Financial Planning and Control
Exam Questions
Course Introduction
Financial Planning and Control focuses on the key concepts, tools, and techniques necessary for effective financial management within organizations. The course covers the processes of budgeting, forecasting, and financial analysis, enabling students to plan for future financial needs and control organizational resources. Topics include the development of financial plans, performance measurement, variance analysis, and strategies for aligning financial objectives with overall business goals. By integrating theoretical frameworks with practical case studies, students gain a comprehensive understanding of how financial control systems support organizational decision-making and drive sustainable growth.
Recommended Textbook Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price in the long run,or the stock's "intrinsic value."
A)True
B)False
Answer: True
Q2) Assume that the corporate tax rate is 34% and the personal tax rate is 30%.The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation.The firm will not need to retain any earnings,so all of its after-tax income will be paid out to its investors,who will have to pay personal taxes on whatever they receive.What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization ?
A) 22.61%
B) 23.80%
C) 21.90%
D) 23.56%
E) 28.56%
Answer: B
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The term "IPO" stands for Introductory Price Offered,and it is the price at which shares of a new company are offered to the public.
B) IPO prices are generally established by the market,and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.
C) In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay.The company determines how many shares it wants to sell.The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
D) It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell.In this situation,the IPO is said to be oversubscribed.
E) It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell.In that case,the company will have to issue more shares than it wants to sell.
Answer: C
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Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
A)True
B)False
Answer: False
Q2) An increase in accounts payable represents an increase in net cash provided by operating activities,an effect similar to taking out a new bank loan.However,these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.
A)True
B)False
Answer: True
Q3) The balance sheet measures the flow of funds into and out of various accounts over time,while the income statement measures the firm's financial position at a point in time.
A)True
B)False
Answer: False
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) In general,if investors regard a company as relatively risky and/or having relatively poor growth prospects,then it will have relatively high P/E and M/B ratios.
B) The basic earning power ratio (BEP)reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.
C) The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year,depending on the time of year when the financial statements are constructed.
D) The market/book (M/B)ratio tells us how much investors are willing to pay for a dollar of accounting book value.In general,investors regard companies with higher M/B ratios as more risky and/or less likely to enjoy higher future growth.
E) It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Which of the following bank accounts has the highest effective annual return?
A) An account that pays 8% nominal interest with monthly compounding.
B) An account that pays 8% nominal interest with annual compounding.
C) An account that pays 7% nominal interest with daily (365-day)compounding.
D) An account that pays 7% nominal interest with monthly compounding.
E) An account that pays 8% nominal interest with daily (365-day)compounding.
Q2) What's the future value of $4,400 after 5 years if the appropriate interest rate is 6%,compounded semiannually?
A) $5,381.04
B) $5,913.23
C) $7,214.14
D) $5,794.97
E) $4,612.32
Q3) Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
A)True
B)False
Q4) A time line is meaningful even if all cash flows do not occur annually.
A)True
B)False
Page 7
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Chapter 6: Interest Rates
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Sample Questions
Q1) Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that
A) Inflation is expected to decline in the future.
B) The economy is not in a recession.
C) Long-term bonds are a better buy than short-term bonds.
D) Maturity risk premiums could help to explain the yield curve's upward slope.
E) Long-term interest rates are more volatile than short-term rates.
Q2) If investors expect the rate of inflation to increase sharply in the future,then we should not be surprised to see an upward sloping yield curve.
A)True
B)False
Q3) Because the maturity risk premium is normally positive,the yield curve must have an upward slope.If you measure the yield curve and find a downward slope,you must have done something wrong.
A)True
B)False
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8
Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
B) Other things held constant,a callable bond should have a lower yield to maturity than a noncallable bond.
C) Once a firm declares bankruptcy,it must be liquidated by the trustee,who uses the proceeds to pay bondholders,unpaid wages,taxes,and legal fees.
D) Income bonds must pay interest only if the company earns the interest.Thus,these securities cannot bankrupt a company prior to their maturity,and this makes them safer to the issuing corporation than "regular" bonds.
E) A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
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9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Assume that two investors each hold a portfolio,and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0,while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same,then the two investors face the same amount of risk.However,the holders of either portfolio could lower their risks,and by exactly the same amount,by adding some "normal" stocks with beta = 1.0.
