Financial Management
Textbook Exam Questions
Course Introduction
Financial Management is a comprehensive course designed to introduce students to the fundamental principles and practices involved in managing an organizations financial resources. Topics include financial statement analysis, planning and forecasting, capital budgeting, risk and return assessment, cost of capital, and short- and long-term financing options. The course emphasizes the decision-making processes that maximize shareholder value while considering ethical, legal, and environmental implications. Real-world case studies and analytical tools are incorporated to equip students with practical skills applicable in corporate finance, investment banking, and personal financial planning.
Recommended Textbook
M Finance 4th Edition by Marcia Cornett
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14 Chapters
1727 Verified Questions
1727 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) This should be the primary objective of a firm as it may actually be the most beneficial for society in the long run.
A) minimizing layoffs
B) maximizing market share
C) minimizing costs
D) maximizing shareholder value
Answer: D
Q2) The portion of a company's profits that are kept by the company rather than distributed to the stockholders as cash dividends is referred to as
A) restricted earnings.
B) venture capital.
C) retained earnings.
D) institutional investment.
Answer: C
Q3) An employee stock option plan is
A) a perk usually only given to the board of directors as compensation.
B) a plan that only partnerships can use to defer compensation to partners.
C) a way to align the interests of employees with those of the owners.
Answer: C
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) You are evaluating the balance sheet for Ultra Corporation.From the balance sheet you find the following balances: cash and marketable securities = $10,000,accounts receivable = $2,000,inventory = $20,000,accrued wages and taxes = $1,000,accounts payable = $3,000,and notes payable = $10,000.Calculate Ultra's net working capital.
A) $ 8,000
B) $18,000
C) $28,000
D) $32,000
Answer: B
Q2) In 2018,Lower Case Productions had cash flows from investing activities of +$50,000 and cash flows from financing activities of +$100,000.The balance in the firm's cash account was $80,000 at the beginning of 2018 and $65,000 at the end of the year.What was Lower Case's cash flow from operations for 2018?
A) -$15,000
B) -$150,000
C) -$165,000
D) -$65,000
Answer: C
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Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Which ratio measures the number of dollars of sales produced per dollar of inventory?
A) asset management
B) cash
C) internal-growth
D) inventory turnover
Answer: D
Q2) You are thinking of investing in Ski Sports,Inc.You have only the following information on the firm at year-end 2018: net income = $50,000,total debt = $1 million,and debt ratio = 70 percent.What is Ski's ROE for 2018?
A) 2.94 percent
B) 3.49 percent
C) 7.14 percent
D) 11.67 percent
Answer: D
Q3) The term "capital structure" refers to
A) the amount of current versus long-term debt on the balance sheet.
B) the amount of current versus fixed assets on the balance sheet.
C) the amount of long-term debt versus equity on the balance sheet.
Answer: C
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) What is the future value of $2,500 deposited for one year earning a 14 percent interest rate annually?
A) $2,550
B) $2,850
C) $2,950
D) $3,150
Q2) Approximately what interest rate is needed to double an investment over four years?
A) 4 percent
B) 18 percent
C) 25 percent
D) 100 percent
Q3) You have $50,000 in your account.Assuming no additional deposits are made and your account earns 8 percent per year,how long will it take for the account to have a balance of $500,000?
A) 28.83 years
B) 29.92 years
C) 50.00 years
D) 90.00 years
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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Sample Questions
Q1) A car company is offering a choice of deals.You can receive $600 cash back on the purchase,or a 2 percent APR,4-year loan.The price of the car is $18,900 and you could obtain a 4-year loan from your credit union at 6 percent APR.What is the monthly payment of each deal?
A) cash back: PMT = $429.78, 2 percent APR: PMT = $410.04
B) cash back: PMT = $438.24, 2 percent APR: PMT = $424.09
C) cash back: PMT = $458.12, 2 percent APR: PMT = $414.09
D) cash back: PMT = $408.33, 2 percent APR: PMT = $410.04
Q2) Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment.Assume you get a 15-year mortgage with a 6 percent interest rate.If the house appreciates at a 2 percent rate per year,what will be the value of the house in seven years? How much of this value is equity?
A) $172,302.85; $65,101.91
B) $172,302.85; $85,615.01
C) $185,612.09; $79,662.83
D) $185,612.09; $81,038.72
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) The Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury securities is 5.00 percent.The one-year interest rate expected in three years is E(<sub>4</sub>r<sub>1</sub>),5.25 percent.According to the liquidity premium theory,what is the liquidity premium on the four-year Treasury security,L<sub>4</sub>?
A) 0.0375 percent
B) 0.504 percent
C) 5.01 percent
D) 5.04 percent
Q2) Which of the following are suppliers of loanable funds?
A) households
B) government units
C) foreign investors
D) All of these choices are correct.
Q3) Which of these is NOT a theory that explains the shape of the term structure of interest rates?
A) liquidity theory
B) market segmentation theory
C) short-term structure of interest rates theory
D) unbiased expectations theory
Page 8
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Calculate the price of a zero coupon bond that matures in five years if the market interest rate is 7.50 percent.(Assume semi-annual compounding and $1,000 par value.)
A) $692.04
B) $696.57
C) $962.50
D) $1,000.00
Q2) Which of the following was the catalyst for the recent financial crisis?
A) Corruption in the investment banking industry.
