Financial Management Test
Preparation
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices essential for effective financial decision-making within organizations. Students will learn the fundamentals of financial planning, analysis, and control, including topics such as time value of money, capital budgeting, risk and return, cost of capital, and working capital management. The course also covers techniques for valuing assets, managing financial resources, and making strategic investment decisions to maximize shareholder value. By applying analytical tools and financial models, students will develop the skills necessary to assess financial statements, forecast cash flows, and strategically allocate resources in both corporate and personal financial contexts.
Recommended Textbook Fundamentals of Financial Management 14th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management
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Q1) Relaxant Inc.operates as a partnership.Now the partners have decided to convert the business into a corporation.Which of the following statements is CORRECT?
A)Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
B)The company will probably be subject to fewer regulations and required disclosures.
C)Assuming the firm is profitable, none of its income will be subject to federal income taxes.
D)The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E)The firm will find it more difficult to raise additional capital to support its growth.
Answer: A
Q2) The Chairman of the Board must also be the CEO.
A)True
B)False
Answer: False
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Chapter 2: Financial Markets and Institutions
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Q1) Which of the following statements is CORRECT?
A)While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
B)The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
C)Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.
D)Money markets are markets for long-term debt and common stocks.
E)A liquid security is a security whose value is derived from the price of some other "underlying" asset.
Answer: B
Q2) If you wanted to know what rate of return stocks have provided in the past,you could examine data on the Dow Jones Industrial Index,the S&P 500 Index,or the NASDAQ Index.
A)True
B)False
Answer: True
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Chapter 3: Financial Statements, cash Flow, and Taxes
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Q1) Which of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?
A)The company sold a new issue of bonds.
B)The company made a large investment in new plant and equipment.
C)The company paid a large dividend.
D)The company had high depreciation expenses.
E)The company repurchased 20% of its common stock.
Answer: A
Q2) The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
A)True
B)False
Answer: False
Q3) Both interest and dividends paid by a corporation are deductible operating expenses,hence they decrease the firm's taxes.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Analysis of Financial Statements
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Q1) Last year Jandik Corp.had $295,000 of assets (which is equal to its total invested capital),$18,750 of net income,and a debt-to-total-capital ratio of 37%.Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%.Sales,total assets,and total invested capital will not be affected,but interest expenses would increase.However,the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE?
A)2.13%
B)2.35%
C)2.58%
D)2.84%
E)3.12%
Q2) Refer to Exhibit 4.1.What is the firm's operating margin?
A)3.12%
B)3.46%
C)3.85%
D)4.28%
E)4.75%
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6
Chapter 5: Time Value of Money
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Q1) All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.
A)True
B)False
Q2) You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $250,000? Round fractional months up.
A)23
B)27
C)32
D)38
E)44
Q3) Which of the following bank accounts has the lowest effective annual return?
A)An account that pays 8% nominal interest with monthly compounding.
B)An account that pays 8% nominal interest with annual compounding.
C)An account that pays 7% nominal interest with daily (365-day) compounding.
D)An account that pays 7% nominal interest with monthly compounding.
E)An account that pays 8% nominal interest with daily (365-day) compounding.
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Page 7
Chapter 6: Interest Rates
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Q1) Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Disregard cross-product terms,i.e.,if averaging is required,use the arithmetic average.
A)5.14%
B)5.42%
C)5.70%
D)5.99%
E)6.28%
Q2) The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak.
A)True
B)False
Q3) The four most fundamental factors that affect the cost of money are (1)production opportunities,(2)time preferences for consumption,(3)risk,and (4)weather conditions.
A)True
B)False
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8
Chapter 7: Bonds and Their Valuation
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Q1) Which of the following statements is CORRECT?
A)A bond is likely to be called if its coupon rate is below its YTM.
B)A bond is likely to be called if its market price is below its par value.
C)Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D)A bond is likely to be called if its market price is equal to its par value.
E)A bond is likely to be called if it sells at a discount below par.
