Financial Management
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Course Introduction
Financial Management is a comprehensive course that introduces students to the fundamental principles and practices involved in managing the financial resources of an organization. Covering topics such as financial planning, capital budgeting, risk analysis, valuation, working capital management, and the cost of capital, the course emphasizes the decision-making processes that maximize firm value. Through both theoretical concepts and practical application, students learn to interpret financial statements, assess investment opportunities, and develop strategies to achieve sustainable financial health in various business environments.
Recommended Textbook Fundamentals of Corporate Finance 6th Canadian Edition by Richard A Brealey
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Page 2
Chapter 1: Goals and Governance of the Firm
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Sample Questions
Q1) Corporations are referred to as public companies when their:
A) shareholders have no tax liability.
B) shares are held by the federal or state government.
C) shares are widely traded.
D) products or services are available to the public.
Answer: C
Q2) A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans.This is best described as an example of a(n):
A) financing decision.
B) investment decision.
C) capital budgeting decision.
D) capital market decision.
Answer: A
Q3) Unlimited liability is faced by the owners of:
A) corporations.
B) partnerships and corporations.
C) sole proprietorships and partnerships.
D) all forms of business organization.
Answer: C
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Financing for public corporations must flow through financial markets.
A)True
B)False
Answer: False
Q2) Which one of the following is least liquid?
A) foreign currency
B) U.S. Treasury bonds
C) real estate
D) savings deposit
Answer: C
Q3) Previously issued securities are traded among investors in the secondary markets.
A)True
B)False
Answer: True
Q4) Smaller businesses are especially dependent upon internally generated funds.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Accounting and Finance
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Sample Questions
Q1) What is the highest marginal rate at which corporate income is taxed?
A) 15%
B) 34%
C) 35%
D) 39%
Answer: D
Q2) Which of the following could account for a firm that has a negative net income,yet has a positive amount of cash provided by operations?
A) the net loss was greater than the amount of depreciation expense.
B) inventory increased significantly more than accounts payable.
C) accounts receivable decreased by significantly more than accounts payable.
D) the cash balance increased significantly.
Answer: C
Q3) Which one of the following does not reduce a firm's net income?
A) income taxes
B) interest expense
C) dividends Paid
D) depreciation expense
Answer: C
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Page 5
Chapter 4: Measuring Corporate Performance
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Q1) Increasing leverage will always act to increase a firm's ROE.
A)True
B)False
Q2) The use of financial leverage will be detrimental to a firm's ROE if the:
A) firm currently has no long-term debt.
B) firm's current ratio is greater than 1.
C) interest expense exceeds the tax liability.
D) interest rate on debt exceeds the firm's ROA.
Q3) A firm's profit margin when ignoring the effects of financing is 20% with an EBIT of $1.5 million and sales of $5 million.How much did the firm pay in taxes?(Enter the answer in dollars)
A) $50,000
B) $300,000
C) $350,000
D) $500,000
Q4) Other things equal,an increase in average accounts receivable will increase a firm's return on assets.
A)True
B)False
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Chapter 5: The Time Value of Money
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Q1) What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today?
A) $9,655.65
B) $10,814.33
C) $12,112.05
D) $13,200.00
Q2) Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually,and the first payment occurs one year from now?
A) $1,067,477.62
B) $1,128,433.33
C) $1,487,320.09
D) $1,250,000.00
Q3) What is the present value of a four-year annuity of $100 per year that begins 2 years from today (end of year 1)if the discount rate is 9%?
A) $297.22
B) $323.97
C) $356.85
D) $272.68
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Page 7
Chapter 6: Valuing Bonds
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Q1) Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments.She sold the bond after 6 months and earned a total return of 4.8% on this investment.At what price,did she sell the bond?
A) $1,001.47
B) $974.28
C) $981.06
D) $1,003.18
Q2) Bonds with a rating of Ba or below by Moody's are referred to as speculative grade,high-yield,or junk bonds.
A)True
B)False
Q3) How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?
A) $696.74
B) $1,075.82
C) $1,082.00
D) $1,123.01
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Chapter 7: Valuing Stocks
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Q1) Technical analysts would be more likely than other investors to index their portfolios.
A)True
B)False
Q2) If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year,what is the stock's current price?
A) $4.50
B) $18.00
C) $22.22
D) $40.50
Q3) What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?
A) $22.86
B) $28.00
C) $42.00
D) $43.75
Q4) Explain the relationship between earnings-price ratio,required rate of return,and present value of growth opportunities.
Q5) How does competition among investors lead to efficient markets?
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Why doesn't the payback rule always make shareholders better off?
Q2) Jamieson is considering a 5-year,$250,000 project with annual cash flows of $90,000.If the company's required return is 10%,determine its discounted payback.