B) Widespread layoffs due to illegal alien hiring.
C) Defaults on subprime mortgages.
D) All of the options were catalysts.
Q3) Consider the following three bond quotes; a Treasury note quoted at 102.30,and a corporate bond quoted at 99.45,and a municipal bond quoted at 102.45.If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000,what is the price of these three bonds in dollars?
A) $1,002.30, $1,000, $1,000, respectively
B) $1,000, $1,000, $5,000, respectively
C) $1,002.30, $994.50, $5,012.25 respectively
D) $1,023.00, $994.50, $5,122.50, respectively
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Page 9
Chapter 8: Valuing Stocks
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Sample Questions
Q1) Value stocks usually have:
A) low P/E ratios and high growth rates.
B) high P/E ratios and low growth rates.
C) low P/E ratios and low growth rates.
D) high P/E ratios and high growth rates.
Q2) Home Depot (HD)recently paid a $0.90 dividend.The dividend is expected to grow at a 17 percent rate.At the current stock price of $33.08,what is the return shareholders are expecting?
A) 2.70 percent
B) 17.03 percent
C) 17.18 percent
D) 20.18 percent
Q3) Coca-Cola recently paid a $3.00 dividend.Investors expect a 12 percent return on this stock.What is the difference in price if Coca-Cola is expected to grow at 7 percent versus 8 percent?
A) $11.40
B) $16.80
C) $21.60
D) $19.40
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Page 10
Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Which of the following statements is correct?
A) A single stock has a lot of diversifiable risk.
B) A single stock has more market risk than a diversified portfolio of stocks.
C) Bonds and stocks have a high correlation because they are both financial assets.
D) None of the statements are correct.
Q2) A stock has an expected return of 12 percent and a standard deviation of 20 percent.Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent.Given this data,which of the following statements is correct?
A) The two assets have the same coefficient of variation.
B) The stock investment has a better risk-return trade-off.
C) The bond investment has a better risk-return trade-off.
D) Both investments have the same diversifiable risk.
Q3) Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?
A) Coefficient of variation
B) Correlation
C) Standard deviation
D) Total risk
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11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) A manager believes his firm will earn a 7.5 percent return next year.His firm has a beta of 2,the expected return on the market is 5 percent,and the risk-free rate is 2 percent.Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.
A) 8 percent, undervalued
B) 8 percent, overvalued
C) 12 percent, undervalued
D) 12 percent, overvalued
Q2) Which of the following statements is incorrect regarding how beta is calculated?
A) The company return is the independent variable.
B) The market portfolio return is the dependent variable.
C) Using the oldest data possible will yield the most accurate results.
D) All of the statements are incorrect.
Q3) If the risk-free rate is 8 percent and the market risk premium is 2 percent,what is the required return for the market?
A) 2 percent
B) 6 percent
C) 8 percent
D) 10 percent
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Page 12
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Flotation costs are:
A) insignificant and can be assumed away.
B) the difference between the bid-ask spread on the sale of the security.
C) commissions to the underwriting firm that floats the issue.
D) None of the options are correct.
Q2) When firms use multiple sources of capital,they need to calculate the appropriate discount rate for valuing their firm's cash flows as:
A) a simple average of the capital components costs.
B) a sum of the capital components costs.
C) a weighted average of the capital components costs.
D) they apply to each asset as they are purchased with their respective forms of debt or equity.
Q3) Which of the following statements is correct?
A) The WACC measures the before-tax cost of capital.
B) An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
C) Flotation costs can decrease the weighted average cost of capital.
D) None of the options are correct.
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) If a firm has already paid an expense or is obligated to pay one in the future,regardless of whether a particular project is undertaken,that expense is a:
A) committed cost.
B) complementary cost.
C) obligated cost.
D) sunk cost.
Q2) Your firm needs a computerized machine tool lathe that costs $50,000,requires $10,000 in installation,and another $12,000 in maintenance for each year of its three-year life.After three years,this machine will be replaced.The machine falls into the MACRS three-year class life category.Assume a tax rate of 30 percent and a discount rate of 12 percent.Calculate the depreciation tax shield for this project in year 1.
A) $7,199.20
B) $8,886.00
C) $5,999.40
D) $6,554.40
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) All of the following capital budgeting tools are suitable for firms facing time constraints EXCEPT:
A) NPV.
B) payback.
C) discounted payback.
D) All of the options are suitable for firms facing time constraints.
Q2) The net present value decision technique may not be the only pertinent unit of measure if the firm is facing:
A) time or resource constraints.
B) a labor union.
C) the election of a new board of directors.
D) a major investment.
Q3) Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?
A) Discounted payback
B) Net present value
C) Internal rate of return
D) Profitability index
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) Joe's Burgers would like to maintain their cash account at a minimum level of $300,000,but expects the standard deviation in net daily cash flows to be $20,000; the effective annual rate on marketable securities to be 5.2 percent per year; and the trading cost per sale or purchase of marketable securities to be $22.55 per transaction.What will be their optimal upper cash limit?
A) $320,000.00
B) $336,492.68
C) $409,478.04
D) $1,009,478.04
Q2) All of the following are examples of carrying costs EXCEPT
A) rental payments on storage facilities where inventory is maintained.
B) the lost sale if the company runs out of a particular model.
C) the opportunity costs associated with having capital tied up in current assets instead of more productive fixed assets.
D) All of these choices are correct.
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