Q2) A 10-year corporate bond has an annual coupon of 9%.The bond is currently selling at par ($1,000).Which of the following statements is CORRECT?
A)The bond's expected capital gains yield is zero.
B)The bond's yield to maturity is above 9%.
C)The bond's current yield is above 9%.
D)If the bond's yield to maturity declines, the bond will sell at a discount.
E)The bond's current yield is less than its expected capital gains yield.
Q3) The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.
A)True
B)False
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9
Chapter 8: Risk and Rates of Return
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Q1) Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.
A)True
B)False
Q2) Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.
A)True
B)False
Q3) The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.
A)True
B)False
Q4) The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
A)True
B)False
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Chapter 9: Stocks and Their Valuation
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Q1) The Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (r<sub>s</sub>)is 12%.What is the best estimate of the current stock price?
A)$41.58
B)$42.64
C)$43.71
D)$44.80
E)$45.92
Q2) If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.
A)True
B)False
Q3) According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
A)True
B)False
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Page 11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A)When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
B)When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
C)Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
D)If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock.
E)Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
Q2) The lower the firm's tax rate,the lower will be its after-tax cost of debt and also its WACC,other things held constant.
A)True
B)False
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Page 12
Chapter 11: The Basics of Capital Budgeting
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Q1) Which of the following statements is CORRECT?
A)One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B)One defect of the IRR method is that it does not take account of the time value of money.
C)One defect of the IRR method is that it does not take account of the cost of capital.
D)One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
E)One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
Q2) The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason why the NPV method is generally preferred over the IRR method.
A)True
B)False
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Chapter 12: Cash Flow Estimation and Risk Analysis
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Q1) Replacement chain or EAA analysis is required when analyzing projects that have different lives.This is true regardless of whether the projects are mutually exclusive or independent of one another.
A)True
B)False
Q2) We can identify the cash costs and cash inflows to a company that will result from a project.These could be called "direct inflows and outflows," and the net difference is the direct net cash flow.If there are other costs and benefits that do not flow from or to the firm,but to other parties,these are called externalities,and they need not be considered as a part of the capital budgeting analysis.
A)True
B)False
Q3) Superior analytical techniques,such as NPV,used in combination with risk-adjusted cost of capital estimates,can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions for capital budgeting projects.
A)True
B)False
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Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Q1) Refer to Exhibit 13.1 and to previous problem.Calculate the project's coefficient of variation.(Hint: Use the expected NPV as found in previous problem.)
A)5.87
B)6.52
C)7.25
D)7.97
E)8.77
Q2) Traditionally,an NPV analysis assumes that projects will be accepted or rejected,which implies that they will be undertaken now or never.However,in practice,companies sometimes have a third choice--delay the decision until later,when more information will be available.
A)True
B)False
Q3) Real options can affect the size of a project's expected NPV but not project's risk as measured by the standard deviation or coefficient of variation of the NPV.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Leverage
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Q1) Your uncle is considering investing in a new company that will produce high quality stereo speakers.The sales price would be set at 1.5 times the variable cost per unit; the variable cost per unit is estimated to be $75.00; and fixed costs are estimated at $1,200,000.What sales volume would be required to break even,i.e.,to have EBIT = zero?
A)28,880
B)30,400
C)32,000
D)33,600
E)35,280
Q2) Modigliani and Miller's second article,which assumed the existence of corporate income taxes,led to the conclusion that a firm's value would be maximized,and its cost of capital minimized,if it used (almost)100% debt.However,this model did not take account of bankruptcy costs.The existence of bankruptcy costs leads to the assumption of an optimal capital structure where the debt ratio is less than 100%.
A)True
B)False
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Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Q1) Which of the following actions will best enable a company to raise additional equity capital,other things held constant?
A)Refund long-term debt with lower cost short-term debt.
B)Declare a stock split.
C)Begin an open-market purchase dividend reinvestment plan.
D)Initiate a stock repurchase program.
E)Begin a new-stock dividend reinvestment plan.