A) 3.27years
B) 3.43 years
C) 3.79 years
D) 4.01 years
Q3) Which mutually exclusive project would you select,if both are priced at $1,000 and your discount rate is 15 percent; Project A with three annual cash flows of $1,000,or Project B,with three years of zero cash flow followed by three years of $1,500 annually?
A) Project A
B) Project B
C) you are indifferent since the NPVs are equal
D) Neither project should be selected
Q4) If a project has multiple IRRs,the highest one is assumed to be correct.
A)True
B)False
Q5) What is the net present value of an investment,and how do you calculate it?
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Page 10
Chapter 9: Using Discounted Cash Flow Analysis to Make Investment Decisions
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Sample Questions
Q1) Which of the following costs probably should not be allocated to the investment needed for a new project?
A) increase in accounts receivable.
B) new warehouse, built for this project.
C) 25 percent of the vice president's salary.
D) labour expense for employees in new warehouse.
Q2) How should the cash flows of a proposed new project be calculated?
Q3) Which of the following changes would be likely to increase the NPV of a project?
A) increasing the firm's opportunity cost of capital.
B) permitting a net decrease in working capital.
C) spreading the total cash inflows over a longer interval.
D) increasing the project's estimated expenses.
Q4) One can continue to earn CCA tax shields from an asset sold from an existing pool if:
A) UCC is positive and greater than salvage.
B) salvage is positive.
C) the present value of the tax shields is negative.
D) the tax bracket is greater than 50 percent.
Q5) Offer examples to confirm that firms do experience opportunity costs,even when cash payments are not explicitly made.
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Chapter 10: Project Analysis
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Sample Questions
Q1) While sensitivity analysis is forward-looking,scenario analysis attempts to reconstruct and analyze the past.
A)True
B)False
Q2) If a decision tree indicates an expected NPV of $1 million,then:
A) at least one of the outcomes had a negative NPV.
B) all of the outcomes had a positive NPV.
C) $1 million Is the firm's minimum guaranteed profit.
D) the project still contains uncertainty.
Q3) What happens to a firm with high operating leverage when the overall level of sales is very high?
A) the firm has higher levels of fixed costs.
B) the firm will enjoy high profits.
C) the firm will not break even in accounting terms.
D) the firm will have a reduced level of fixed costs.
Q4) Operating leverage increases with fixed cost.
A)True
B)False
Q5) Why is managerial flexibility important in capital budgeting?
Q6) Define DOL,discuss what affects it and how to interpret it.
Page 12
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Sample Questions
Q1) The addition of a negative risk asset to a portfolio of assets will:
A) increase the portfolio's expected return.
B) decrease the portfolio's expected return.
C) increase the portfolio's expected volatility.
D) decrease the portfolio's expected volatility.
Q2) What nominal return was received by an investor when inflation averaged 8.0 percent and the real rate of return was a negative 2.5 percent?
A) 5.30 percent
B) 5.36 percent
C) 6.50 percent
D) 10.77 percent
Q3) From a historical perspective (1926-2014),what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?
A) 8.5 percent
B) 12.5 percent
C) 14.5 percent
D) 19.5 percent
Q4) Define the term "risk" and explain how it is related to the expected return.
Page 13
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Chapter 12: Risk, Return, and Capital Budgeting
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Sample Questions
Q1) A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.
A) Company cost of capital.
B) Risk-free rate.
C) Market risk premium.
D) Project cost of capital.
Q2) Which of the following statements best explains the fact that cyclical firms tend to have high Betas?
A) their earnings are not stable
B) their stocks are overpriced
C) their earnings are less diversifiable
D) their profit margins are small
Q3) Which of the following statements is more likely to be correct concerning the statement,"Stock A has a higher expected return than Stock B"?
A) Stock A has more unique risk.
B) Stock B plots below the security market line.
C) Stock B is a cyclical stock.
D) Stock A has a higher Beta.
Q4) How can a manager calculate the opportunity cost of capital for a project?
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) What will happen to the required return on assets as a result of changing to a more debt-intensive capital structure?
A) it will decrease.
B) it will increase.
C) it will remain unchanged although individual investor requirements will shift.
D) the required rates of return for assets, debt holders, and equity holders will all remain constant.
Q2) There are two costs of debt finance.The explicit cost of debt is the rate of interest that bondholders demand.But there is also an implicit cost,because borrowing decreases the required rate of return to equity.
A)True
B)False
Q3) The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.
A)True
B)False
Q4) Can WACC be used to value an entire business?
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Chapter 14: Introduction to Corporate Financing and Governance
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Sample Questions
Q1) Which of the following forms of debt would be likely to offer debt holders the lowest interest rate?
A) secured debt that is not callable.
B) secured debt with a sinking fund.
C) subordinated debt that is callable.
