Financial Management
Test Bank
Course Introduction
Financial Management is a comprehensive course designed to introduce students to the principles and practices involved in the effective management of an organizations financial resources. Topics covered include financial analysis, planning and control, capital budgeting, risk assessment, working capital management, cost of capital, and financing strategies. Students will learn to interpret financial statements, evaluate investment opportunities, and understand the implications of financial decisions on a firm's value and performance. Through theoretical learning and practical case studies, the course equips students with critical skills necessary for making informed financial decisions in a dynamic business environment.
Recommended Textbook Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Short-term assets and short-term liabilities are referred to as the firm's:
A)cash flow
B)capital budget
C)capital structure
D)working capital
E)financing mix
Answer: D
Q2) Over-the-counter markets are __________ markets.
A)dealer
B)franchise
C)private
D)auction
E)physical
Answer: A
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Which one of the following terms is defined as the total tax paid divided by the total taxable income?
A)average tax rate
B)variable tax rate
C)marginal tax rate
D)absolute tax rate
E)contingent tax rate
Answer: A
Q2) Caldweiler & Co.owes a total of $21 684 in taxes for this year.The taxable income is $71 509.If the firm earns $100 more in income,it will owe an additional $36 in taxes.What is the average tax rate on income of $71 609?
A)28.00 per cent
B)30.33 per cent
C)33.33 per cent
D)34.00 per cent
E)36.00 per cent
Answer: B
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Chapter 3: Working With Financial Statements
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Q1) Harry's Healthy Foods has total assets of $129 800,net fixed assets of $71 500,long-term debt of $52 000,and total debt of $78 700.If inventory is $31 800,what is the current ratio?
A)0.33
B)0.46
C)0.84
D)1.18
E)2.18
Answer: E
Q2) Donovan Brothers,Inc.would like to increase its internal rate of growth.Decreasing which one of the following will help the firm achieve its goal?
A)return on assets
B)net income
C)retention ratio
D)dividend payout ratio
E)return on equity
Answer: D
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Page 5
Chapter 4: Introduction to Valuation: the Time Value of Money
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Q1) The value of an investment after one or more periods of time is called the:
A)simple value
B)present value
C)discounted value
D)future value
E)interest on interest value
Q2) Ben invested $5000 twenty years ago with an insurance company that has paid him 5 per cent simple interest on his funds.Charles invested $5000 twenty years ago in a fund that has paid him 5 per cent interest,compounded annually.How much more interest has Charles earned than Ben over the past 20 years?
A)$0
B)$2109.16
C)$3266.49
D)$7109.16
E)$8266.49
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Chapter 5: Discounted Cash Flow Valuation
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Q1) You need to borrow $30 000 to pay for urgent medical treatment.Your bank has offered you a 3-year amortising loan at 9% interest per annum.If the bank requires monthly payments and interest is added monthly what is the amount of your monthly repayment?
A)$833.33
B)$953.99
C)$987.64
D)$1058.33
E)$908.33
Q2) If you were offered the chance of an investment in a mango orchard in North Queensland and you were promised a return of $12 000 per year for ever,with the first payment being in one year from now,what is the maximum amount you would be prepared to pay for such an investment if you required a return of 14 per cent?
A)$87 514
B)$58 714
C)$85 714
D)$120 000
E)It cannot be calculated.
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Chapter 6: Interest Rates and Bond Valuation
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Q1) What is the principal amount of a bond that is repaid at the end of the loan term called?
A)market price
B)dirty price
C)accrued price
D)coupon
E)face value
Q2) An unsecured note is:
A)long-term debt secured by part,or all,of the assets of the borrower
B)debt that is secured by a borrower's accounts receivables
C)unsecured debt that is generally payable within the next ten years
D)a formal type of loan that is secured by real estate
E)the written agreement which details the information relative to a bond issue
Q3) When interest payments are made to whoever holds the bond,the bond is said to be in _____ form.
A)street
B)secure
C)bearer
D)coupon
E)registered
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Chapter 7: Equity Markets and Stock Valuation
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Q1) Keller Metal's common stock is selling for $36 a share and has a dividend yield of 3.2 per cent.What is the dividend amount?
