Financial Management Test
Preparation
Course Introduction
Financial Management is a foundational course that explores the principles and practices essential for effective financial decision-making within organizations. The course covers core topics such as time value of money, risk and return analysis, capital budgeting, cost of capital, working capital management, and financial statement analysis. Students will learn how to evaluate investment opportunities, manage resources efficiently, and develop strategies to maximize shareholder value. Through case studies and practical applications, learners gain insight into the financial challenges businesses face and acquire the analytical tools necessary for responsible financial planning and management.
Recommended Textbook Business Finance 11th Edition by Graham Peirson
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Which of the following statements is an advantage of a partnership?
A)It can combine the wealth and talents of several individuals.
B)The partners are personally liable for the debts of the partnership.
C)The partnership has an indefinite life.
D)Additional capital can be raised relatively by issuing additional shares on the stock market.
Answer: A
Q2) The shareholders of most companies have _______________,meaning that if the company is unable to pay its debts,the owners of fully paid shares are not obliged to contribute further to repay the debt.
Answer: limited liability
Q3) The market value of a company is calculated as the sum of the net assets and owners equity on the company's balance sheet:
A)True
B)False
Answer: False
Q4) Compared with other forms of business structure,a ___________ is subject to the most onerous regulation.
Answer: company
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Chapter 2: Consumption, Investment and the Capital Market
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Q1) In practice,managers are unable to predict with certainty the impact that a particular decision will have on a company's share price.
A)True
B)False
Answer: True
Q2) Fama (1970)outlines the sufficient conditions in order for all shareholders to agree about the exact nature of uncertainty.Which of the following statements is not one of the specified sufficient conditions?
A)There are no transaction costs in trading securities.
B)All agree on the implication of current information for the future price and distributions of future prices of each security.
C)All information is costlessly available to all market participants.
D)None of the given options.
Answer: B
Q3) In the absence of _______________ companies are unable to make decisions about dividend policy that will please all share holders.
Answer: capital markets
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Page 4
Chapter 3: The Time Value of Money: An Introduction to Financial Mathematics
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Sample Questions
Q1) Suppose you deposited $250 at the end of 2011,2012,2013 and 2014.How much would you have in your account on 1 January 2015,based on annual compounding of 8% by your bank?
A)$1025.25
B)$1235.53
C)$1183.53
D)$1126.53
Answer: D
Q2) Calculate the present value of the following cash flows assuming they occur at the end of each year and the interest rate is 12% p.a.:
Year 0,($12 000);Year 1,$5670;Year 2,$11 250.
A)$2030.93
B)$26 030.93
C)$28 920
D)($1163.19)
Answer: A
Q3) Continuous interest rates are an example of where the future sum grows
Answer: exponentially
5
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Chapter 4: Applying the Time Value of Money to Security
Valuation
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Sample Questions
Q1) The expectations theory of the term structure of interest implies that:
A)interest received on securities is in accordance with term to maturity.
B)bond investors can expect to achieve the same return over any future period,regardless of the security in which they invest.
C)there is a premium due to uncertainty about the future level of interest rates.
D)there is a risk that borrowers may default on the payment of the principal.
Q2) Immunisation can best be described as:
A)the ability of investors to choose a bond investment that minimises reinvestment risk.
B)the ability of investors to choose a bond investment that minimises interest rate risk.
C)the ability of investors to choose a bond investment that matches cash inflows with outflows.
D)the ability of investors to choose a bond investment that achieves some future target regardless of changes to interest rates.
Q3) An increase in interest rates results in a _________ in the price of a bond.
Q4) The ________________ of interest rates is the relationship between the interest rates and time to maturity.
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Page 6
Chapter 5: Project Evaluation: Principles and Methods
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Sample Questions
Q1) The net present value method of project evaluation is preferred to the internal rate of return method because:
A)the internal rate of return method may give multiple rates of return or zero rates of return in some cases,but not for mutually exclusive projects.
B)the internal rate of return method may give an inconsistent ranking due to the magnitude or timing of cash flows.
C)most projects are independent rather than mutually exclusive.
D)the internal rate of return method yields net present value profiles that do not intersect for mutually exclusive projects.
Q2) A company should approve all projects with a ___________ net present value.
Q3) Using the benefit-cost ratio the decision rule is to accept projects with a benefit-cost ratio:
A)equal to 1.
B)less than 1.
C)greater than the opportunity cost.
D)greater than 1.
Q4) The benefit-cost ratio is calculated by dividing the present value of the future net cash flows by the ________________.
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Page 7
Chapter 6: The Application of Project Evaluation Methods
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Q1) Which of the following statements is the correct treatment of finance charges in project evaluation?