D) subordinated debt with a sinking fund.
Q2) A stock's par value is represented by:
A) the maturity value of the stock.
B) the price at which each share is recorded.
C) the price at which an investor could sell the stock.
D) the price received by the firm when the stock was issued.
Q3) How would a convertible bondholder decide whether to exercise his rights of exchange?
Q4) What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?
A) $17,500
B) $32,500
C) $50,000
D) $76,923
Q5) What are recent trends in a firm's use of different sources of finance?
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Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Sample Questions
Q1) The primary reason for an underwriters' syndication is to:
A) monitor the actions of the different underwriters.
B) reduce the risk of selling a large issue.
C) increase the size of the spread.
D) avoid the scrutiny of the Securities and Exchange Commission.
Q2) Second-stage financing occurs:
A) prior to the initial public offering.
B) when company founders sell a portion of their shares.
C) after the best efforts of the underwriters.
D) when the IPO does not raise sufficient cash.
Q3) Discuss the potential benefits to a corporation of POP registration,coupled with bought deals.
Q4) To be successful,a start-up business will require:
A) taking a big risk, even if the payoff is only mediocre.
B) funds from a venture capitalist.
C) large amounts of debt financing.
D) an initial public offering.
Q5) What is a security?
Q6) What must be the subscription price on the rights the company plans to offer?
Q7) What is venture capital?
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Chapter 16: Debt and Payout Policy
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Sample Questions
Q1) As the debt to equity ratio decreases when debt is not risk free:
A) debt holders demand a higher expected return.
B) debt holders demand a lower expected return.
C) the expected return on equity increases.
D) the expected return on assets increases.
Q2) What is the present value of the tax shields for a firm that anticipates a perpetual debt level of $10 million at an interest rate of 7% and a tax rate of 35%?(Use values in dollar.)
A) $245,000
B) $700,000
C) $3,500,000
D) $10,000,000
Q3) The pecking-order theory of capital structure suggests the following order of financing:
A) internal financing, debt issue, equity issue.
B) internal financing, equity issue, debt issue.
C) debt issue, equity issue, internal financing.
D) equity issue, internal financing, debt issue.
Q4) What is the goal of the capital structure decision? What is the financial manager trying to do?
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Chapter 17: Leasing
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Sample Questions
Q1) If a lease is capitalized,the firm successfully circumvents restrictive financing covenants.
A)True
B)False
Q2) If a lessor has a tax bracket much higher than a lessee's,and the CCA tax shields occur early in the lease,there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.
A)True
B)False
Q3) Lease financing analysis concentrates not only on the net difference between leasing and borrowing and then buying,but also examines the various alternative assets that would be considered for leasing or buying.
A)True
B)False
Q4) Short-term leases are convenient but:
A) often expensive for the lessee.
B) often cheap for the lessee.
C) usually involve second-rate equipment.
D) are not as profitable for the lessor as longer-term ones.
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Chapter 18: Payout Policy
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Q1) Which of the following statements is correct about investors in Ajax Industries,which has just announced a three-for-one stock split?
A) investors will triple their wealth after the split
B) investors' wealth will fall by two-thirds after the split
C) %age of ownership increases for the investors
D) earnings per share will fall by two-thirds after the split
Q2) What effect does a stock dividend have on the book and market values of the firm?
A) book value increases; market value increases
B) book value increases; market value decreases
C) book value decreases; market value increases
D) book and market values remain constant
Q3) A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:
A) causes share price to decline.
B) causes share price to increase.
C) creates the same tax liability for the investor.
D) leaves the firm with the same amount of assets.
Q4) How are dividends paid and how do companies decide on dividend payments?
Q5) Compare and contrast share repurchases with dividend payouts.
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Chapter 19: Long-Term Financial Planning
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Q1) First-stage pro forma balance sheets do not determine:
A) Whether external financing is required
B) The need for additional fixed assets
C) The amount of the balancing item
D) The financing mix for external funding
Q2) Describe the role of a balancing item or "plug" in financial planning.
Q3) Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:
A) Debt has grown too large, too fast
B) It is more difficult to maintain a stable dividend
C) Debt covenants always accommodate more debt, but often prevent debt prepayment
D) Equity is always less expensive to obtain than debt
Q4) Which of the following statements is not true regarding financial planning models?
A) They should include as much detail as possible
B) The results of a model are pro forma financial statements
C) The plug variable maintains consistency
D) Financial analysis is not used in financial planning
Q5) Why is it important that financial plans incorporate adaptability?
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Chapter 20: Short-Term Financial Planning
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Q1) Carrying costs are the cost of holding inventory.
A)True
B)False
Q2) Company which sees a customer pay a $2,500 bill resulting from a previous sale will see no change in its net working capital.
