Financial Management
Study Guide Questions
Course Introduction
Financial Management is a fundamental course that explores the principles and practices involved in planning, organizing, directing, and controlling the financial activities of an organization. Students learn about key concepts such as time value of money, risk and return, capital budgeting, financial analysis, and forecasting. The course covers topics including working capital management, sources of financing, cost of capital, dividend policies, and financial statement analysis. Through case studies and real-world applications, students develop analytical and decision-making skills essential for effective financial planning and management in both corporate and personal finance settings.
Recommended Textbook
Foundations of Finance 9th Edition by Arthur J. Keown
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2570 Verified Questions
2570 Flashcards
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Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) One of the causes of the recent financial crisis in the United States has been excessive risk taking due to underestimation of risk.How does this relate to shareholder wealth maximization and financial leverage? Can overestimation of risk also be detrimental?
Answer: Underestimation of risk can lead managers to borrow excessively to fund more and more projects.High levels of debt require interest and principal payments which may become impossible to make if the company's cash flows are reduced,even for short periods of time.Overestimation of risk can also be problematic.Managers who take on too little risk may be passing up desirable projects that could increase shareholder wealth.The principle that risk requires a return does not mean that all risk is bad,but rather that additional risk is ok if additional expected returns are high enough.If all risk was bad,companies would go out of business and all investors would buy U.S.Treasury bills.
Q2) Fortunately,Europe was largely shielded from the economic recession that afflicted the world economy in 2007.The European economies contracted less and have recovered much more rapidly than their counterparts in the United States and China.
A)True
B)False
Answer: False
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Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded.
A)True
B)False
Answer: True
Q2) When an investment banking firm "underwrites" an issue of securities,the firm is performing which of the following?
A) agreeing to market the securities to investors for a fee
B) giving legal advice to the firm that is issuing the securities
C) offering to purchase the securities from the firm, thereby assuming the risk of resale to investors
D) agreeing to provide insurance that the firm's securities will sell for a price that is established by the firm
Answer: C
Q3) Individuals,corporations,and governments can be either savings deficit units or savings surplus units.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Siskiyou Corp.has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000.What is the firm's net working capital?
A) $390,000
B) $175,000
C) $700,000
D) $210,000
Answer: A
Q2) Which of the following best describes cash flow from financing activities?
A) Interest income, plus dividend income, minus taxes
B) Interest expense, minus dividends paid
C) Interest paid, plus dividends paid, plus increase (or minus decrease) in stock, plus increase (or minus decrease) in debt
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid
Answer: D
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Page 5
Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) One weakness of the times interest earned ratio is that it includes only the annual interest expense as a finance expense and ignores other financing items such as lease payments that must be paid.
A)True
B)False
Q2) Based on the information in Table 4-3,the debt ratio is
A) 18.38%.
B) 40.24%.
C) 48.48%.
D) 53.43%.
Q3) Trend analysis is the forecasting of the firm's financial ratios for a future time period by using its own ratios from previous periods.
A)True
B)False
Q4) Based on the information in Table 4-1,the total asset turnover ratio is A) 1.11.
B) 1.41.
C) 2.33.
D) 4.45.
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa.The villa costs $500,000 today,and housing prices in Mexico are expected to increase by 6% per year.Manny and Irene want to make fifteen equal annual payments into an account,starting today,so there will be enough money to purchase the villa in fifteen years.If the account earns 10% per year,what is the amount of each deposit?
A) $79,885
B) $72,623
C) $34,286
D) $32,947
Q2) A deferred annuity will pay you $500 at the end of each year for 10 years,however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12).What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100.
A) $2,200
B) $2,400
C) $2,900
D) $3,400
Q3) How does compound interest differ from simple interest?
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) The beta of a T-bill is one.
A)True
B)False
Q2) Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?
A) 0.97
B) 1.02
C) 1.12
D) 1.21
Q3) Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.
A)True
B)False
Q4) Which of the following is the slope of the security market line?
A) beta
B) one
C) It varies, and it is steeper for riskier securities.
D) the market risk premium
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Which of the following is true of a zero coupon bond?
A) The bond makes no coupon payments.
B) The bond sells at a premium prior to maturity.
C) The bond has a zero par value.
D) The bond has no value until the year it matures because there are no positive cash flows until then.
Q2) William Corp.bonds have a current yield of 7% and mature in 10 years.Smith Corp.bonds have a current yield of 5% and mature in 10 years.Given this information,which of the following statements is MOST correct?
A) William Corp. bonds will have a higher yield to maturity than Smith Corp. bonds.
B) Smith Corp. bonds will sell for a lower price than William Corp. bonds.
C) Smith Corp. bonds are riskier than William Corp. bonds.
D) If both bonds have the same yield to maturity, then the price of Smith Corp. bonds must be less than the price of William Corp. bonds.
Q3) The current yield is greater than the coupon rate for a bond selling above par value.
A)True
B)False
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Page 9
Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Stimpson Inc.preferred stock pays a $.50 annual dividend.What is the value of the stock if your required rate of return is 10%?
A) $.05
B) $.50
C) $5.00
D) $50.00
Q2) The common stock of a constant-growth firm is valued in the same manner as its preferred stock.
A)True
B)False
Q3) ABC Corp.5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.
A)True
B)False
Q4) If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?
A)True
B)False
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10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) Cost of capital is
A) the coupon rate of debt.
B) a hurdle rate set by the board of directors.
C) the rate of return that must be earned on additional investment if firm value is to remain unchanged.
D) the average cost of the firm's assets.
Q2) The mixture of financing sources used by a firm will vary from year to year,so many firms use target capital structure proportions when calculating the firm's weighted average cost of capital.
