Financial Management
Textbook Exam Questions
Course Introduction
Financial Management is a course designed to introduce students to the core principles and practices involved in the effective management of an organizations financial resources. This course covers fundamental topics including financial analysis, planning and control, asset management, capital budgeting, risk assessment, and the sources of short-term and long-term financing. Through case studies and practical exercises, students learn to interpret financial statements, make informed investment decisions, and apply strategic approaches to maximize shareholder value, preparing them for real-world financial challenges in both corporate and entrepreneurial settings.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following statements is true?
A)The currency values among different countries rarely fluctuate.
B)Cash flows of various parts of a multinational corporate system are always denominated in the same currencies.
C)Institutional differences among countries can cause significant problems in coordination of subsidiaries.
D)No nation places constraints on the transfer of corporate resources.
E)Within similar geographic regions, different countries have uniform cultural heritages that shape values and influence the role of business in the society.
Answer: C
Q2) Managers of firms that use alternative accounting techniques to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm.
A)True
B)False
Answer: False
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Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following mathematical expressions calculates a firm's retained earnings at the end of a year?
A)Retained earnings = Beginning balance of retained earnings Net income in the current year + Net loss in the previous year
B)Retained earnings = Beginning balance of retained earnings + Net income in the current year + Dividends paid in the current year
C)Retained earnings = Beginning balance of retained earnings + Net income in the current year Dividends paid in the current year
D)Retained earnings = Beginning balance of retained earnings Net loss in the previous year Dividends paid in the current year
E)Retained earnings = Beginning balance of retained earnings Net income in the current year + Dividends paid in the current year
Answer: C
Q2) A simple approach to trend analysis is to construct graphs.
A)True
B)False
Answer: True
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(n) _____.
A)investment transfer
B)best-effort arrangement
C)underwriting
D)direct transfer
E)positive intermediation
Answer: D
Q2) Persian Rugs needs $600 million to support growth next year. If it issues new common stock to raise the funds, the flotation (issuance) costs will be 4 percent. If
Persian can issue stock at $125 per share, how many shares of common stock must be issued so that it has $600 million after flotation costs to use for its planned growth?
A)5,000,000
B)4,800,000
C)4,992,000
D)4,512,000
E)4,000,000
Answer: A
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.
A)$17,226
B)$14,868
C)$23,252
D)$18,725
E)$21,804
Q2) A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of cash flow pattern is a(n) _____.
A)ordinary annuity
B)annuity due
C)uneven cash flow stream
D)lump-sum payment
E)compounded cash flow
Q3) The present value of an investment increases as the opportunity cost rate increases.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Inflation leads to an increase in the purchasing power of investors.
A)True
B)False
Q2) The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.
A)True
B)False
Q3) Securities that can be easily converted into cash on short notice at a price that is close to the original cost generally have a:
A)low liquidity premium.
B)high maturity risk premium.
C)high inflation premium.
D)low budget risk premium.
E)high real risk premium.
Q4) In general, when rates in the financial markets increase, the prices (values) of financial assets decrease.
A)True
B)False
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Chapter 6: Bonds Debt Characteristics and Valuation
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Sample Questions
Q1) The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond?
A)The value of the bond at 8 percent is $385.54.
B)The value of the bond at 10 percent is $463.19.
C)The maturity value of the bond at 8 percent is $508.34.
D)The maturity value of the bond at 7 percent is $508.34.
E)The value of the bond at 7 percent is $508.34.
Q2) Which of the following types of bonds protects a bondholder against increases in interest rates?
A)Floating-rate bonds
B)Income bonds
C)Bonds with call provisions
D)Municipal bonds
E)Mortgage bonds
Q3) Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.
A)True
B)False
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) A share of a preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is the simple (not effective) annual rate of return?
A)8%
B)6%
C)12%
D)14%
E)10%
Q2) What is another name for the par value of a preferred stock?
A)Liquidation value
B)Interest
C)Preference value
D)Cumulative value
E)Hybrid value
Q3) Which of the following securities is eligible for a cumulative dividend?
A)Debenture bonds
B)Preferred stock
C)Classified stock
D)Common stock
E)Founders' stock
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The standard deviation is calculated as the weighted average of all the deviations of possible returns from the expected value, and it indicates how far above or below the expected value the actual value is expected to be.
A)True
B)False
Q2) Which of the following pairs of terms are names for the same risk?
A)Market risk and unsystematic risk
B)Market risk and relevant risk
C)Firm-specific risk and nondiversifiable risk
D)Firm-specific risk and systematic risk
E)Firm-specific risk and market risk
Q3) A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.
A)True
B)False
Q4) Risk refers to the chance that no unfavorable event will occur.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Q1) Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?
A)The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR.
B)The NPV method assumes that the project's cash flows will be reinvested at the risk-free rate, whereas the IRR method assumes reinvestment at the firm's required rate of return.
C)The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the risk-free rate.
D)The NPV method assumes that the project's cash flows are not reinvested, whereas the IRR method assumes the cash flows are reinvested at the firm's required rate of return.
