Course Introduction
Financial Management
Textbook Exam Questions
Financial Management is a foundational course that explores the principles and practices essential to effective financial decision-making within organizations. The course covers key concepts such as the time value of money, risk and return analysis, valuation of financial assets, cost of capital, capital budgeting, and working capital management. Students will learn how to analyze financial statements, evaluate investment opportunities, and develop strategies for financing and managing resources to maximize firm value. Emphasis is placed on both the theoretical frameworks and practical tools used by financial managers to make informed decisions in dynamic business environments.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The higher the profit of a firm, the higher the value the firm is in the market.
A)True
B)False
Answer: False
Q2) What is the major difference between money markets and capital markets?
A) One is more domestic while the other is more international.
B) One includes stock while the other includes loans.
C) The size of the profit or return on the market.
D) The timing of how long the security will be held onto.
Answer: B
Q3) When a company is looking to raise money through issuing more shares of stock, that is considered in the secondary market.
A)True
B)False
Answer: False
Q4) New issues are sold in the secondary market.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Given the following, what is free cash flow?
\(\begin{array} { l }
\text { Cash flow from operating activities}&\$200,000 \\
\text { Cash flow from investing activities}&\$140,000 \\
\text {ash flow from financing activities }&\$ 56,000\\
\text { Building purchases}&\$50,000 \\
\text { Dividends Paid}&\$ 20,000\\ \end{array}\)
A) $396,000
B) $270,000
C) $326,000
D) $130,000
Answer: D
Q2) Paying cash dividends to common shareholders will not affect the Cash Flow Statement.
A)True
B)False
Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Trend and industry analysis provide all of the following information except A) benchmarking.
B) the progress of the company.
C) a basis for decision making about capital structure.
D) future information about the company.
Answer: D
Q2) If the company's accounts receivable turnover is increasing, the average collection period
A) is going up slightly.
B) is going down.
C) could be moving in either direction.
D) is going up by a significant amount.
Answer: B
Q3) Total asset turnover indicates the firm's A) liquidity.
B) debt position.
C) ability to use its assets to generate sales.
D) profitability.
Answer: C
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) Level production schedules usually have the advantage of reducing overall production costs.
A)True
B)False
Q2) A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO?
A) $2,750
B) $3,600
C) $3,300
D) $3,850
Q3) Firms that successfully increase their inventory turnover ratio will, among other things,
A) be able to reduce their borrowing needs.
B) be able to reduce their dividend payments to stockholders.
C) find it more difficult to be given credit by their resource suppliers.
D) have a greater need for high balances in their cash accounts.
Q4) The primary purpose of the cash budget is to forecast income.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) The lower a firm's break-even point, the lower amount of quantity which needs to be sold in order to reach a profit of zero.
A)True
B)False
Q2) The concept of operating leverage involves the use of ________ to magnify returns at high levels of operation.
A) fixed costs
B) variable costs
C) marginal costs
D) semivariable costs
Q3) A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle.
A)True
B)False
Q4) Linear break-even analysis and operating leverage are only valid within a relevant range of unit production.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Short-term interest rates are more dependent upon inflation than on current demand for money.
A)True
B)False
Q2) Heavy use of long-term financing can generate more profit for the company during a tight money period.
A)True B)False
Q3) Use of long-term financing and the carrying of highly liquid assets is a high-risk combination.
A)True
B)False
Q4) Under normal conditions (60% probability), Financing Plan A will produce a $30,000 higher return than Plan B. Under tight money conditions (40% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return?
A) $34,000
B) $4,000
C) $4,800
D) $2,000
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Chapter 7: Current Asset Management
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Sample Questions
Q1) When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields.
A)True
B)False
Q2) When developing a credit scoring report, many variables would be considered. Which of the following best represents the major factors Dun & Bradstreet would examine?
A) The age of the management team, the dollar amount of sales, net profits, and long-term debt.
B) The age of the company, the number of employees, and the level of current assets.
C) The financial statements, satisfactory or slow payment experiences, and negative public records (suits, liens, judgments, and bankruptcies).
D) The company's cash balances, return on equity, and its average tax rates.
