Financial Management Test
Questions
Course Introduction
Financial Management is a foundational course that explores the principles and practices necessary for sound financial decision-making within organizations. Students will learn about fundamental topics such as time value of money, financial statement analysis, risk and return, capital budgeting, cost of capital, and working capital management. The course places emphasis on both theoretical concepts and practical applications, equipping students with the skills to analyze financial data, evaluate investment opportunities, and understand strategies for financing and managing organizational resources effectively. By the end of this course, students will possess the analytical tools required to make informed financial decisions that enhance organizational value and sustainability.
Recommended Textbook
Foundations of Finance 7th Edition by Arthur J. Keown
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it.If Joe invests and the business loses the lawsuits,the most Joe can lose is
A) $10,000 if Joe is a general partner.
B) $10,000 if Joe is a sole proprietor.
C) $10,000 if Joe is a limited partner.
D) $10,000 plus his share of the lawsuits if Joe is a limited partner.
Answer: C
Q2) Capital budgeting is concerned with
A) whether a company's assets should be financed with debt or equity.
B) managing a firms cash budgeting procedures.
C) what long-term investments a firm should undertake.
D) planning sales of a corporation's equity capital.
Answer: C
Q3) A limited liability company (LLC)is taxed like a partnership but provides limited liability for its owners similar to a corporation.
A)True
B)False
Answer: True
Page 3
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Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) The one-year interest rate is 4%.The interest rate for a two-year security is 6%.The one-year interest rate one year from now is 8.34%.According to the liquidity preference theory,the risk premium for the second one-year investment is
A) 0.50%.
B) 0.34%.
C) 0.30%.
D) 1.66%.
Answer: C
Q2) An example of a primary market transaction involving a money market security is
A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.
Answer: A
Q3) The investment banker performs three basic functions: (1)underwriting,(2)distributing,and (3)advising.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) All of the following statements about balance sheets are true except:
A) Assets - Liabilities = Shareholders' Equity.
B) assets are reported at historical cost.
C) balance sheets show average asset balances over a one-year period.
D) a balance sheet reports a company's financial position at a specific point in time.
Answer: C
Q2) A balance sheet reflects the current market value of a firm's assets and liabilities.
A)True
B)False
Answer: False
Q3) Which of the following accounts belongs on the asset side of a balance sheet?
A) depreciation expense
B) accounts payable
C) inventory
D) accruals
Answer: C
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) Acme Incorporated has a debt ratio of .42,noncurrent liabilities of $20,000 and total assets of $70,000.What is Acme's level of current liabilities?
A) $8,400
B) $9,400
C) $12,348
D) $10,600
Q2) Lorna Doom Inc.has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT).Lorna Doom's times-interest-earned ratio is 4.2.What is Lorna Doom's net income?
A) $96,000
B) $57,000
C) $126,000
D) $57,600
Q3) A high debt ratio can be favorable because higher leverage may result in a higher return on equity.
A)True
B)False
Q4) How could an analyst determine whether a company's ratio is good or bad?
Q5) Discuss five limitations to ratio analysis.
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) You inherit $300,000 from your parents and want to use the money to supplement your retirement.You receive the money on your 65<sup>th</sup> birthday,the day you retire.You want to withdraw equal amounts at the end of each of the next 20 years.What constant amount can you withdraw each month and have nothing remaining at the end of 20 years if you are earning 7% interest compounded monthly?
A) $1,200
B) $1,829
C) $2,326
D) $2,943
Q2) You have the choice of two equally risk annuities,each paying $5,000 per year for 8 years.One is an annuity due and the other is an ordinary annuity.If you are going to be receiving the annuity payments,which annuity would you choose to maximize your wealth?
A) The annuity due
B) The ordinary annuity
C) Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better.
D) Either one because they have the same present value.
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Chapter 6: The Meaning and Measurement of Risk and Return
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Q1) An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.
A)True
B)False
Q2) The capital asset pricing model
A) provides a risk-return trade off in which risk is measured in terms of the market volatility.
