Financial Management Test
Bank
Course Introduction
Financial Management is a foundational course designed to introduce students to the principles and practices involved in effective financial decision-making within organizations. The course covers key concepts such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, working capital management, and financial planning. Through case studies and practical applications, students learn how to evaluate investment opportunities, optimize funding sources, and create strategies to maximize shareholder value while considering ethical and regulatory issues in finance.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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17 Chapters
1391 Verified Questions
1391 Flashcards
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Page 2
Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Capital market instruments include both long-term debt and common stocks.
B) An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
C) The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
D) If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
E) While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
Answer: A
Q2) One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
A)True
B)False
Answer: True
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3
Chapter 2: Financial statements, cash flow, and taxes
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
B) The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
C) The balance sheet gives us a picture of the firm's financial position at a point in time.
D) The income statement gives us a picture of the firm's financial position at a point in time.
E) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
Answer: C
Q2) To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.
A)True
B)False
Answer: True
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Chapter 3: Analysis of financial statements
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104 Flashcards
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Sample Questions
Q1) Arshadi Corp.'s sales last year were $52, 000, and its total assets were $22, 000.What was its total assets turnover ratio (TATO)?
A) 2.03
B) 2.13
C) 2.25
D) 2.36
E) 2.48
Answer: D
Q2) One problem with ratio analysis is that relationships can be manipulated.For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.
A)True
B)False
Answer: False
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Chapter 4: Time value of money
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Sample Questions
Q1) Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding.What effective annual rate (EFF%)does the bank pay?
A) 3.72%
B) 4.13%
C) 4.59%
D) 5.05%
E) 5.56%
Q2) Starting to invest early for retirement increases the benefits of compound interest. A)True
B)False
Q3) Suppose you just won the state lottery, and you have a choice between receiving $2, 550, 000 today or a 20-year annuity of $250, 000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.
A) 7.12%
B) 7.49%
C) 7.87%
D) 8.26%
E) 8.67%
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Chapter 5: Bonds, bond valuation, and interest rates
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
Q2) A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.
A)True
B)False
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Chapter 6: Risk and return
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Lower beta stocks have higher required returns.
B) A stock's beta indicates its diversifiable risk.
C) Diversifiable risk cannot be completely diversified away.
D) Two securities with the same stand-alone risk must have the same betas.
E) The slope of the security market line is equal to the market risk premium.
Q2) Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%.Based on the SML, what is the firm's required return?
A) 13.51%
B) 13.86%
C) 14.21%
D) 14.58%
E) 14.95%
Q3) The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
A)True
B)False
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Page 8
Chapter 7: Valuation of stocks and corporations
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80 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
B) The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis)new issues of the firm's common stock.
C) The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates.
D) The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required returns.
E) If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.
Q2) A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.
A)True
B)False
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Page 9
Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.
A)True
B)False
Q2) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
Q3) The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option, assuming the same strike price and expiration date as for the call option?
A) $7.33
B) $7.71
C) $8.12
D) $8.55
E) $9.00
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Chapter 9: The cost of capital
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Sample Questions
Q1) Refer to Exhibit 9.1.What is the best estimate of the firm's WACC?
A) 10.85%
B) 11.19%
C) 11.53%
D) 11.88%
E) 12.24%
Q2) If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms.Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
A)True
B)False
Q3) The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
A)True
B)False
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Chapter 10: The basics of capital budgeting: evaluating cash flows
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Sample Questions
Q1) The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.
A)True
B)False
Q2) Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life.Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs.Now suppose interest rates and money costs decline.Other things held constant, this change will cause L to become preferred to S.
A)True
B)False
Q3) Both the regular and the modified IRR (MIRR)methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.
A)True
B)False
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Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) McLeod Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?
A) 0.67
B) 0.73
C) 0.81
D) 0.89
E) 0.98
Q2) Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process.Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.
A)True
B)False
Q3) The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant.
A)True
B)False
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13
Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital.Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.
A)True
B)False
Q2) Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets.However, its fixed assets were used at only 75% of capacity.Now the company is developing its financial forecast for the coming year.As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity.What target FA/Sales ratio should the company set?
A) 28.5%
B) 30.0%
C) 31.5%
D) 33.1%
E) 34.7%
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Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q4) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders)from such a split, but any such benefit is probably small.
A)True
B)False
Q2) If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.
A)True
B)False
Q3) A reverse split reduces the number of shares outstanding.
A)True B)False
Q4) Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.
A)True
B)False
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Page 16
Chapter 15: Capital structure decisions
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Sample Questions
Q1) Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%.The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value.If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged.Which of the following is most likely to occur as a result of the recapitalization?
A) The ROA would remain unchanged.
B) The basic earning power ratio would decline.
C) The basic earning power ratio would increase.
D) The ROE would increase.
E) The ROA would increase.
Q2) Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
A) The costs that would be incurred in the event of bankruptcy increase.
B) Management believes that the firm's stock has become overvalued.
C) Its degree of operating leverage increases.
D) The corporate tax rate increases.
E) Its sales become less stable over time.
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Page 17
Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should
A) consist mainly of short-term securities because they pay higher rates.
B) consist mainly of U.S.Treasury securities to minimize interest rate risk.
C) consist mainly of short-term securities to minimize interest rate risk.
D) be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
E) consist mainly of long-term securities because they pay higher rates.
Q2) The twin goals of inventory management are (1)to ensure that the inventories needed to sustain operations are available, but (2)to hold the costs of ordering and carrying inventories to the lowest possible level.
A)True
B)False
Q3) Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.
A)True
B)False
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Chapter 17: Multinational financial management
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Sample Questions
Q1) If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S.dollar.
A)True
B)False
Q2) Which of the following statements is NOT CORRECT?
A) Foreign bonds and Eurobonds are two important types of international bonds.
B) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
C) The term Eurobond applies only to foreign bonds denominated in U.S.currency.
D) A foreign bond might pay a higher nominal interest rate than a U.S.bond.
E) Any bond sold outside the country of the borrower is called an international bond.
Q3) Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
A)True
B)False
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