A)Finance charges should be included in a project's net cash flows and in the discount rate.
B)Finance charges should be included in a project's net cash flows and excluded from the discount rate.
C)Finance charges should be excluded from a project's net cash flows and included in the discount rate.
D)None of the given options.
Q2) Which of the following methods should be applied when comparing independent projects with different lives?
A)The constant chain of replacement method only.
B)Either the constant chain of replacement method or the equivalent annual value method only.
C)The constant chain of replacement method using the real cost of capital only.
D)The net present value method is adequate.
Q3) How can we compare mutually exclusive projects with different timeframes?
Q4) Sensitivity analysis examines the effect of changing one or more ______________ to observe the effect on results.
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Chapter 7: Risk and Return
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Sample Questions
Q1) Portfolio theory,as initially developed by Markowitz (1952),assumes that the returns from investments are normally distributed.
A)True
B)False
Q2) Which of the following statements is true?
A)Two assets that are perfectly negatively correlated can produce a portfolio with zero variance.
B)Adding an asset to a portfolio by random selection will reduce the risk of a portfolio.
C)Adding a riskless security to a portfolio will increase its overall risk.
D)The amount of risk reduction that can be achieved by adding a new security to an existing portfolio increases as the correlation between the expected returns of the new security and the expected returns on the existing portfolio increases.
Q3) An 'efficient' portfolio is one that:
A)combines assets whose returns are not perfectly correlated.
B)offers the highest expected return for a given level of risk.
C)holds a proportion of all possible assets.
D)combines many diverse assets.
Q4) Explain the difference between systematic and unsystematic risk.
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Page 9
Chapter 8: The Capital Market
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Sample Questions
Q1) A savings-deficit unit is one:
A)whose expenditure is equal to the income generated.
B)whose expenditure exceeds its income for a particular period.
C)that needs to borrow from a financial intermediary.
D)whose expenditure is equal or greater than its income generated.
Q2) The Basel committee was established by the:
A)European Central Bank.
B)BIS.
C)IMF.
D)World Bank.
Q3) Which of the following is not one of the four main functions of investment banks?
A)the wholesale banking operation
B)the investment management function
C)making a market in foreign exchange and derivative securities
D)regulating the stock exchange
Q4) Superannuation funds are characterised as ___________ institutions.
Q5) ______________________ borrow funds on their own behalf and then lend the funds to another party.
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Chapter 9: Sources of Finance: Equity
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Sample Questions
Q1) Which of the following is not an advantage of raising equity via the issue of ordinary shares?
A)Dividend payment is not an obligation.
B)It reduces borrowing costs.
C)Borrowing entails higher transaction costs than raising equity,as the company has to prepare disclosure documents to attract lenders.
D)None of the given options.
Q2) Typically,a company employs the services of an underwriter:
A)if it has pre-marketed its shares before a new share issue.
B)to issue new shares at a discount.
C)if the shares are no-liability shares.
D)to take up any under-subscription of new shares.
Q3) A plan in which payments are made to employees based on the achievement of certain performance criteria is known as a/an:
A)replicator plan.
B)option plan.
C)fully paid share plan.
D)employee share trust.
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Chapter 10: Sources of Finance: Debt
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Sample Questions
Q1) A discounting agreement under which the discounter and the company share responsibility for managing the company's debtors is known as:
A)cooperation discounting.
B)full service discounting.
C)invoice discounting.
D)debtor finance without recourse discounting.
Q2) Subordinated debt-holders will demand higher compensation than unsubordinated debt-holders because:
A)unsubordinated debt is riskier.
B)subordinated debt ranks ahead of unsubordinated debt.
C)unsubordinated debt ranks ahead of subordinated debt.
D)the interest rate on subordinated debt tends to be fixed rather than variable.
Q3) An interest rate swap involves an exchange of principles and interest payments.
A)True
B)False
Q4) The interest rate on overnight loans between a bank and other banks is:
A)the cash rate.
B)the LIBOR.
C)the interbank cash rate.
D)the interbank cash rate or simply the cash rate.
Page 12
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Chapter 11: Payout Policy
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Sample Questions
Q1) In Australia companies generally pay dividends:
A)twice a year.
B)three times a year.
C)four times a year.
D)at least twice a year.
Q2) Share price changes around the time of announcements of dividend changes are positively related to the change in dividends.This evidence may not invalidate the dividend irrelevance theorem because:
A)investors are indifferent between capital gains and dividend income.
B)debt is not necessarily affected by such announcements.
C)share prices revert back to pre-dividend levels following the announcement.
D)it is not the dividend payments that determine the value of shares but information about the future cash flows that is conveyed by the announcement.