B) provides a risk-return trade off in which risk is measured in terms of beta.
C) measures risk as the coefficient of variation between security and market rates of return.
D) depicts the total risk of a security.
Q3) Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a yearend value of $21,000 with a 30% probability; a yearend value of $24,000 with a 45% probability; and a yearend value of $30,000 with a 25% probability.What is the expected holding period return for this investment?
A) 50%
B) 25%
C) 23%
D) 18%
Page 8
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) PDQ bonds have a par value of $1,000.The bonds pay $40 in interest every six months and will mature in 10 years.
a.Calculate the price if the yield to maturity on the bonds is 7,8,and 9 percent,respectively.
b.Explain the impact on price if the required rate of return decreases.
c.Compute the coupon rate on the bonds.How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value?
Q2) SWH Corporation issued bonds on January 1,2004.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on January 1,2019.What is the yield to maturity for an SWH Corporation bond on January 1,2010 if the market price of the bond on that date is $950?
A) 5.50%
B) 6.23%
C) 8.43%
D) 10.50%
Q3) Bond prices are inversely related to market interest rates.
A)True
B)False
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Page 9
Chapter 8: The Valuation and Characteristics of Stock
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Q1) Modem Development,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 10% for the next two years,at which point the dividends will begin to grow at a constant rate indefinitely.If the stock is selling for $50 today and the required return is 15%,what it the expected annual dividend growth rate after year two?
A) 3.365%
B) 3.878%
C) 4.556%
D) 5.000%
Q2) Public perception and reputation do not affect stock prices,which are strictly a function of dividends and required returns.
A)True
B)False
Q3) The stock valuation model D<sub>1</sub>/(r<sub>cs </sub>- g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Milton Parker has a capital structure that consists of $7 million of debt,$2 million of preferred stock,and $11 million of common equity,based upon current market values.Parker's yield to maturity on its bonds is 7.4%,and investors require an 8% return on Parker's preferred and a 14% return on Parker's common stock.If the tax rate is 35%,what is Parker's WACC?
A) 7.21%
B) 8.12%
C) 10.18%
D) 12.25%
Q2) Joe's Discount Club currently has a weighted average cost of capital of 12%.Joe's has been growing rapidly over the past several years,selling common stock in each year to finance its growth.However,due to difficult economic times this year,Joe's decides to cut its dividend and increase its retained earnings so that the common equity portion of its capital structure will include only retained earnings and no new common stock will be sold.Joe's weighted average cost of capital this year should be
A) zero, since no new stock will be sold.
B) less than 12%.
C) equal to 12%.
D) greater than 12%.
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Page 11
Chapter 10: Capital-Budgeting Techniques and Practice
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Q1) Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.
A)True
B)False
Q2) A project with a NPV of zero should be rejected since even the returns on U.S.Treasury bill are greater than zero.
A)True
B)False
Q3) Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The net present value for Project A is
A) $12,358.
B) $16,947.
C) $19,458.
D) $26,074.
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Page 12
Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) Salvage value would most likely not be considered by
A) net present value.
B) internal rate of return.
C) payback.
D) A and B.
Q2) Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?
A) increase in accounts receivable
B) cost of issuing new bonds if the project is financed by a new bond issue
C) installation costs
D) none of the above - all are considered
Q3) One example of a terminal cash flow is the recapture of the net working capital associated with the project.
A)True
B)False
Q4) Advantages of using simulation include
A) adjustment for risk in the resulting distribution of net present values.
B) a range of possible outcomes presented.
C) is good only for single period investments since discounting is not possible.
D) graphically displays all possible outcomes of the investment.
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Fixed costs are called indirect costs while variable costs are called direct costs.
A)True
B)False
Q2) When deciding upon how much debt financing to employ,most practitioners would cite which of the following as the most important influence on the level of the debt ratio?
