Course Introduction
Financial Management
Textbook Exam Questions
Financial Management is designed to introduce students to the principles and practices involved in the effective management of an organization's financial resources. The course covers key concepts such as financial planning, capital budgeting, financial analysis, risk assessment, and the valuation of assets and securities. Students will explore the techniques used in managing working capital, making investment decisions, and raising funds through equity and debt. Through case studies and real-world applications, the course aims to provide a solid foundation in creating value for a business while balancing risk and profitability.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) If shareholders are unhappy with a CEO's performance,they are most likely to:
A)buy more shares in an effort to gain control of the firm.
B)file a shareholder resolution.
C)replace the CEO through a grassroots shareholder uprising.
D)sell their shares.
Answer: D
Q2) You own 100 shares of a Sub Chapter "S" corporation.The corporation earns $5.00 per share before taxes.Once the corporation has paid any corporate taxes that are due,it will distribute the rest of its earnings to its shareholders in the form of a dividend.If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend)income is 30%,then how much money is left for you after all taxes have been paid?
A)$210
B)$300
C)$350
D)$500
Answer: C
Q3) Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation.
Answer: 11ea857d_97fc_bb24_a31f_35a87a17a5c9_TB6458_00
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Luther's quick ratio for 2008 is closest to:
A)0.77
B)0.87
C)1.15
D)1.30
Answer: A
Q2) Which of the following is NOT a reason why cash flow may not equal net income?
A)Amortization is added in when calculating net income.
B)Changes in inventory will change cash flows but not income.
C)Capital expenditures are not recorded on the income statement.
D)Depreciation is deducted when calculating net income.
Answer: A
Q3) The firm's revenues and expenses over a period of time are reported on the firm's:
A)income statement or statement of financial performance.
B)income statement or statement of financial position.
C)balance sheet or statement of financial performance.
D)balance sheet or statement of financial position.
Answer: A
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4
Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Suppose that the ETF is trading for $362.36; you should:
A)sell the EFT and buy 2 shares of IBM,3 shares of MRK,and 3 shares of C.
B)sell the EFT and buy 3 shares of IBM,2 shares of MRK,and 3 shares of C.
C)buy the EFT and sell 2 shares of IBM,3 shares of MRK,and 3 shares of C.
D)do nothing,no arbitrage opportunity exists.
Answer: D
Q2) Which one of the following statements is FALSE?
A)When we compute the return of a security based on the average payoff we expect to receive,we call it the expected return.
B)The notion that investors prefer to have a safe income rather than a risky one of the same average amount is call risk aversion.
C)Because investors are risk averse,the risk-free interest rate is not the right rate to use when converting risky cash flows across time.
D)The more risk averse investors are,the higher the current price of a risky asset will be compared to a risk-free bond.
Answer: D
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) The Internal Rate of return of this project is closest to:
A)10.2%
B)12.2%
C)14.2%
D)16.2%
Q2) At an annual interest rate of 7%,the future value of this timeline in year 2 is closest to:
A)$3080
B)$3525
C)$3770
D)$4035
Q3) You have been offered the following investment opportunity,if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Draw a timeline detailing this investment opportunity.
Q4) Define the following terms:
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
Q5) Draw a timeline detailing the cash flows from investment "A."
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Chapter 5: Interest Rates
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Q1) If you forgo the $2500 rebate and finance your new car through the dealership your monthly payments (with payments made at the end of the month)will be closest to:
A)$520
B)$573
C)$595
D)$799
Q2) What is the effective after-tax rate of each instrument,expressed as an EAR?
Q3) The effective annual rate (EAR)for a loan with a stated APR of 8% compounded monthly is closest to:
A)7.72%
B)8.00%
C)8.30%
D)8.66%
Q4) The present value of the lease payments for the delivery truck is closest to:
A)$206,900
B)$207,050
C)$207,680
D)$198,420
Q5) Should you purchase the delivery truck or lease it? Why?
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Chapter 6: Valuing Bonds
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Q1) Consider a bond that pays annually an 8% coupon with 20 years to maturity.The amount that the price of the bond will change if its yield to maturity increases from 5% to 7% is closest to:
A)-$270
B)-$225
C)-$310
D)-$250
Q2) Which of the following statements is FALSE?
