Financial Management
Study Guide Questions
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices involved in the effective management of an organizations financial resources. Students will learn about key topics such as financial statement analysis, budgeting, working capital management, capital structure, investment decision-making, and the valuation of assets and firms. The course equips learners with essential skills to assess financial health, optimize resource allocation, and make informed strategic decisions to maximize shareholder value. Through case studies and practical exercises, students gain a strong foundation in financial planning, risk assessment, and the use of financial tools for organizational growth and sustainability.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Q1) The disadvantages associated with a proprietorship are similar to those of a partnership. A major difference between these two forms of business organization is that a partnership requires a legal agreement that commits the partners' personal assets, which means that partnerships have little difficulty raising large amounts of capital (similar to corporations).
A)True
B)False
Answer: False
Q2) The credit manager is supervised by the _____.
A)treasurer
B)inventory manager
C)director of capital budgeting
D)vice president of finance
E)controller
Answer: A
Q3) If a firm raises its product prices beyond reasonable levels, it will generally lose some of its market share.
A)True
B)False Answer: True
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Chapter 2: Analysis of Financial Statements
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Q1) The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. Crimpson's current ratio is:
A)2.5 times.
B)1.56 times.
C)1.325 times.
D)0.565 times.
E)1.855 times.
Answer: C
Q2) Which of the following items appears at the top of an income statement when determining the net income of a firm?
A)Earnings before tax
B)Operating costs
C)Net sales
D)Gross profit
E)Retained earnings
Answer: C
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock markets.
A)True
B)False
Answer: True
Q2) Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition among the stock exchanges.
A)True
B)False
Answer: True
Q3) An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time Value of Money
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Q1) An investor purchased a 10-year bond that makes a $50 interest payment at the end of every six-month period until the bond matures. These interest payments represent a(an) _____.
A)perpetuity
B)ordinary annuity
C)annuity due
D)compounded annuity
E)discounted annuity
Q2) Dire invested $10,000 today in an investment that has a maturity value of $13,500 in five years. If the interest is compounded annually, what is the annual rate of return earned on the investment?
A)7.8%
B)8.2%
C)6.2%
D)4.5%
E)9.5%
Q3) The present value of an uneven cash flow can be determined by using the annuity equations.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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Q1) Assume that the expectations theory of the term structure of interest rates is correct, and other term structure theories are invalid. If a downward sloping yield curve is observed, which of the following is a correct statement?
A)Investors expect interest rates to be constant over time.
B)Investors expect interest rates to increase in the future.
C)Investors expect interest rates to decrease in the future.
D)Investors require a negative maturity risk premium.
E)The inflation premium must be greater than 2 percent.
Q2) The value of an asset is determined by discounting the future cash flows generated by the asset using the:
A)tax rate.
B)interest rate.
C)inflation rate.
D)deficit rate.
E)surplus rate.
Q3) The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.
A)True
B)False
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Page 7
Chapter 6: Bonds Debt Characteristics and Valuation
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Q1) Which of the following ratings by Standard & Poor's (S&P) is given to speculative bonds with extremely high credit risk?
A)A
B)B
C)BB
D)BBB
E)CCC
Q2) There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).
A)True
B)False
Q3) Which of the following ratings by Moody's is given to the bonds of companies that have the best credit risk?
A)Caa
B)Aaa
C)B
D)Ba
E)A
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) Common stockholders have the right to _____.
A)vote for the changes in a firm's charter
B)convert their stock into bonds
C)receive the cash distributions before preferred stockholders
D)receive the par value of shares on liquidation
E)receive cumulative dividends
Q2) A typical common stock issue has a maturity period of 10 years.
A)True
B)False
Q3) Common shareholders can exert control of the management of the firm by:
A)requiring the firm to unionize.
B)directly replacing management with themselves.
C)buying shares in an initial public offering (IPO) at a discounted price.
D)electing board members who can replace the management.
E)buying shares in a second firm at a substantially reduced price.
Q4) A proxy fight is an attempt by a group to overthrow the current management team and take control of a business by soliciting stockholders' proxy votes.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Q1) The part of a security's risk associated with economic factors that affect all firms to some extent is known as the _____.
A)diversifiable risk
B)unsystematic risk
C)stand-alone risk
D)market risk
E)business risk
Q2) The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as _____.
A)nondiversifiable risk
B)unsystematic risk
C)market risk
D)systematic risk
E)relevant risk
Q3) The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.
A)True
B)False
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Page 10
Chapter 9: Capital Budgeting Techniques
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Q1) One advantage to using the traditional payback period technique is that it provides a rough measure of a project's liquidity and risk.
A)True
B)False
Q2) Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?
A)Internal rate of return (IRR)
B)Traditional payback period (PB)
C)Modified internal rate of return (MIRR)
D)Net present value (NPV)
E)Present value (PV) of cash flows
Q3) Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. By forecasting the needs for capital assets in advance, a firm will have an opportunity to purchase and install assets before they are needed.
