Financial Management Test
Bank
Course Introduction
Financial Management explores the fundamental principles and practices of managing an organizations financial resources. The course covers key topics such as financial analysis, planning, and control; investment decisions; capital budgeting; financing options; risk and return evaluation; and working capital management. Students learn to interpret financial statements, assess investment opportunities, and understand the strategies that maximize shareholder value. Emphasizing real-world application, the course equips students with the financial decision-making skills necessary for effective management in both corporate and entrepreneurial settings.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Ediiton by Stephen A. Ross
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21 Chapters
1629 Verified Questions
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Insider trading is
A)illegal.
B)impossible to have in our efficient market.
C)legal.
D)discouraged,but legal.
E)defined as the trading of stock by a corporate director based on publicly available information.
Answer: A
Q2) Which one of the following is a key requirement of the Sarbanes-Oxley Act?
A)Officers of the corporation must now own at least five percent of the firm's stock.
B)Officers of the corporation must review and sign the annual reports.
C)Annual reports must list the strengths of the internal controls.
D)Firms must "go dark" every 5 years.
E)Monthly financial statements must be provided to all shareholders.
Answer: B
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3
Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) School House Antiques has current assets of $340 and current liabilities of $190 at the end of the year.At the beginning of the year,the current assets were $415 and the current liabilities were $210.What is the change in net working capital?
A)-$95
B)$0
C)$55
D)$95
E)-$55
Answer: E
Q2) Pete's Boats has beginning long-term debt of $647 and ending long-term debt of $749.The beginning and ending total debt balances are $801 and $768,respectively.The interest paid is $54.What is the amount of the cash flow to the creditors?
A)-$10
B)-$48
C)$21
D)$156
E)$87
Answer: B
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Page 4
Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) A firm has a debt-equity ratio of 0.36.What is the total debt ratio?
A)0.26
B)0.29
C)0.67
D)0.71
E)0.74
Answer: A
Q2) Les' Motors has sales of $482,800,cost of goods sold of $297,400,inventory of $169,600,and accounts receivable of $52,900.How many days,on average,does it take the firm to sell its inventory and collect payment on that sale?
A)265.27 days
B)185.20 days
C)248.14 days
D)138.22 days
E)284.67 days
Answer: C
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5
Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Jensen's Shipping is expected to produce an annual cash flow of $218,900 next year.Thereafter,this cash flow is expected to decrease by 1.6 percent per year indefinitely.What is this firm worth today at a discount rate of 18 percent?
A)$1,116,836.74
B)$1,424,350.00
C)$1,394,210.53
D)$1,334,756.10
E)$1,221,400.00
Q2) Keane just borrowed $38,700 for 5 years at an interest rate of 5.9 percent,compounded monthly.What is the amount of each monthly loan payment?
A)$627.62
B)$721.60
C)$630.62
D)$746.38
E)$693.04
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Chapter 5: Interest Rates and Bond Valuation
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Sample Questions
Q1) Bonds issued by the U.S.government
A)are considered to be default-free.
B)are exempt from interest-rate risk.
C)provide totally tax-free income.
D)pay interest that is exempt from federal income tax.
E)are taxed the same as municipal bonds.
Q2) The term structure of interest rates reflects the
A)pure time value of money for various lengths of time.
B)actual risk premium being paid for corporate bonds of varying maturities.
C)pure inflation adjustment applied to bonds of various maturities.
D)interest rate risk premium applicable to bonds of varying maturities.
E)nominal interest rates applicable to coupon bonds of varying maturities.
Q3) Assume a bond yields a real rate of return of 3.6 percent during a time when inflation is 1.87 percent.What would the actual nominal rate of return be?