A)The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds.
B)If the zero-coupon yield curve is downward sloping,the yield to maturity will decrease with the coupon rate.
C)The information in the zero-coupon yield curve is sufficient to price all other risk-free bonds.
D)When the yield curve is flat,all zero-coupon and coupon-paying bonds will have the same yield,independent of their maturities and coupon rates.
Q3) Assume that the YTM increases by 1% for each of the four bonds listed.Rank the bonds based upon the sensitivity of their prices from least to most sensitive.
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Chapter 7: Investment Decision Rules
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Q1) When choosing between projects,an alternative to comparing their IRRs is:
A)to compute the incremental IRR,which tells us the discount rate at which it becomes profitable to switch from one project to the other.
B)to compute the incremental payback period,which tells us the number of years during which it becomes profitable to switch from one project to the other.
C)to compute the incremental NPV,which tells us the discount rate at which it becomes profitable to switch from one project to the other.
D)There is no alternative selection criterion to comparing IRRs.
Q2) The NPV for project Beta is closest to:
A)$24.01
B)$16.92
C)$20.96
D)$14.41
Q3) What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?
Q4) Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larry's three movie deal offer.
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) Epiphany would like to know how sensitive the project's NPV is to changes in the discount rate.How much can the discount rate vary before the NPV reaches zero?
Q2) Suppose that of the 60% of FFL's current overnight photo customers,half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service.The level of incremental sales in this case is closest to:
A)$60,000
B)$150,000
C)$90,000
D)$120,000
Q3) Which of the following costs would you consider when making a capital budgeting decision?
A)Sunk cost
B)Opportunity cost
C)Interest expense
D)Fixed overhead cost
Q4) Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.
Q5) What is the NPV of the Epiphany's project?
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Chapter 9: Valuing Stocks
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Q1) Rearden's expected dividend yield is closest to:
A)3.40%
B)3.65%
C)4.00%
D)4.20%
Q2) Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:
A)$25.00
B)$40.00
C)$15.40
D)$11.10
Q3) Suppose you plan to hold Von Bora stock for one year.The price one would expect to be able to sell a share of Von Bora stock for in one year is closest to:
A)$26.50
B)$22.70
C)$23.15
D)$24.10
Q4) What are some common multiples used to value stocks?
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) The average annual return on the Index from 2000 to 2009 is closest to:
A)7.10%
B)4.00%
C)9.75%
D)8.75%
Q2) Which of the following types of risk doesn't belong?
A)Market risk
B)Unique risk
C)Idiosyncratic risk
D)Unsystematic risk
Q3) Which of the following statements is FALSE?
A)Fluctuations of a stock's returns that are due to firm-specific news are common risks.
B)The volatility in a large portfolio will decline until only the systematic risk remains.
C)When we combine many stocks in a large portfolio,the firm-specific risks for each stock will average out and be diversified.
D)The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk.
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Which of the following statements is FALSE?
A)Without trading,the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.
B)The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio.
C)Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio.
D)A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.
Q2) Consider a portfolio consisting of only Microsoft and Wal-Mart stock.Calculate the volatility of such a portfolio when the weight on Microsoft stock is 0%,25%,50%,75%,and 100%
Q3) The beta for Sisyphean's new project is closest to:
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Chapter 12: Estimating the Cost of Capital
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Q1) Your estimate of the asset beta for Nielson Motors is closest to:
A)0.59
B)0.66
C)0.71
D)1.75
Q2) Galt Industries has a market capitalization of $50 billion,$30 billion in BBB rated debt,and $8 billion in cash.If Galt's equity beta is 1.15,then Galt's underlying asset beta is closest to:
A)0.83
B)0.92
C)1.00
D)1.15
Q3) Luther Industries has a market capitalization of $23 billion,no debt,and $4 billion in cash.If Luther's estimated equity beta is 1.32,then the beta of Luther's underlying business enterprise is closest to:
A)1.09
B)1.32
C)1.48
D)1.60
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Page 14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Which of the following statements is FALSE?
A)The risk premium of any marketable security can be written as the sum of the risk premium of each factor multiplied by the sensitivity of the stock with that factor.
B)The factor betas measure the sensitivity of the stock to a particular factor.
C)If we use more than one portfolio as factors,then together these factors will capture systematic risk,but each factor captures different components of the systematic risk.