A)True
B)False
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Chapter 10: Project Cash Flows and Risk
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Q1) A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:
A)depreciation represents a tax-deductible cash expense.
B)the firm incurs a cash payment equal to the depreciation expense each year.
C)depreciation has an impact on the taxes paid by the firm, which is a cash flow.
D)depreciation is a sunk cost.
E)depreciation is a fixed cash payment that the firm receives each year.
Q2) Using the capital asset pricing model (CAPM), Sun State determined that the required rate of return for a capital budgeting project it is evaluating is equal to 18 percent. If U.S. Treasury bonds yield 7 percent and the market risk premium is 5 percent, what is the project's beta coefficient?
A)5.50
B)2.20
C)5.00
D)12.50
E)0.45
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Chapter 11: The Cost of Capital
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Q1) The marginal cost of capital (MCC) schedule generally rises, which implies that the weighted average cost of capital:
A)increases as the firm achieves economies of scale in its financing arrangements.
B)decreases as the firm uses more retrained earnings to finance capital budgeting projects.
C)decreases as the firm uses a greater proportion of cheaper debt and a lower proportion of more expensive common stock.
D)increases as the firm pays more taxes on higher levels of taxable income.
E)generally increases because the firm incurs higher flotation costs and higher financial risk as it raises more funds through new debt and new equity issues.
Q2) For a particular firm, depending on tax rates, flotation costs, and the attitude of investors, the cost of new common equity, re, can be less than, equal to, or greater than its before-tax cost of debt, rd.
A)True
B)False
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Chapter 12: Capital Structure
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Q1) If a firm increases the proportions of debt and preferred stock that are contained in its capital structure, its _____.
A)financial risk will increase
B)business risk will decrease
C)tax liability will increase
D)operating leverage will decrease
E)financial leverage will decrease
Q2) Symmetric information is defined as the situation in which _______.
A)investors and managers have identical information about the firm's prospects
B)employees and managers have identical information about the firm's prospects
C)investors and creditors have identical information about the firm's prospects
D)managers have different (better) information about their firm's prospects than outside investors
E)employees have different (better) information about their firm's prospects than managers
Q3) The optimal capital structure is the capital structure that strikes a balance between risk and return such that the firm's stock price is maximized.
A)True
B)False
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Page 14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) A firm following the _____ dividend policy pays a specific dollar dividend each year or periodically increases the dividend at a constant rate.
A)free cash flow
B)residual
C)constant payout ratio
D)stable, predictable
E)extra
Q2) Mom's Apple Pies (MAP) earned $500,000 this year. The company follows the residual dividend policy when paying dividends. MAP has determined that it needs a total of $600,000 for investment in capital budgeting projects this year. If the company's debt/asset ratio is 40 percent, what will its dividend payout ratio be this year? MAP has no preferred stock.
A)40%
B)28%
C)72%
D)48%
E)52%
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Page 15
Chapter 14: Managing Short-Term Financing Liabilities
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Q1) A(n) ______ is a type of legal claim (lien) against a firm's inventory when it is used as collateral for a loan and the goods are relatively low priced, fast moving, and difficult to identify individually.
A)recourse order
B)bond indenture
C)trust receipt
D)warehouse receipt
E)blanket lien
Q2) The following information relates to Gear Corporation:
Inventory conversion period 68.2 days
Receivables collection period
Payables deferral period
35.8 days
24.6 days
Which of the following is the cash conversion cycle of the company?
A)128.6 days
B)79.4 days
C)57.0 days
D)79.2 days
E)60.4 days
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Chapter 15: Managing Short-Term Assets
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Q1) Which of the following statements about working capital management in multinational corporations is correct?
A)Multinational corporations can take advantage of the best interest rates available in the international financial markets by using global concentration banks.
B)The primary reason foreign governments impose import or export quotas and tariffs is to ensure that multinational corporations are able to compete with domestic companies.
C)The political and legal environments in most foreign countries make it easier for multinational corporations than for domestic companies to collect defaulted credit accounts.
D)Many foreign governments provide multinational corporations that operate in their countries with subsidies to offset exchange rate changes that harm the foreign companies' profits.
E)Generally, a multinational company faces a lower threat of government expropriation than do domestic companies.
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Chapter 16: Financial Planning and Control
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Q1) Which of the following would be considered part of financing feedbacks in the financial forecasting process?
A)Funds that a firm must raise externally through new borrowing or by selling new stock to meet its financial goals.
B)The change in current assets that occur when a firm implements a sales forecast.
C)The effects forecasts of the economic prospects for the nation, region, and industry have on the taxes the firm must pay on the income it earned in the most recent accounting period.
D)The effects on the income statement and balance sheet of actions the firm takes to finance forecasted increases in assets.
E)The effect that forecasted sales has on the owners of the firm.
Q2) A firm should scale back its projected level of operations if the funds required to meet the forecasted sales are readily available.
A)True
B)False
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