A)$0.32
B)$11.52
C)$3.49
D)$1.15
E)$11.25
Q2) The Oz Printing Company's ordinary shares are trading at $32.60 a share based on a 14 per cent rate of return.What is the amount of the next annual dividend if the dividends are increasing by 2.5 per cent annually?
A)$3.57
B)$3.75
C)$3.52
D)$3.66
E)$3.48
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9
Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Angie is evaluating a proposed project and wants to answer two questions.First,what is the market value of the project? Second,how much profit will the project produce in relation to its book value.To answer these two questions,Angie should use which one of the following sets of investment analysis methods?
A)internal rate of return and payback
B)payback and profitability index
C)net present value and average accounting return
D)net present value and payback
E)profitability index and net present value
Q2) Avalon Aviation Products are evaluating a new project.What is the net present value of this project if the discount rate is 14 per cent and the net cash flows are as per the following table?
A)$742.50
B)$801.68
C)$823.92
D)$899.46
E)$901.15
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10
Chapter 9: Making Capital Investment Decisions
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Q1) Shere Khan Corporation is currently evaluating a new project.Relatively inexpensive equipment with an estimated cost of $300 000 would be purchased,but shipping costs to move the equipment would total $25 000 and installation charges would add another $15 000 to the total equipment costs.Further,the company's inventories would have to be increased by $20 000 at the time of initial investment.The straight-line depreciation rate is 20% and corporate tax rate is 25%.What is the cash outflow in Year 0?
A)$20 000
B)$360 000
C)$325 000
D)$340 000
E)$300 000
Q2) A proposed project will reduce the amount of inventory a firm must keep on hand.This effect:
A)should be ignored when analysing the viability of the project
B)is a cash outflow relevant to the first year of the project
C)is an initial cash inflow that should be included in the analysis
D)is a negative capital expenditure at time zero
E)is an erosion cost and should be included in the annual net income of the project
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Chapter 10: Some Lessons From Capital Market History
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Q1) What was the average risk premium on Australian government bonds for the period 1985-2009?
A)5.3%
B)0.0%
C)9.7%
D)1.7%
E)8.0%
Q2) The standard deviation measures the _____ of a security's returns over time.
A)average value
B)frequency
C)volatility
D)mean
E)arithmetic average
Q3) Which one of the following had the lowest standard deviation of returns for the period of 1985-2009?
A)All Ordinaries Index
B)All Ordinaries Index and ten-year government bonds are the same
C)ten-year government bonds
D)30-day bank bills
E)30-day bank bills and ten-year government bonds are the same
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Chapter 11: Risk and Return
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Q1) Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
A)capital asset pricing model
B)systematic
C)diversification
D)unsystematic
E)security market line
Q2) The beta of a risk-free security is _____ and the beta of the overall market is:
A)1;0
B)infinite;1
C)1;1
D)0;0
E)0;1
Q3) Which one of the following is the best example of unsystematic risk?
A)a decrease in the value of the dollar
B)inflation exceeding market expectations
C)a warehouse fire
D)a decrease in corporate tax rates
E)an increase in consumer spending
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Page 13
Chapter 12: Long-Term Financing
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Q1) The weighted average cost of capital is defined as the weighted average of a firm's:
A)pre-tax cost of debt and equity securities
B)dividend and capital gains yields
C)cost of equity and its after-tax cost of debt
D)bond coupon rates
E)return on its investments
Q2) Which one of the following statements is accurate for a levered firm?
A)A firm's WACC will decrease whenever the firm's tax rate decreases.
B)The subjective approach totally ignores a firm's own WACC.
C)WACC should be used as the required return for all proposed investments.
D)An increase in the market risk premium will decrease a firm's WACC.
E)A reduction in the risk level of a firm will tend to decrease the firm's WACC.
Q3) Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent upon which one of the following?