Q3) The cash-generating process for a firm is continuous, even though cash flow can be sporadic.
A)True B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Approximately 40% of all short-term financing is in the form of accounts payable or trade credit.
A)True
B)False
Q2) The sale of securities backed by the receivables of large credit-worthy firms is a large and growing source of financing.
A)True
B)False
Q3) The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
A)True
B)False
Q4) Approximately 40% of all short-term financing is in the form of loans from the bank. A)True
B)False
Q5) Commercial paper represents secured short-term borrowing by large companies. A)True B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) To calculate "Future or Present Values of an "Annuity Due," we must assume that payments happen twice as often.
A)True
B)False
Q2) If you invest $10,000 today at 10% interest, how much will you have in 10 years?
A) $13,860
B) $25,940
C) $3,860
D) $80,712
Q3) The amount of annual payments necessary to accumulate a desired future total can be found by reference to the present value of an annuity table.
A)True
B)False
Q4) Discounting refers to devaluing the item from the higher future value amount to the present value amount through the consideration of interest.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Valuation of a common stock with no dividend growth potential is treated in the same manner as preferred stock.
A)True
B)False
Q2) An increase in the yield of a bond compared to the coupon rate would be associated with an increase in the price of a bond.
A)True
B)False
Q3) Future stock value is equal to P<sub>0</sub> = D<sub>1</sub>/(K<sub>e</sub> - g), assuming a constant growth in dividends.
A)True
B)False
Q4) The risk premium is likely to be highest for
A) U.S. government bonds investment.
B) corporate bonds investment.
C) utility company stock investment.
D) either corporate bonds or utility company stock investments.
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Page 12
Chapter 11: Cost of Capital
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Sample Questions
Q1) The weighted average cost of capital is used as a discount rate because
A) it is an indication of how much the firm is earning overall.
B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.
C) it is comparable to the prevailing market interest rates.
D) returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.
Q2) A firm that does not earn the cost of capital in the short run will probably be in bankruptcy.
A)True
B)False
Q3) All of the following are important considerations for minimizing the cost of capital EXCEPT:
A) future inflation rates
B) industry debt ratios
C) future economic conditions
D) current coupon rates of outstanding debt
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Page 13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) In using the internal rate of return method, it is assumed that cash flows can be reinvested at
A) the cost of equity.
B) the cost of capital.
C) the internal rate of return.
D) the prevailing interest rate.
Q2) If a firm is experiencing no capital rationing, it should accept all investment proposals
A) as long as it has available funds.
B) that return an amount equal to or greater than the cost of capital.
C) that return an amount greater than the cost of equity.
D) that are available, regardless of return.
Q3) For high-internal rate of return investments, it is perfectly acceptable to assume that reinvestment will occur at an equally high, if not higher, rate.
A)True
B)False
Q4) The payback method is not really a theoretically correct approach.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) An example of negative correlation may exist between the A) forest products and housing industries.
B) jewelry and discount furniture industries.
C) steel and aluminum industries.
D) oil and auto industries.
Q2) The coefficient of correlation represents the standard deviation divided by the expected value.
A)True
B)False
Q3) The "portfolio effect" in capital budgeting refers to
A) the relationship of stocks to bonds.
B) the degree of correlation between various investments.
C) the coefficient of variation.
D) the risk-adjusted discount rate.
Q4) A Monte Carlo simulation model uses
A) random variables as inputs.
B) a point estimate.
C) the cost of capital.
D) portfolio risk.
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Chapter 14: Capital Markets
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Sample Questions
Q1) The European Central Bank issues bonds, notes, and bills denominated in the Euro currency.
A)True
B)False
Q2) One of the advantages of the BATS exchange is that it simply matches orders in a very fast pace.
A)True
B)False
Q3) Middle- to small-sized companies that are centered in one city or state would most likely be found on the
A) NASDAQ National Market.
B) NASDAQ Small Cap Market.
C) Supplemental list.
D) New York Stock Exchange.
Q4) As corporate bonds mature and become due for payment, it's common for the borrowing corporation to replace this debt with the issuance of new bonds.