Q2) If on January 3,2015,a company declares a dividend of $1.50 per share,payable on January 31,2015,to holders of record on January 17,then the price of the stock should drop by approximately $1.50 on January 15,which is the ex-dividend date.
A)True
B)False
Q3) One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
A)True
B)False
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Chapter 16: Working Capital Management
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Q1) Roton Inc.purchases merchandise on terms of 2/15,net 40,and its gross purchases (i.e.,purchases before taking off the discount)are $800,000 per year.What is the maximum dollar amount of costly trade credit the firm could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year.)
A)$53,699
B)$56,384
C)$59,203
D)$62,163
E)$65,271
Q2) The longer its customers normally hold inventory,the longer the credit period supplier firms normally offer.Still,suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered,this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.
A)True
B)False
Q3) Because money has time value,a cash sale is always more profitable than a credit sale.
A)True
B)False
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Page 18
Chapter 17: Financial Planning and Forecasting
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Q1) To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.
A)True
B)False
Q2) If a firm's capital intensity ratio (A<sub>0</sub>*/S<sub>0</sub>)decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.
A)True
B)False
Q3) Two firms with identical capital intensity ratios are generating the same amount of sales.However,Firm A is operating at full capacity,while Firm B is operating below capacity.If the two firms expect the same growth in sales during the next period,then Firm A is likely to need more additional funds than Firm B,other things held constant.
A)True
B)False
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Chapter 18: Derivatives and Risk Management
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Q1) Which of the following statements is CORRECT?
A)An option's value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can't sell for more than its exercise value.
B)As a stock's price increases, the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases.
C)If the company is consistently profitable, its call options will always be in the money.
D)The market value of an option depends in part on the option's length of time until expiration and on the variability of the underlying stock's price.
E)The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger.
Q2) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
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Chapter 19: Multinational Financial Management
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Q1) Because political risk is seldom negotiable,it cannot be explicitly addressed in multinational corporate financial analysis.
A)True
B)False
Q2) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
Q3) When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
Q4) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
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21
Chapter 20: Hybrid Financing: Preferred Stock, leasing, warrants,
and Convertibles
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Q1) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True
B)False
Q2) Its investment bankers have told Donner Corporation that it can issue a 25-year,8.1% annual payment bond at par.They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket.The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%,which would represent an after-tax risk premium.What coupon rate must be set on the preferred in order to issue it at par?
A)6.66%
B)6.99%
C)7.34%
D)7.71%
E)8.09%
Q3) Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
A)True
B)False
Page 22
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Chapter 21: Mergers and Acquisitions
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Q1) If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.
A)True
B)False
Q2) Which of the following actions does NOT help managers defend against a hostile takeover?
A)Establishing a poison pill provision.
B)Granting lucrative golden parachutes to senior managers.
C)Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%.
D)Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position.
E)Finding a "white squire" that will buy enough of the target firm's shares to block the hostile takeover.
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23
Chapter 22: Continuous Compounding and Discounting
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Q1) Assume one bank offers you a nominal annual interest rate of 6% compounded daily while another bank offers you continuous compounding at a 5.9% nominal annual rate.You decide to deposit $1,000 with each bank.Exactly two years later you withdraw your funds from both banks.What is the difference in your withdrawal amounts between the two banks?
A)$2.24
B)$2.35
C)$2.47
D)$2.59
E)$2.72
Q2) You have $5,436.60 in an account that pays 10% interest,compounded continuously.If you deposited some funds 10 years ago,how much was your original deposit?
A)$1,900
B)$2,000
C)$2,100
D)$2,205
E)$2,315
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24
Chapter 23: Zero Coupon Bonds
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Q1) S.Claus & Co.is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years.The bonds will be sold today at a price of $826.45.If the firm's marginal tax rate is 40%,what is the annual after-tax cost of debt to the company on this issue?