Q3) Under the imputation tax system,dividends are only taxed once at the company tax rate.
A)True
B)False
Q4) A __________ share buyback is a type of buyback where offers are made to only some of the shareholders in a company.
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Chapter 12: Principles of Capital Structure
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Sample Questions
Q1) Financial leverage is the relationship between:
A)borrowings and equity.
B)borrowings and liabilities.
C)debt to assets.
D)gearing and assets.
Q2) A limitation of the MM analysis in the absence of taxes is that:
A)risky debt is not considered.
B)the possibility of default on debt is not considered.
C)there is no cost associated with default on debt.
D)only risk-free debt is considered.
Q3) The agency costs of equity increase:
A)when management acts in its own interest.
B)as the fraction of debt in a company's capital structure increases.
C)as the fraction of equity owned by outside shareholders increases.
D)when management acts in the interest of debtholders.
Q4) Which of the following statements is not true regarding Miller's analysis?
A)There is an optimal debt/equity ratio for the corporate sector.
B)There is no optimal debt/equity ratio for individual companies.
C)Shareholders benefit from the tax saving of interest on debt.
D)Securities issued by different companies will appeal to different clientele.
Page 14
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Chapter 13: Capital Structure Decisions
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Sample Questions
Q1) Graham (1996)found that changes in long-term debt are positively related to the company's:
A)tax rate.
B)average tax rate.
C)marginal tax rate.
D)effective marginal tax rate.
Q2) A company may raise funds at a lower cost than otherwise would be the case if:
A)it can design a security that focuses on the disequilibrium that exists between investor demands and the supply of securities.
B)it issues securities that have been in short supply in the market indefinitely.
C)it issues a particular security at a discount.
D)it issues a particular security at a premium.
Q3) Interest on debt:
A)is taxed more heavily than dividends and capital gains received by shareholders.
B)is deducted from the company's taxable income.
C)is taxed as the corporate tax rate.
D)none of the given options.
Q4) Evidence from surveys of CFOs provides support to the _____________ theory.
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Page 15
Chapter 14: The Cost of Capital and Taxation Issues in Project Evaluation
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Sample Questions
Q1) Bank overdraft is not included in the calculation of the WACC.
A)True
B)False
Q2) The cost of capital of a project should never be estimated based on another listed company,even if that company's sole operations are of the same systematic risk as the project being assessed.
A)True
B)False
Q3) Assume that Expansion Ltd is a diversified company that is considering an expansion project in a mining division.The company has a target debt-equity ratio of 1:2 and this ratio will not be affected by the new project.The company's manager has identified Dig-it-out Ltd as a company with the same business risk as the new project (equity beta of 1.5).Dig-it-out has a debt-equity ratio of 1:3.What is the beta estimate of Expansion Ltd?
A)1.69
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Chapter 15: Leasing and Other Equipment Finance
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Sample Questions
Q1) Which lease is essentially a rental agreement?
A)Finance lease.
B)Cross-border lease.
C)Operating lease.
D)Leveraged lease.
Q2) A tax deduction may be permitted for lease rentals provided that:
A)the lease is classified as an instalment purchase agreement.
B)the lease agreement does not give the lessee an option to purchase the leased asset at the end of the lease term.
C)the leased asset is used to generate revenue.
D)the lease is an operating lease.
Q3) Under the provisions of Taxation Ruling IT2051,the debt participants are expected to contribute no more than:
A)80 per cent of the cost of the asset.
B)70 per cent of the cost of the asset.
C)60 per cent of the cost of the asset.
D)90 per cent of the cost of the asset.
Q4) A leveraged lease differs from an ordinary finance lease in that it involves at least ________ parties.
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Chapter 16: Capital Market Efficiency
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Q1) The field of behavioural finance argues that the efficiency of markets is ensured through the fallibility of human beings in competitive markets.
A)True
B)False
Q2) An investment strategy in which the tax rules make it attractive for an investor to sell certain shares just before the end of the tax year is known as:
A)the turn of the month effect.
B)the December effect.
C)tax loss selling.
D)the tax effect.
Q3) An implication of the EMH for financial managers is that:
A)investing in a project that increases the company's true value will be reflected in the share price upon release of the information.
B)the current share price is not a good indicator of the company's true value.
C)the company's share price may overstate the true value of the company.
D)All of the given answers.
Q4) In an efficient market,there should be an instantaneous and ____________ share price reaction to information.
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Page 18
Chapter 17: Futures Contracts
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Q1) The financial controller of Nointerest Ltd has planned that the company borrow using a 90-day bank bill facility with face value of $500 000 in four weeks.Interest rates on 90-day bank bills are currently 12% p.a.As a protection against possible interest rate increases,she has entered into a futures contract by selling one bank bill futures contract at a price of $88.50.After the four-week period,she reverses the futures position at $86.50 and issues a bank bill at a rate of 14% p.a.Calculate the gain/loss made on the futures contract.