E)The NPV method assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas the IRR method assumes the cash flows are not reinvested.
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Page 11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) If a capital budgeting project has a higher corporate risk than the average risk contained in the firm's portfolio of assets, it generally has a:
A)lower political risk.
B)greater beta risk.
C)lower project risk.
D)lower exchange rate risk.
E)greater financial risk.
Q2) Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the firm's marginal tax rate is 40%, the initial investment outlay for the new machine is _____.
A)$19,600
B)$30,000
C)$33,600
D)$21,000
E)$44,000
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12
Chapter 11: The Cost of Capital
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Sample Questions
Q1) SW Inc.'s preferred stock, which pays a $5.25 dividend each year, currently sells for $62.50. The company's marginal tax rate is 40 percent. When it issues preferred stock, SW normally incurs flotation costs equal to 8 percent. What is the cost of preferred stock, r<sub>ps</sub>, that should be included in the computation of the SW Inc.'s weighted average cost of capital (WACC)?
A)7.73%
B)9.07%
C)8.40%
D)9.13%
E)7.78%
Q2) The cost of issuing preferred stock must be adjusted for taxes because preferred stock dividend payments represent a tax-deductible expense for the firm.
A)True
B)False
Q3) A firm's cost of capital (WACC) represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm does not decrease.
A)True
B)False
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) The situation in which managers have different (better) information about their firm's prospects than outside investors is known as _____ information.
A)symmetric
B)contingent
C)asymmetric
D)favorable
E)unfavorable
Q2) What is the formula for calculating the times-interest earned (TIE) ratio?
A)TIE ratio = Interest charges ÷ Total liabilities
B)TIE ratio = Earnings per share ÷ Interest charges
C)TIE ratio = Sales ÷ Interest charges
D)TIE ratio = Earnings before interest and taxes ÷ Interest charges
E)TIE ratio = Interest charges ÷ Net income
Q3) Which of the following is considered a component of financial risk?
A)Fixed operating costs
B)Variable operating costs
C)The variability of a product's selling price
D)Interest payments on bonds
E)Fixed labor costs
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) Which of the following dividend payment policies represents a compromise between a stable, predictable dividend policy and a constant payout ratio policy?
A)Free cash flow dividend policy
B)Residual dividend policy
C)Dividend reinvestment policy (DRIP)
D)Equity dividend policy
E)Low regular dividend plus extras policy
Q2) Which of the following hypotheses/theories asserts that there exists no optimal dividend policy, because a firm's dividend policy does not affect its value.
A)Dividend relevance theory
B)Dividend irrelevance theory
C)Clientele effect theory
D)Signaling hypothesis
E)Free cash flow hypothesis
Q3) Many firms offer to reinvest stockholders' cash dividends in new shares of its stock through dividend reinvestment plans (DRIP).
A)True
B)False
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) The following information relates to RAM Corporation:
\(\begin{array} { l c }
\text { Accounts receivable } & \$ 160,000 \\
\text { Total credit sales } & \$ 2,500,000 \\
\text { Accounts payable } & \$ 220,000 \end{array}\)
What is RAM's receivables collection period (DSO)? In your computations, assume there are 360 days in a year.
A)23.04 days
B)21.56 days
C)15.62 days
D)22.50 days
E)160.00 days
Q2) Net working capital represents the amount of current assets that is financed with long-term funds.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) Which of the following statements about inventory management is correct?
A)The economic ordering quantity is the quantity at which the total cost of carrying (holding) inventory is minimized.
B)A firm should always order inventory in amounts sufficient to take advantage of quantity discounts.
C)Safety stock is additional inventory that a firm carries to guard against unexpected changes in sales.
D)To most efficiently manage its inventory, a firm should not reorder raw materials until it has no products remaining in inventory.
E)Outsourcing is the practice of arranging for a supplier to deliver raw materials at the time they are needed in the production process.
Q2) A firm should change its credit policy if the net present value (NPV) of the proposed credit policy is both positive and less than the NPV of its existing credit policy.
A)True
B)False
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17
Chapter 16: Financial Planning and Control
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Sample Questions
Q1) Which of the following mathematical equations represents the operating breakeven point, QOpBEP, for a firm?
A)Sales = Gross profit margin
B)Sales = Total variable costs + Total fixed costs
C)Total operating costs = Total variable costs + Total contribution margin costs
D)Total operating costs = Contribution margin
E)Contribution margin = Earnings before interest and tax
Q2) New World Manufacturing has determined that its degree of financial leverage (DFL) is 3.0 when sales equal $750,000, which happens to be its operating breakeven point (i.e.,
SOpBE = $750,000). At sales equal to $750,000, which of the following conditions must exist for New World Manufacturing? Assume everything else is equal.
A)Earnings per share (EPS) = 0
B)Earnings per share (EPS) > 0
C)Earnings per share (EPS) < 0
D)Earnings before interest and taxes (EBIT) > 0
E)Total operating costs = 0
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18