A)True
B)False
Q3) NewLinePhone Corp.is very risky,with a beta equal to 2.8 and a standard deviation of returns of 32%.The risk-free rate of return is 3% and the market risk premium is 8%.NewLinePhone's marginal tax rate is 35%.Use the capital asset pricing model to estimate NewLinePhone's cost of retained earnings.
Q4) If a firm's tax rate increases,then its weighted average cost of capital increases also. A)True
B)False
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Page 11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) The required rate of return reflects the costs of funds needed to finance a project.
A)True B)False
Q2) Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.
A)True
B)False
Q3) How might capital rationing conflict with the goal of maximizing shareholders' wealth?
Q4) If a project is acceptable using the net present value criteria,then it will also be acceptable under the less stringent criteria of the payback period.
A)True B)False
Q5) If the net present value of a project is zero,then the profitability index will equal one. A)True B)False
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) Cash flows associated with a project's termination generally include the salvage value of the project net of any taxes associated with the sale.
A)True
B)False
Q2) A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.
A)True
B)False
Q3) Overhead costs are sometimes incremental cash flows and other times are considered sunk costs.
A)True
B)False
Q4) The initial outlay includes the cost of purchasing the asset and getting it operational,including the purchase price,shipping and installation,and any training costs for employees who will be operating the equipment,and any increases in working capital requirements.
A)True
B)False
Page 13
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) The break-even point is equal to
A) fixed costs divided by (sales price per unit - variable cost per unit).
B) fixed costs divided by unit variable costs.
C) fixed costs divided by selling price per unit.
D) (sales price per unit - variable cost per unit) times the fixed costs.
Q2) A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.
A)True
B)False
Q3) The more fixed-charge securities (such as bonds and preferred stock)the firm employs in its financial structure,the greater its financial leverage.
A)True
B)False
Q4) The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.
A)True
B)False
Q5) Identify several factors that influence the decision to issue debt.
Q6) Describe the sources of business risk.
Page 14
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Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) All of the following are potential benefits of stock repurchases EXCEPT
A) a means for providing an internal investment opportunity.
B) an approach for maintaining the existing capital structure while still making a distribution to shareholders.
C) a favorable impact on earnings per share.
D) the elimination of a minority ownership group of stockholders.
Q2) Bass Frozen Foods,Inc.has found three acceptable investment opportunities.The three projects require a total of $5 million in financing.It is the company's policy to finance its investments by using 40% debt and 60% common equity.The firm has generated $3.8 million dollars from its operations that could be used to finance the common equity portion of its investments.
a.What portion of the new investments will be financed by common equity and what portion by debt?
b.According to the residual dividend theory,how much would be paid out in dividends?
Q3) Within the context of a stock repurchase,what is meant by a tender offer?
Q4) Describe the types of dividend policies that corporations frequently use.Which is most common? Why?
Q5) Distinguish between the residual dividend theory and the clientele effect.
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) Using the percent of sales method and assuming that no excess capacity exists,a 20% increase in sales will result in
A) a 20% increase in total assets.
B) a 20% increase in total liabilities.
C) a 20% increase in retained earnings.
D) a 20% increase in the company's profit margin.
Q2) When economies of scale exist,the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.
A)True
B)False
Q3) One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs.
A)True
B)False
Q4) Cash budgets are completed only on an annual basis because shorter periods of time are too variable and uncertain for meaningful results.
A)True
B)False
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) Major sources of secured credit include commercial banks,finance companies,and factors.
A)True
B)False
Q2) Commercial paper is an unsecured form of credit.
A)True
B)False
Q3) Which of the following statements about factoring is true?
A) The firm, not the factor, bears the risk of collecting bad receivables in a factoring arrangement.
B) Factoring involves the outright sale of a firm's accounts receivable to the factor.
C) The borrowing firm is able to obtain a greater advance against inventory in a factoring arrangement than in a typical line of credit secured by accounts receivable.
D) Factoring firms sell the receivables of other firms.
Q4) Floating lien agreements are the least secure form of inventory collateral.
A)True
B)False
Q5) What is the hedging principle or principle of self-liquidating debt?
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Chapter 16: International Business Finance
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Sample Questions
Q1) The direct quote in New York is .015 dollar per Pakistani rupee.The direct quote in Pakistan is 60 rupees per dollar.This imbalance in rates can be corrected by arbitrage.A trader will ________ rupees in New York and ________ rupees in Pakistan,causing the direct quote in New York to ________.
A) buy; sell; increase B) buy; sell; decrease C) sell; buy; decrease D) sell; buy; increase
Q2) A quote of .7645 euros per dollar in New York is an example of a direct quote.
A)True
B)False
Q3) A direct quote of $1.6 per British pound in the United States is equivalent to a direct quote of .625 British pounds per U.S.dollar in Great Britain.
A)True
B)False
Q4) Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.
A)True
B)False
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) Funds that are available in a company's bank account until its payment check has cleared refers to
A) mail float.
B) processing float.
C) transit float.
D) disbursing float.
Q2) A firm's credit and collection policies usually include
A) terms of sale, quality of customers, and collection of credit sales.
B) average collection period, dollar value of aged receivables, and terms of sale.
C) terms of sale and collection of credit sales.
D) terms of sale, level of credit sales, and collection of credit sales.
Q3) The corporate treasurer of Wooden Furniture Inc.is considering the purchase of either a municipal obligation with a 6.1% coupon or a corporate bond with a 9.5% return.Both bonds have a $1,000 par value.The company is currently in the 35% marginal tax bracket.Which security should the treasurer recommend?
Q4) What are the three motives for holding cash?
Q5) The economic order quantity (EOQ)model is well accepted.However,there are weaknesses associated with several of its assumptions.What are these weaknesses?
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