A)$2321 gain.
B)$2111 gain.
C)$7902 loss.
D)$3580 loss.
Q2) A futures price must be greater than or equal to the current spot price,plus the carrying cost.
A)True
B)False
Q3) Which of the following is not a major function of the clearing house:
A)establish and collect deposits.
B)determine the price of all futures contracts.
C)call in margins as required.
D)apportion the gains and losses.
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Chapter 18: Options and Contingent Claims
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Q1) What is the payoff of a call option (bought)with an exercise price of $15.00,if the underlying share price is $16.50,at the expiry date of the option?
A)$15.00
B)Zero
C)$1.00
D)$1.50
Q2) Which of the following is a potential disadvantage of privately negotiated options?
A)It is often difficult to find a party with whom to contract.
B)It is not possible to reverse out of a contract before the agreed expiry date.
C)It may be necessary to investigate the creditworthiness of the other party.
D)All of the given options.
Q3) Calculate the hedge ratio for the following: call option with exercise price of $3.20,current share price of $3.10 and an expected price at the expiry of the option of either $3.40 or $2.80.
A)3
B)1/3
C)1/2
D)2/3
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Chapter 19: Analysis of Takeovers
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Q1) Who restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity of ownership test or the same business test is satisfied?
A)The chairperson of the ACCC.
B)The Minister of Finance.
C)The Treasurer.
D)The Commissioner of Taxation.
Q2) Small positive or negative returns to acquiring-company shareholders may be explained by:
A)tax loss benefits of a target.
B)perceived cost reductions due to economies of scale in operations.
C)perceived benefit of the method of financing the takeover to reduce agency costs.
D)the over-confidence of acquiring-company management in their ability to value other companies.
Q3) Synergy can best be demonstrated as:
A)Value (A + B)< Value (A)+ Value (B)
B)Value (A + B)> Value (A)+ Value (B)
C)Value (A + B)= Value (A)+ Value (B)
D)Value (A + B)= or > Value (A)+ Value (B)
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21
Chapter 20: International Financial Management
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Q1) Which theory states that the difference in interest rates between two countries is an unbiased predictor of the future change in the spot exchange rate?
A)Interest rate parity.
B)Unbiased forward rates.
C)International Fisher effect.
D)Purchasing power parity.
Q2) Covered interest arbitrage is expected to continue:
A)until interest rates between two investments and/or exchange rates between two different countries' rates do not adjust to eliminate further arbitrage.
B)in an efficient market.
C)unless markets become deregulated.
D)until interest rates between two investments and/or exchange rates between two different countries' rates adjust to eliminate further arbitrage.
Q3) Companies who are only entering into foreign currency markets for a one-off transaction have no need to hedge against exchange risk.
A)True
B)False
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Chapter 21: Management of Short-Term Assets: Inventory
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Q1) ___________ includes raw materials,work in progress and finished goods not yet sold.
Q2) The ___________ system of inventory management is based on the concept that raw materials,equipment and labour are each supplied only in the amounts required and at the times required to complete the manufacturing task.
Q3) The relevant costs to be included in the economic order quantity model are __________ costs.
Q4) Carrying costs:
A)increase as the order quantity increases.
B)decrease as the order quantity increases.
C)increase irrespective of whether the order quantity changes.
D)are not related to changes in the order quantity.
Q5) An example of a stockout cost for a manufacturer is:
A)disruption to the production process due to poor production planning.
B)storage costs of holding finished goods.
C)disruption of the production process due to raw material shortage.
D)opportunity costs of holding raw materials.
Q6) Current assets are those assets that will normally be converted into cash within a ________.
Page 23
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Chapter 22: Management of Short-Term Assets: Liquid
Assets and Accounts Receivable
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Q1) Which of the following statements about investment of idle cash balances in longer-term (but not long-term)fixed-period investments is false?
A)Companies can usually obtain a higher interest rate on longer term investments.
B)Higher transaction costs of continual reinvestment in short-term securities can usually be avoided.
C)A problem with such a cash management policy is the possibility of an unforeseen cash shortage.
D)Longer term fixed-interest securities are not considered as alternative investments to holding cash.
Q2) Which budget provides a forecast of the amount and timing of the cash receipts and payments that will result from the company's operations over a period of time?
A)Cash receipts budget.
B)Cash payments budget.
C)Cash budget.
D)Cash management budget.
Q3) The steps a company takes to recover the amount owing on debts is called its _______ policy.
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