A) providing a borrowing reserve
B) maintaining desired bond rating
C) ability to adequately meet financing charges
D) exploiting advantages of financial leverage
Q3) Financial leverage is distinct from operating leverage since it accounts for A) use of debt and preferred stock.
B) variability in fixed operating costs.
C) variability in sales.
D) changes in EBIT.
Q4) According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.
A)True
B)False
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Chapter 13: Dividend Policy and Internal Financing
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Q1) Dividends per share divided by earnings per share equal the dividend payout ratio. A)True
B)False
Q2) According to the expectations theory,the actual dividend must equal the expected dividend,or lese the stock price will decrease after the dividend amount is announced.
A)True
B)False
Q3) You are a retired worker whose income is derived from your company pension plan and social security.However,you are highly dependent upon the income generated from your 401(k)plan,which is heavily weighted in stocks that pay substantial dividends.Which of the following dividend policies would you prefer?
A) Constant dividend payment ratio
B) Stable dollar dividend per share
C) Small, regular dividend plus a year-end extra
D) Any of the above would be equally desirable
Q4) When considering taxes,most investors prefer capital gains over dividend income.
A)True
B)False
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15
Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) When economies of scale exist,the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.
A)True
B)False
Q2) Which of the following is the initial and most important step in the preparation of pro forma financial statements?
A) Estimate the levels of investment in current and fixed assets.
B) Determine the rate of interest that will be required for borrowed funds.
C) Project the firm's sales revenues for the planning period.
D) Approximate the cost of raw materials.
Q3) If a firm currently has excess capacity,then using the percent of sales method to forecast its fixed asset balance will likely result in an overestimate of the fixed asset balance and an inflated amount of discretionary financing needed.
A)True
B)False
Q4) The key ingredient in a firm's financial planning is an accurate sales forecast.
A)True
B)False
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Chapter 15: Working-Capital Management
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Q1) What is the primary advantage of a firm that is able to issue commercial paper to finance its short-term assets?
A) Commercial paper provides greater flexibility in terms of repayment.
B) Interest rates on commercial paper are generally lower than rates on bank loans.
C) Commercial paper does not need to be repaid.
D) Commercial paper is guaranteed by the Federal Government
Q2) Which of the following statements about factoring is true?
A) The firm, not the factor, bears the risk of collecting bad receivables in a factoring arrangement.
B) Factoring involves the outright sale of a firm's accounts receivable to the factor.
C) The borrowing firm is able to obtain a greater advance against inventory in a factoring arrangement than in a typical line of credit secured by accounts receivable.
D) Factoring firms sell the receivables of other firms.
Q3) Sources of spontaneous financing include trade credit,salaries payable,and accrued taxes.
A)True
B)False
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Chapter 16: Current Asset Management
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Sample Questions
Q1) Lockbox arrangements may reduce mail float,processing float,and transit float.
A)True
B)False
Q2) Which of the following is the least liquid?
A) U.S. Treasury bills
B) commercial paper
C) money market mutual funds
D) federal agency securities
Q3) The goal of cash management is to hold the minimum amount of cash necessary to meet the firm's obligations in a timely manner.
A)True
B)False
Q4) The EOQ model calculates the size of the firm's inventory given its expected usage,carrying costs,and ordering costs.
A)True
B)False
Q5) Zero balance accounts reduce disbursing float.
A)True
B)False
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Chapter 17: International Business Finance
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Sample Questions
Q1) Triangular arbitrage eliminates exchange rate differentials across three markets for three currencies.
A)True
B)False
Q2) Except for the effects of small transaction costs,the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity.What is the name of this theory?
A) the purchasing power parity theory
B) the Bobby Fisher effect
C) interest rate parity theory
D) the law of one price
Q3) An important (additional)consideration for a direct foreign investment is
A) political risk.
B) maximizing the firm's profits.
C) attaining a high international P/E ratio.
D) maintaining the domestic cost of capital.
Q4) The asked rate is also known as the selling rate or the offer rate.
A)True
B)False
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