D)When we use more than one portfolio to capture risk,the model is known as a single factor model.
Q2) The expected alpha for Taggart Transcontinental is closest to:
A)-3.00%
B)-1.00%
C)1.00%
D)3.00%
Q3) What does the existence of a positive alpha investment strategy imply?
Q4) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Consider the following equation:
E + D = U = A
The E in this equation represents:
A)the value of the firm's equity.
B)the value of the firm's debt.
C)the value of the firm's unlevered equity.
D)the market value of the firm's assets.
Q2) Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.
Q3) Two separate firms are considering investing in this project.Firm unlevered plans to fund the entire $80,000 investment using equity,while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Calculate the expected returns for both the levered and unlevered firm.
Q4) Based upon the three comparable firms,what asset beta would you recommend using for your firm's new project?
Q5) What is the conservation of value principle?
Q6) Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same exact cash flows?
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Chapter 15: Debt and Taxes
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Q1) The value of Shepard Industries with leverage is closest to:
A)$64 million
B)$100 million
C)$135 million
D)$114 million
Q2) Wyatt Oil has 25 million shares outstanding and has a marginal corporate tax rate of 40%.Wyatt Oil announces that it will payout $40 million in cash to investors through a special dividend.Shareholders had previously assumed that Wyatt Oil would retain this excess cash permanently.The amount that Wyatt Oil's share price can be expected to change upon this announcement is closest to:
A)$0.56
B)$0.64
C)$0.96
D)$1.56
Q3) The interest rate tax shield for Kroger in 2005 is closest to:
A)$362 million
B)$36 million
C)$102 million
D)$195 million
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Page 17
Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) If in the event of distress,the present value of distress costs is equal to $5 million,then the optimal level of debt for d'Anconia Copper is:
A)$25 million
B)$50 million
C)$60 million
D)$70 million
Q2) Which of the following statements is FALSE?
A)An important consequence of leverage is the risk of bankruptcy.
B)Whether default occurs depends on the cash flows,not on the relative values of the firm's assets and liabilities.
C)Economic distress is a significant decline in the value of a firm's assets,whether or not it experiences financial distress due to leverage.
D)Modigliani and Miller's results continue to hold in a perfect market even when debt is risky and the firm may default.
Q3) Assume that capital markets are perfect except for the existence of corporate taxes and that your firm pays 35% of earnings in taxes.If you want to maintain ownership of at least a 50%,then calculate the minimum amount of debt that you must issue to fund the expansion.
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Chapter 17: Payout Policy
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Q1) Which of the following statements is FALSE?
A)When a firm pays a dividend,shareholders are taxed according to the dividend tax rate.If the firm repurchases shares instead,and shareholders sell shares to create a homemade dividend,the homemade dividend will be taxed according to the capital gains tax rate.
B)When the tax rate on dividends exceeds the tax rate on capital gains,shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.
C)Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
D)The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.
Q2) Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:
A)8.8 million
B)1.2 million
C)9.0 million
D)8.9 million
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Page 19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) The value of Galt's equity using the WACC method is closest to:
A)$150 million
B)$180 million
C)$230 million
D)$240 million
Q2) Alpha Beta Corporation maintains a constant debt-equity ratio of 0.5.The total value of the firm is $30 million,and existing debt is riskless.Over the next three months,news will come out that will either raise or lower Alpha Beta's value by 10%.How will Alpha Beta adjust its debt level in response to keep its debt-equity ratio constant?
A)Either increase by $1 million or decrease by $1 million.
B)Either increase by $1.5 million or decrease by $1.5 million.
C)Either increase by $3 million or decrease by $3 million.
D)There will be no change - the debt-equity ratio will remain constant.
Q3) The NPV of this project using the APV method is closest to:
A)$10 million
B)$13 million
C)$42 million
D)$71 million
Q4) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A)17.6
B)16.4
C)14.5
D)19.0
Q2) The unlevered beta for Oakley is closest to:
A)0.70
B)1.50
C)1.00
D)0.60
Q3) The after tax interest expense in 2010 is closest to:
A)0
B)2856
C)5304
D)8160
Q4) What range for the market value of equity for Ideko is implied by the range of EV/EBITDA multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital needs?
21
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