A)5.61%
B)5.47%
C)5.49%
D)5.54%
E)5.57%
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Page 7
Chapter 6: Stock Valuation
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Sample Questions
Q1) Theo owns 49,800 of the 120,000 outstanding shares of BBE Inc.The share price is $28.64.Each share is granted one vote for each open seat on the board of directors.Currently,there are three open seats.Theo wants to be on the board and is assuming that no one,other than himself,will vote for him.How much additional money,if any,must he invest in BBE to guarantee his election if the firm uses a straight voting system?
A)$0
B)$287,403.64
C)$292,128.00
D)$292,156.64
E)$287,375.00
Q2) ALP Inc.has decided to issue preferred stock with an annual dividend of $5 a share.Similar stocks are currently yielding 14 percent.What price should the firm expect to receive for each new share issued?
A)$35.71
B)$33.08
C)$44.92
D)$40.71
E)$38.97
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Page 8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) A project has an initial cost of $51,900 and cash flows of $18,700,$56,500,and -$9,100 for Years 1 to 3,respectively.If the required rate of return for this investment is 17 percent,should you accept it based solely on the internal rate of return rule? Why or why not?
A)Yes,because the IRR exceeds the required return.
B)Yes,because the IRR is a positive rate of return.
C)You cannot apply the IRR rule in this case because there are multiple IRRs.
D)No,because the IRR is a negative rate of return.
E)No,because the IRR is less than the required return.
Q2) Toy Town is considering a new toy with initial costs of $35,900.This toy is expected to produce cash flows of $52,500 in Year 1,$11,300 in Year 2,and nothing thereafter.The discount rate assigned to the toy is 18.7 percent.What is the IRR?
A)65.28%
B)24.79%
C)38.03%
D)56.65%
E)20.04%
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Page 9
Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Margarite's Enterprises is considering a new 5-year project that will require $612,000 for new fixed assets,$160,000 for inventory,and $35,000 for accounts receivable.Short-term debt is expected to increase by $110,000.The fixed assets will be depreciated straight-line to zero over the life of the project.The project is expected to generate annual sales of $694,000 with costs of $428,000.The tax rate is 35 percent,and the required rate of return is 15 percent.What is the amount of the earnings before interest and taxes (EBIT)for the first year of this project?
A)$138,500
B)$143,600
C)$167,000
D)$93,340
E)$90,025
Q2) Which one of these represents the difference between a nominal rate and a real rate as they relate to project analysis?
A)Interest rate on any project debt
B)Risk-free rate of interest
C)Market rate of return
D)Rate of inflation
E)Required rate of return
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Page 10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) If a project breaks even on an accounting profit basis,then
A)the project's net present value will be zero.
B)its sales quantity will be higher than if the project were to break even on a financial basis.
C)the project's net present value will be negative.
D)it will also break even on a financial basis.
E)its contribution margin must be zero.
Q2) Appalachian Crafts is analyzing a project with expected sales of 18,900 units,±2 percent.The expected variable cost per unit is $23 and the expected fixed costs are $52,000.Cost estimates are considered accurate within a range of ±1 percent.The depreciation expense is $18,400.The sale price is estimated at $54 a unit,±2 percent.What is the total dollar difference between the revenue using the optimistic sale price versus the expected sale price?
A)$24,600
B)$16,800
C)$20,412
D)$17,894
E)$22,200
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Winter's just declared an increase in its annual dividend from $.82 a share to $.85 a share.If the stock price should remain constant,then
A)the capital gains yield would decrease.
B)the capital gains yield would increase.
C)the dividend yield would remain constant.
D)the dividend yield would increase.
E)neither the capital gains yield nor the dividend yield would change.
Q2) For our historical comparison purposes,how are large-company stocks defined?
A)Stocks of the lowest 20 percent of the firms listed on the NYSE based on market capitalization
B)Stocks with average annual returns that exceed the average annual return of the U.S.Treasury bill
C)Any firm that has been listed on the NYSE for 40 years or more
D)Stocks of firms included in the S&P 500 composite index
E)Stocks of firms that employ over 5,000 employees
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Chapter 11: Return and Risk: The Capital Asset Pricing Model
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Sample Questions
Q1) You plotted the monthly rate of return for two securities against time for the past 48 months.If the pattern of the movements of these two sets of returns rose and fell together the majority,but not all,of the time,then the securities have
A)no correlation at all.