A)True
B)False
Q2) Cheng Inc.is considering a capital budgeting project that has an expected return of 24% and a standard deviation of 30%.What is the project's coefficient of variation? Do not round your intermediate calculations.Round the final answer to 2 decimal places.
A) 1.08
B) 1.40
C) 1.03
D) 1.25
E) 0.99
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Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Carter's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $57.50,what is its nominal (not effective)annual rate of return?
A) 7.03%
B) 8.56%
C) 6.75%
D) 5.84%
E) 6.96%
Q2) When a new issue of stock is brought to market,the marginal investor determines the price at which the stock will trade.
A)True
B)False
Q3) A share of common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 14.2%,then what is the stock price?
A) $12.70
B) $11.98
C) $14.61
D) $10.66
E) $12.10
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Page 11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) If a firm is privately owned,and its stock is not traded in public markets,then we cannot measure its beta for use in the CAPM model,we cannot observe its stock price for use in the DCF model,and we don't know what the risk premium is for use in the bond-yield-plus-risk-premium method.All this makes it especially difficult to estimate the cost of equity for a private company.
A)True
B)False
Q2) Duval Inc.uses only equity capital,and it has two equally-sized divisions.Division A's cost of capital is 10.0%,Division B's cost is 14.0%,and the corporate (composite)WACC is 12.0%.All of Division A's projects are equally risky,as are all of Division B's projects.However,the projects of Division A are less risky than those of Division B.Which of the following projects should the firm accept?
A) A Division B project with a 13% return.
B) A Division B project with a 12% return.
C) A Division A project with an 11% return.
D) A Division A project with a 9% return.
E) A Division B project with an 11% return.
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Page 12
Chapter 11: The Basics of Capital Budgeting
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Q1) Which of the following statements is CORRECT?
A) The NPV method was once the favorite of academics and business executives,but today most authorities regard the MIRR as being the best indicator of a project's profitability.
B) If the cost of capital declines,this lowers a project's NPV.
C) The NPV method is regarded by most academics as being the best indicator of a project's profitability,hence most academics recommend that firms use only this one method and disregard other methods.
D) A project's NPV depends on the total amount of cash flows the project produces,but because the cash flows are discounted at the WACC,it does not matter if the cash flows occur early or late in the project's life.
E) The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted,but they always give the same recommendation regarding the acceptability of a normal,independent project.
Q2) Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
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Page 13
Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following rules is CORRECT for capital budgeting analysis?
A) The interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows.
B) Only incremental cash flows,which are the cash flows that would result if a project is accepted,are relevant when making accept/reject decisions for capital budgeting projects.
C) Sunk costs are not included in the annual cash flows,but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision.
D) A proposed project's estimated net income as determined by the firm's accountants,using generally accepted accounting principles (GAAP),is discounted at the WACC,and if the PV of this income stream exceeds the project's cost,the project should be accepted.
E) If a product is competitive with some of the firm's other products,this fact should be incorporated into the estimate of the relevant cash flows.However,if the new product is complementary to some of the firm's other products,this fact need not be reflected in the analysis.
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Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Gleason Research regularly takes real options into account when evaluating its proposed projects.Specifically,it considers the option to abandon a project whenever it turns out to be unsuccessful (the abandonment option),and it evaluates whether it is better to invest in a project today or to wait and collect more information (the investment timing option).Assume the proposed projects can be abandoned at any time without penalty.Which of the following statements is CORRECT?
A) The abandonment option tends to reduce a project's NPV.
B) The abandonment option tends to reduce a project's risk.
C) If there are important first-mover advantages,this tends to increase the value of waiting a year to collect more information before proceeding with a proposed project.
D) A project can either have an abandonment option or an investment timing option,but never both.
E) Investment timing options always increase the value of a project.
Q2) The following are all examples of real options that are discussed in the text: (1)protection options, (2)flexibility options, (3)timing options,and (4)abandonment options.
A)True B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.