A)source of the funds used to build the facility
B)firm's overall source of funds
C)current tax rate
D)the nature of the investment
E)firm's historical average rate of return
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Page 14
Chapter 13: Leverage and Capital Structure
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Q1) Brown's Department Store has a cost of equity of 19.1 per cent,a pre-tax cost of debt of 8 per cent,and a return on assets of 14 per cent.Ignore taxes.What is the debt-equity ratio?
A)0.70
Q2) Which of the following statements correctly relate to M&M Proposition I,with taxes?
I.Debt decreases the value of a firm.
II.The levered value of a firm exceeds the firm's unlevered value.
III.The weighted average cost of capital (WACC)is constant.
IV.The optimal capital structure is zero debt.
A)II only
B)I,III,and IV only
C)I and IV only
D)I only
E)II and III only
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Chapter 14: Dividends and Dividend Policy
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Q1) Which two of the following tend to limit the amount of dividends that can be paid by a leveraged corporation?
I.current tax laws
II.corporate tax rates
III.bond trust deed covenant
IV.laws pertaining to retained earnings
A)III and IV only
B)II and III only
C)I and II only
D)I and III only
E)II and IV only
Q2) The ex-dividend date is defined as _____ business days before the date of_____:
A)four;record
B)three;declaration
C)two;payment
D)three;payment
E)three;record
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Page 16
Chapter 15: Raising Capital
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Q1) Which one of the following statements concerning IPOs and underpricing is correct?
A)IPO underpricing primarily benefits a firm's pre-issue owners.
B)The more an issue is underpriced,the more it tends to be oversubscribed.
C)IPO underpricing is a function of the underwriting fee.
D)Underpricing tends to discourage investors from participating in the IPO market.
E)Undersubscribed shares generally tend also to be underpriced shares.
Q2) Which of the following are true statements?
I.Venture capitalists tend to be long-term investors in a firm.
II.Venture capital is relatively easy to obtain for most new firms.
III.Venture capitalists generally have an exit strategy.
IV.Venture capitalists tend to specialise in one type of financing for a select type of firm.
A)III and IV only
B)I and II only
C)II and IV only
D)I and IV only
E)I and III only
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) The Moose Co.currently has 81 days in its cash cycle and 136 days in its operating cycle.The firm purchases all of its inventory from one supplier.This supplier has offered a 5 per cent discount to The Moose Co.if it will pay for its purchases within 10 days.If The Moose Co.changes it payables policy and pays in 10 days,the firm's cash cycle will be _____ days.
A)91
B)131
C)114
D)126
E)103
Q2) Which one of the following actions will decrease the operating cycle?
A)granting customers more time to pay for their credit purchases
B)increasing inventory
C)paying suppliers faster
D)buying more inventory with cash rather than with credit
E)lessening the production time needed to manufacture a good for sale
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18
Chapter 17: Working Capital Management
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Sample Questions
Q1) The optimal credit policy:
A)is the policy that eliminates all potential bad debts
B)is the one which offers credit to the largest number of customers
C)minimises the carrying costs associated with granting credit
D)is the policy that produces the largest amount of sales for a firm
E)minimises the total cost of granting credit
Q2) Sydney Surfboards sells 12 000 surfboards a year at an average price per carpet of $499.The carrying cost per unit is $25 and the fixed order costs are $75.What is the economic order quantity assuming there is no safety stock.
A)268
B)28
C)848
D)211
E)8
Q3) What is the primary purpose of a cash discount?
A)inducement to pay promptly
B)customer compensation for an out-of-stock item
C)customer compensation for faulty goods or services
D)incentive to purchase a specialty item
E)means of offsetting the interest charges on an account receivable
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Chapter 18: International Aspects of Financial Management
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Q1) The concept that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:
A)exchange rate equilibrium
B)exchange rate parity
C)interest rate equilibrium
D)foreign equalisation
E)interest rate parity
Q2) Exchange rate risk is defined by your textbook as the risk related to:
A)trading in the foreign exchange markets with the sole purpose of arbitrage
B)investing in a foreign currency for the sole purpose of profiting on rate fluctuations
C)having international operations in a world where relative currency values fluctuate
D)trading among three or more currencies within a single day
E)holding a foreign currency as an investment over a period of time
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