B)a weak negative correlation.
C)a strong negative correlation.
D)a strong positive correlation.
E)a perfect positive correlation.
Q2) A portfolio consists of 35 percent of Stock S and 65 percent of Stock T.Stock S is expected to return 15 percent if the economy booms,10 percent if it is normal,and lose 19 percent if it is recessionary.Stock T will return 26 percent in a boom,15 percent in a normal economy,and lose 40 percent in a recession.The probability of a boom is 5 percent and probability of a recession is 10 percent.What is the portfolio standard deviation?
A)11.69%
B)14.05%
C)14.22%
D)12.10%
E)12.33%
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) CTO Transport has an aftertax cost of debt of 5.6 percent,a cost of equity of 13.7 percent,and a cost of preferred stock of 7.8 percent.The firm has 60,000 shares of common stock outstanding at a market price of $45 a share.There are 12,000 shares of preferred stock outstanding at a market price of $52 a share.The bond issue has a total face value of $400,000 and sells at 102 percent of face value.The tax rate is 35 percent.What is the company's WACC?
A)11.83%
B)12.06%
C)12.42%
D)11.39%
E)10.87%
Q2) ABC stock has a beta that is 13 percent higher than the overall market beta.The risk-free rate is 3.1 percent,and the market rate of return is 10.6 percent.What is the company's cost of equity?
A)12.27%
B)10.91%
C)11.58%
D)15.48%
E)16.08%
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Page 14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) Given the vast resources available to mutual fund managers,these managers on average have generally
A)outperformed the overall market on a risk-adjusted basis.
B)eliminated excess profits for arbitrageurs.
C)beat broad-based indexes.
D)proved the market to be strong form efficient.
E)underperformed the market on a risk-adjusted basis.
Q2) The hypothesis that market prices reflect all publicly available information is called ________ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable
Q3) If behavioral finance holds,this implies
A)all investors are irrational some of the time.
B)all investors are irrational all the time.
C)some investors are irrational some of the time.
D)some investors are irrational all of the time.
E)all investors are rational all of the time.
Page 15
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) An unlevered firm is a company that A)pays no current dividends.
B)has only one geographic location.
C)has no debt.
D)produces a single product.
E)is undervalued based on its current capital structure.
Q2) MM Proposition II,without taxes,is the proposition that A)supports the argument that the capital structure of a firm is irrelevant to the value of the firm.
B)a firm's cost of equity increases in direct relationship to the increase in debt.
C)the cost of levered equity is determined solely by the return on debt,the debt-equity ratio,and the tax rate.
D)the cost of equity depends on the market value of the firm's assets.
E)supports the argument that the size of the pie does not depend on how the pie is sliced.
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16
Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) As an attempt to avoid bankruptcy,a firm may
A)agree to a composition with its creditors.
B)employ the stalking horse strategy.
C)develop a prepack agreement.
D)take advantage of a Section 363 auction.
E)ask a trustee to enact the absolute priority rule.
Q2) Corporations in the U.S.tend to
A)have extremely high debt-equity ratios.
B)rely less on equity financing than they should.
C)minimize taxes.
D)underutilize debt.
E)rely more heavily on bonds than stocks as the major source of financing.
Q3) Which one of these is a payment of a nonmarketed claim on a firm's cash flows?
A)Dividend payment
B)Principal repayment of a bond
C)Repurchase of stock
D)Payment of a customer's liability claim
E)Payment of interest due on a bond
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Chapter 16: Dividends and Other Payouts
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Sample Questions
Q1) The Retail Outlet has 6,000 shares of stock outstanding with a par value of $1 per share.The current market value of the firm is $120,000.The company just announced a one-for-three reverse stock split.What will the par value per share be after the split?
