5) How can a company use its credit period to affect sales and inventory?
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) All of the following are first determined by the lessee before a direct lease EXCEPT:
A)Equipment that will be leased
B)What taxes will be paid based on the lease
C)Options, warranties service agreements that will have to be made
D)What price will be paid for the asset
Q2) In a leveraged lease, what items secure the mortgage bonds of the lender?
Q3) All of the following are types of "true leases" EXCEPT:
A)Operating lease
B)Capital lease
C)Financial lease
D)Maturity lease
Q4) In a leveraged lease, how much of the asset's full purchase price does the lessor supply?
A)0-10%
B)20-40%
C)50-70%
D)80-100%
Q5) What is a term loan?
Q6) Explain a leveraged lease.
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Chapter 20: Financing with Derivatives
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Q1) What is the difference between a conversion price and a conversion ratio?
Q2) People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10.Each warrant entitles the holder to purchase one share of PSW common stock.Last week PSW common stock was selling for $12 per share and, at the same time, the warrants traded at $5 each.Determine the formula value of PSW warrants.
A)$0
B)$2
C)$5
D)$11
Q3) Mercury Inc.issued bonds with warrants attached that had an exercise price of $22.Each warrant allows the holder to purchase two shares.Since the issuance, the stock split 2 for 1, the current stock price is $24 and the warrant price is $30.How much is the warrant selling above its formula value?
A)84.6%
B)130.8%
C)15.4%
D)269%
Q4) What is an interest rate swap? Describe how they are used.
Q5) What variables affect the call option valuation?
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Chapter 20: A: Financing with Derivatives
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Q1) What is the principal inflow and what is the principal outflow from a bond refunding situation?
Q2) Midget Digit Toe Doctors is planning to refund a 30 year bond issue.They will replace $1,500,000 of 10.25% bonds with 6.25% bonds.The firm is in the 40% tax bracket.What is the savings on the refunding?
A)$515,100
B)$646,310
C)$725,600
D)$815,170
Q3) If Alliant can issue a $110 million 20-year refunding bond at 7.45% and call an older $110 million issue with 20-years to maturity that had a coupon of 8.80%, what is the present value of the interest savings? Assume a 40% tax rate.
A)$11,620,259
B)$17,820,000
C)$ 9,117,935
D)$29,561,100
Q4) Why is the after-tax cost of debt used in bond refunding analysis?
Q5) Why would a corporation consider bond refunding?
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Chapter 21: Risk Management
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Q1) What is a hedge?
Q2) All of the following are methods whereby a hedge is accomplished EXCEPT:
A)Using derivative securities
B)Owning several shares of a company's stock
C)Buying or selling a forward contract
D)Using an option in the cash market
Q3) Currency and commodity price volatility is a component of which of the following types of risk?
A)Systematic risk
B)Unsystematic risk
C)Operational risk
D)Non-diversifiable risk
Q4) All of the following are losses generally insured by corporations EXCEPT:
A)Death of key employees
B)Executive bonuses
C)Fraud
D)Product liability
Q5) What options does the buyer of a futures contract have at the time the futures contract matures?
Q6) List some nonhedging risk management strategies.
Page 27
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Chapter 22: International Financial Management
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Q1) The law of one price, an economic principle, means that the price of a product in different markets should be:
A)the same if the raw materials were obtained from a single source.
B)the same if adjusted for inflation.
C)the same if taxes are adjusted based on a single currency.
D)the same if there are no significant costs associated with moving between markets.
Q2) Primary sources of demand for British pounds in the foreign exchange market include
A)foreign buyers of British exports who must pay for their purchases in pounds
B)foreign investors who desire to make investments in physical or financial assets in Great Britain
C)speculators who expect British pounds to increase in value relative to other currencies
D)all of these answers are correct
Q3) Name the factors that affect exchange rates.
Q4) How does a firm manage economic exposure due to changes in exchange rates?
Q5) What are two hedging techniques that a U.S.company might use to protect itself against foreign exchange risk with regard to transaction exposure?
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Chapter 23: Corporate Restructuring
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Q1) A plan of reorganization must be all of the following EXCEPT:
A)feasible
B)fair
C)a plan that allows the firm a chance to reestablish successful business operations
D)a plan whereby the creditors that are due the most money are paid first.
Q2) A combination of two or more companies that have a buyer-seller relationship with each other is known as a
A)conglomerate merger
B)vertical merger
C)horizontal merger
D)takeover
Q3) In a form of business combination, a parent-subsidiary relationship exists between the acquiring and acquired companies.
A)leveraged buyout
B)holding company
C)consolidation
D)leveraged buyout or consolidation
Q4) How does a joint venture differ from a holding company?
Q5) A new takeover defense is boardmail.How does it work?
To view all questions and flashcards with answers, click on the resource link above. Page 29