A)True
B)False
Q3) The principle of "matched maturities" in finance refers to:
A) finding sources of funds with the longest maturity, in order to avoid liquidity crises
B) funding long-term assets with long-term sources, and short-term assets with short terms borrowings.
C) using as much short-term financing as possible due to the lower cost of interest
D) buying marketable securities when demand is high and borrowing short term when demand is low
Q4) An increase in long-term assets is a source of cash.
A)True
B)False
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22
Chapter 21: Cash and Inventory Management
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Q1) Concentration banking allows the banks to use the local collection system to clear the customers' cheques.
A)True
B)False
Q2) In the Baumol model,the optimal sale amount is _____ with higher interest rates and ______ with a higher cost of selling securities. A) increased; increased B) decreased; increased C) decreased; decreased D) increased; decreased
Q3) ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?
A) $16,733
B) $33,466
C) $37,417
D) $74,833
Q4) What are the cost and benefits of holding cash?
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Chapter 22: Credit Management and Collection
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Q1) What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value)sale that has an 80% (present value)cost?
A) Grant credit since expected profit is $3,200
B) Grant credit since expected profit is $800
C) Refuse credit since expected profit is zero
D) Refuse credit since expected loss is $3,000
Q2) What is the effective annual rate of trade credit if the trade credit terms are 1/10,net 30?
A) 13.01%
B) 18.00%
C) 18.43%
D) 20.13%
Q3) Which of the following credit decisions appears correct for a customer that intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?
A) Reject because expected loss equals $320
B) Reject because expected profit equals $0
C) Accept because expected profit equals $1,440
D) Accept because expected profit equals $3,200
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Chapter 23: Mergers, Acquisitions, and Corporate Control
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Q1) A "poison pill" is a generous retirement package for current management,implemented after a hostile takeover.
A)True
B)False
Q2) If the shareholders of an acquired firm capture all of the merger's gain,then the:
A) cost of the merger is zero.
B) NPV of the merger is zero.
C) EPS will increase.
D) acquiring firm retains all merger benefits.
Q3) Amendments to the corporate charter that attempt to circumvent mergers are known as poison pills.
A)True
B)False
Q4) In which merger type would it be least likely to observe economies of scale?
A) Horizontal
B) Vertical
C) Conglomerate
D) It is equally likely to observe economies of scale in all merger types
Q5) Why are firms with free cash flow attractive acquisition candidates?
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Chapter 24: International Financial Management
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Q1) Explain the interest rate parity theory.
Q2) What is the basic difference between hedgers and speculators?
Q3) One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:
A) transaction costs in the forward market are high.
B) forward rates are always lower than spot rates.
C) hedged currency could appreciate during the period.
D) hedged currency could depreciate during the period.
Q4) An indirect exchange rate can be converted to a direct exchange rate by:
A) dividing the indirect rate by number of U.S. Dollars required to purchase one unit of the other currency.
B) dividing the indirect rate by 100.
C) multiplying the indirect rate by the spot rate.
D) taking the inverse of the indirect rate.
Q5) If the Euro is trading at a forward discount relative to the Dollar,then you'll receive fewer marks per Dollar in the future.
A)True
B)False
Q6) Explain the international Fisher Effect.
Page 26
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Chapter 25: Options
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Q1) Firms spend an increasing amount of time evaluating real options,which are:
A) options on real assets such as an option to abandon.
B) call and put options traded on organized exchanges.
C) call options such as warrants and convertible bonds.
D) put options such as held by shareholders of a firm with financial leverage.
Q2) How does the price of a put option respond to an interest rate increase?
A) Increases
B) Decreases
C) Remains the same
D) Goes to zero
Q3) Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.
A)True
B)False
Q4) The option to abandon a project investing in real assets can be considered to have a strike price equal to the:
A) historical cost of the asset.
B) market value of the asset at abandonment.
C) forgone revenues anticipated from the project.
D) forgone interest on the bonds used to finance the real assets.
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Chapter 26: Risk Management
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Q1) The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract,which requires delivery of 40,000 of pork bellies at expiration?
A) A loss of $400 is posted to the account
B) A gain of $400 is posted to the account
C) A loss of $1,200 is posted to the account
D) A gain of $1,200 is posted to the account
Q2) Selling a futures contract may be appropriate for one who wishes to:
A) lock in a future sales price.
B) lock in a future purchase price.
C) speculate that future spot prices are going down.
D) have a ready market in which to sell product.
Q3) If the market for corn futures has more prospective sellers than buyers,then one would expect:
A) the price of corn futures to decrease.
B) the price of corn futures to increase.
C) some traders to change from seller to buyer.
D) the market to cease operations until demand is rebalanced.
Q4) What is a currency swap and give an example of how this might be used?
Q5) What is the basic difference between hedgers and speculators?
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