A)$.33
B)$.25
C)$1.00
D)$3.00
E)$4.00
Q2) From a tax-paying shareholder's point of view,a stock repurchase
A)is equivalent to a stock split.
B)is more desirable than a cash dividend.
C)is more highly taxed than a cash dividend.
D)avoids all taxation.
E)creates a tax liability even if the investor does not participate in the repurchase.
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18
Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) Which term applies to the purchase or sale of an underlying asset via an option contract?
A)Exercising the option
B)Striking the price
C)Opening the bid
D)Splitting the security
E)Expiring the option
Q2) Which one of the following will cause the value of a call to decrease?
A)Lowering the risk level of the underlying security
B)Increasing the time to expiration
C)Increasing the risk-free rate
D)Lowering the exercise price
E)Increasing the stock price
Q3) A 35 put option on FKL stock expires today.The current price of the stock is $36.The put is
A)at the money.
B)out of the money.
C)in the money.
D)funded.
E)unfunded.
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) The primary difference between a line of credit and a revolving credit arrangement is the
A)length of the time period covered by the loan agreement.
B)type of collateral used to secure the loan.
C)fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured.
D)fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured.
E)fact that the revolving credit arrangement requires a cleanup period but the line of credit does not.
Q2) A short-term loan where the borrower pledges its accounts receivable as security but is still responsible for any uncollectible account is referred to as
A)a compensating balance.
B)a letter of credit.
C)an assignment.
D)factoring.
E)a repurchase.
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Page 20
Chapter 19: Raising Capital
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Sample Questions
Q1) DDP has 120,000 shares of stock outstanding at a market price per share of $52.The firm plans a rights offering of 20,000 shares with an offer price of $46 a share.What will be the ex-rights stock price if each outstanding share is granted one right?
A)$51.10
B)$50.67
C)$51.14
D)$50.54
E)$51.40
Q2) Butterfield's is an all-equity firm with 132,000 shares of stock outstanding.The book value per share is $14,and the market value per share is $31.The current net income is $301,000.The firm is considering a new project that will cost $1.4 million and increase net income by $87,000.The current earnings per share is ________ and it will be ________ if the project is accepted.
A)$2.24; $2.12
B)$2.24; $2.08
C)$2.24; $2.21
D)$2.28; $2.19
E)$2.28; $2.11
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Chapter 20: International Corporate Finance
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Sample Questions
Q1) Assume the current spot rate is Can$1.0267 and the 1-year forward rate is C$1.0259.The nominal risk-free rate in Canada is 2.5 percent while it is 2.1 percent in the United States.If you use covered interest arbitrage,how much extra profit can you earn over that which you would earn if you invested $1,000 in the United States for 1 year?
A)$.21
B)$4.22
C)$4.80
D)$.24
E)$0
Q2) Interest rate parity
A)eliminates exchange rate fluctuations.
B)exists when spot rates are equal for multiple countries.
C)exists when the spot rate is equal to the forward rate.
D)means that the nominal risk-free rate of return must be the same across countries. E)eliminates covered interest arbitrage opportunities.
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Chapter 21: Mergers and Acquisitions Web Only
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Sample Questions
Q1) Assume Firm A acquires Firm B.As a result,the EPS of Firm A increase by 10 percent.Given this increase,you know for certain that the
A)acquisition created synergy.
B)purchase price was below market value.
C)value of B to A exceeded the value of B as a stand-alone firm.
D)acquisition provided diversification benefits.
E)total earnings divided by the total shares increased.
Q2) Which of these may be a source of synergy?
I.Unused debt capacity
II.Economies of scale
III.Increase in overall revenue
IV.Unused net operating losses
A)I and IV only
B)II and III only
C)II,III,and IV only
D)I,II,and III only
E)I,II,III,and IV
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23