A)True
B)False
Q2) Southeast U's campus book store sells course packs for $15.00 each,the variable cost per pack is $11.00,fixed costs for this operation are $300,000,and annual sales are 75,000 packs.The unit variable cost consists of a $4.00 royalty payment,V<sub>R</sub> ,per pack to professors plus other variable costs of V<sub>O</sub> = $7.00.The royalty payment is negotiable.The book store's directors believe that the store should earn a profit margin of 10% on sales,and they want the store's managers to pay a royalty rate that will produce that profit margin.What royalty per pack would permit the store to earn a 10% profit margin on course packs,other things held constant? Do not round your intermediate calculations.
A) $2.50
B) $1.88
C) $2.78
D) $2.25
E) $2.00
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Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Q1) Which of the following statements is CORRECT?
A) One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company.
B) One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
C) Stock repurchases can be used by a firm that wants to increase its debt ratio.
D) Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years,provided investors are aware of these investment opportunities.
E) One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
Q2) A 100% stock dividend and a 2:1 stock split should,at least conceptually,have the same effect on the firm's stock price.
A)True
B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Which of the following statements is most consistent with efficient inventory management? The firm has a
A) below-average inventory turnover ratio.
B) low incidence of production schedule disruptions.
C) below-average total assets turnover ratio.
D) relatively high current ratio.
E) relatively low DSO.
Q2) If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.
A)True
B)False
Q3) Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing.
A)True
B)False
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18
Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?
A) The company previously thought its fixed assets were being operated at full capacity,but now it learns that it actually has excess capacity.
B) The company increases its dividend payout ratio.
C) The company begins to pay employees monthly rather than weekly.
D) The company's profit margin increases.
E) The company decides to stop taking discounts on purchased materials.
Q2) The capital intensity ratio is generally defined as follows:
A) Sales divided by total assets,i.e. ,the total assets turnover ratio.
B) The percentage of liabilities that increase spontaneously as a percentage of sales.
C) The ratio of sales to current assets.
D) The ratio of current assets to sales.
E) The amount of assets required per dollar of sales,or A<sub>0</sub>*/S<sub>0</sub>.
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)
A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
Q2) Suppose a hypothetical CBOT 13-year U.S. ,semiannual payment,6% coupon Treasury note futures contract has a quoted price of 103-180.If annual interest rates go up by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,round the new interest rate to 4 decimal places when written as a decimal,and round the change in price up to the nearest whole dollar. )Do not round other intermediate calculations.
?
A) ?$111
B) ?$94
C) ?$85
D) ?$71
E) ?$89
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Page 20
Chapter 19: Multinational Financial Management
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Q1) When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
Q2) When the value of the U.S.dollar appreciates against another country's currency,we may purchase more of the foreign currency with the U.S.dollar.
A)True
B)False
Q3) If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.76 shekels per dollar,then the forward rate for the Israeli shekel is selling at a(n)______________ to the spot rate.
A) 3.68% premium
B) 3.72% premium
C) 4.99% discount
D) 4.54% discount
E) 5.58% discount
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21
Chapter 20: Hybrid Financing: Preferred Stock,leasing,warrants,and
Convertibles
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Q1) A convertible debenture can never sell for more than its conversion value or less than its bond value.
A)True
B)False
Q2) A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it.Most traded warrants are originally attached to bonds or preferred stocks.
A)True
B)False
Q3) Historically,leasing was often referred to as off-balance-sheet financing because lease payments were shown as operating expenses on a firm's income statement,and leased assets and associated liabilities did not appear on the firm's balance sheet under certain conditions.
A)True
B)False
Q4) A warrant is an option,and as such it cannot be used as a "sweetener."
A)True
B)False
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Chapter 21: Mergers and Acquisitions
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Q1) Gekko Properties is considering purchasing Teldar Properties.Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million,$4 million,$5 million,and $10 million over the next four years.The horizon value of the firm's operations,as of Year 4,is expected to be $108 million.Assume all cash flows occur at the end of the year.The acquisition would be made immediately,if it is undertaken.Teldar's post-merger beta is estimated to be 2.0,and its post-merger tax rate would be 35.00%.The risk-free rate is 6.00%,and the market risk premium is 5.70%.What is the value of Teldar to Gekko Properties? Do not round intermediate calculations.
A) $78,888,332
B) $69,812,683
C) $76,793,952
D) $82,378,966
E) $56,548,273
Q2) Synergistic benefits can arise from a number of different sources,including operating economies of scale,financial economies,and increased managerial efficiency.
A)True
B)False
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