A)5.70%
B)6.00%
C)6.30%
D)6.61%
E)6.95%
Q2) A 15-year,$1,000 face value,zero coupon bond has a yield to maturity of 8%.What is the amount of tax an investor in the 33% tax bracket will pay the first year of the bond?
A)$ 8.32
B)$ 8.74
C)$ 9.18
D)$ 9.63
E)$10.12
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Chapter 24: Bankruptcy and Reorganization
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Q1) What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act?
1)Trustees' costs to administer and operate the firm.
2)Common stockholders.
3)General,or unsecured,creditors.
4)Secured creditors who have claim to the proceeds from the sale of a specific property pledged for a mortgage.
5)Taxes due to federal and state governments.
A)1, 4, 3, 5, 2
B)5, 4, 1, 3, 2
C)4, 1, 5, 3, 2
D)5, 1, 4, 2, 3
E)1, 5, 4, 3, 2
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Chapter 25: Calculating Beta Coefficients
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Q1) Refer to Exhibit 8A.1.Set up the SML equation and use it to calculate both stocks' required rates of return,and compare those required returns with the expected returns given above.You should invest in the stock whose expected return exceeds its required return by the widest margin.What is the widest positive margin,or greatest excess return (expected return required return)?
A)1.97%
B)2.19%
C)2.43%
D)2.70%
E)3.00%
Q2) Refer to Exhibit 8A.1.Calculate both stocks' betas.What is the difference between the betas? That is,what is the value of beta<sub>R</sub> beta<sub>S</sub>? (Hint: The graphical method of calculating the rise over run,or (Y<sub>2</sub> Y<sub>1</sub>)divided by (X<sub>2</sub> X<sub>1</sub>)may aid you.)
A)1.3538
B)1.4250
C)1.5000
D)1.5750
E)1.6538
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Chapter
Cost of Capital
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Q1) Using the Security Market Line concept in capital budgeting,which of the following statements is CORRECT?
A)If the expected rate of return on a given capital project lies above the SML, the project should be accepted even if its beta is greater than the beta of the firm's average project.
B)If a project's return lies below the SML, it should be rejected if it has a beta greater than the firm's existing beta but accepted if its beta is below the firm's beta.
C)If two mutually exclusive projects' expected returns are both above the SML, the project with the lower risk should be accepted.
D)If a project's expected rate of return is greater than the expected rate of return on an average project, it should be accepted.
E)None of the statements is correct.
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Chapter 27: Techniques for Measuring Beta Risk
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Q1) Interstate Transport has a target capital structure of 50% debt and 50% common equity.The firm is considering a new independent project that has a return of 13% and is not related to transportation.However,a pure-play proxy firm has been identified that has a beta of 1.38.Both firms have a marginal tax rate of 40%,and Interstate's before-tax cost of debt is 12%.The risk-free rate is 10% and the market risk premium is 5%.The firm should:
A)Reject the project; its return is less than the firm's required rate of return on the project of 16.9%.
B)Accept the project; its return is greater than the firm's required rate of return on the project of 12.05%.
C)Reject the project; its return is only 13%.
D)Accept the project; its return exceeds the risk-free rate and the before-tax cost of debt.
E)Be indifferent between accepting or rejecting; the firm's required rate of return on the project equals its expected return.
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Chapter 28: Degree of Leverage
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Source URL: https://quizplus.com/quiz/64713
Sample Questions
Q1) Bell Brothers has $3,000,000 in sales.Fixed costs are estimated to be $100,000 and variable costs are equal to 50% of sales.The company has $1,000,000 in debt outstanding at a before-tax cost of 10%.If Bell Brothers' sales were to increase by 20%,how much of a percentage increase would you expect in the company's net income?
A)18.80%
B)19.79%
C)20.83%
D)21.92%
E)23.08%
Q2) Alvarez Technologies has sales of $3,000,000.The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales,so the company's current operating income is $700,000.The company's interest expense is $500,000.What is the company's degree of total leverage (DTL)?
A)4.8870
B)5.1443
C)5.4150
D)5.7000
E)6.0000
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