A)True
B)False
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Page 16
Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) The risk function of investment banking is categorized mainly under A) underwriting function.
B) market-maker function.
C) advisor function.
D) agent function.
Q2) The Glass-Steagall Act prohibited
A) retail brokerage firms from having investment banking operations.
B) commercial banks from combining investment banking and commercial banking functions.
C) investment banks from selling both debt and equity securities.
D) insurance companies from selling investment products.
Q3) Privatization in many foreign markets means selling companies to the public that were previously owned by the state or government.
A)True
B)False
Q4) An investment banker most commonly makes money from A) commissions from buyers.
B) fees from other investment bankers in the syndicate.
C) the spread between the issue price and proceeds to the issuer.
D) artificially supporting the stock price during and after the offering.
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) A capital (or "financing") lease usually calls for an annual expense deduction equal to the lease payment.
A)True
B)False
Q2) When interest rates rise, bond refunding becomes quite popular.
A)True
B)False
Q3) The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.
A)True
B)False
Q4) The dollar interest received divided by the market price of the bond is called the A) par value.
B) coupon rate.
C) current yield.
D) yield to maturity.
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Page 18
Chapter 17: Common and Preferred Stock Financing
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Q1) To the corporate investor, preferred stock offers which of the following advantages?
A) A higher yield than debt, everything else being equal before taxes.
B) 30% of preferred dividends are tax-exempt.
C) 70% of preferred dividends are tax-exempt.
D) 70% of preferred dividends are tax-exempt and have a higher yield than debt, all else equal before taxes.
Q2) Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.
A)True
B)False
Q3) A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called
A) a preemptive right.
B) a poison pill.
C) ex-rights.
D) rights-on.
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Page 19
Chapter 18: Dividend Policy and Retained Earnings
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Q1) When a firm that previously paid regular dividends ceases to do so, the stock is ex-dividend until the firm resumes regular dividend payments.
A)True
B)False
Q2) A firm may repurchase its own stock in the market because A) it will increase the stockholders' wealth.
B) the firm's stock is temporarily depressed. C) it provides positive informational content.
D) all of these options are correct.
Q3) A stock dividend is often used when the company has high cash levels, but feels that a stock dividend would be more beneficial to the investors.
A)True
B)False
Q4) The "marginal principle of retained earnings" states that corporate investment should provide a return equal to or higher than what a stockholder could earn.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Q1) Conversion premiums are influenced heavily by expectations of future stock performance.
A)True
B)False
Q2) For the most downside protection, an investor should search for convertibles trading below par value near their floor value.
A)True
B)False
Q3) A convertible security is almost always
A) a security that can be converted into any other type of security.
B) a debt security that can only be converted into preferred or common stock.
C) a security that can be converted into common stock at the holder's option.
D) a security that can be converted into common stock only at the option of the issuing corporation.
Q4) As a financing device for creating common stock, warrants are usually more desirable than convertible bonds.
A)True
B)False
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21
Chapter 20: External Growth Through Mergers
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Q1) Most mergers are horizontal in nature in order to avoid the potential antitrust complications involved with the elimination of competition.
A)True
B)False
Q2) The potential of a tax loss carryforward has no effect when considering the acquisition of a company.
A)True
B)False
Q3) The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 21% tax bracket, would be willing to pay (on a non-discounted basis) the sum of ________ for Celluloid Collar Corporation's carryforward alone.
A) $108,000
B) $52,000
C) $44,100
D) $700,000
Q4) An example of horizontal integration is if Macy's and JC Penney were to merge.
A)True
B)False
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Chapter 21: International Financial Management
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Q1) A firm that perhaps suffers a loss as a result of a decline in the value of the Japanese yen could offset part of that risk by selling Japanese yen futures.
A)True
B)False
Q2) The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country.
A)True
B)False
Q3) A particular country's pattern of importing more than is being exported is likely to A) depress that country's currency.
B) depress other countries' currencies.
C) increase the value of that country's currency.
D) more than one of the options is correct.
Q4) In recent years, fully owned foreign subsidiaries are experiencing increased political pressure from foreign governments.
A)True
B)False
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Page 23