Financial Planning and Control
Exam Solutions
Course Introduction
Financial Planning and Control is an essential course that introduces students to the fundamental concepts, tools, and techniques used in managing an organizations financial resources. The course covers the processes involved in budgeting, forecasting, and financial analysis, equipping students with the skills to develop effective financial plans that align with organizational objectives. Key topics include cost estimation, capital budgeting, variance analysis, performance measurement, and the use of financial information for strategic decision-making. Through practical case studies and real-world examples, students learn how to implement financial controls, monitor financial performance, and make informed decisions to ensure the long-term financial health and stability of an organization.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) Shareholder wealth is measured by the ____.
A) book value of the shareholders' common stock holdings
B) market value of the shareholders' common stock holdings
C) book value of the company's assets
D) market value of the company's assets
Answer: B
Q2) The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to
A) separation of social responsibility and stakeholders' concerns
B) separation of ownership and control
C) separation of personal welfare and long-run profit goals
D) the granting of "golden parachute" contracts
Answer: B
Q3) Many small business owners are ____ diversified with respect to their personal wealth.
A) poorly
B) highly
C) well
D) 90%
Answer: A
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) What is the holding period return to an investor who bought 100 shares of Oil Slick stock nine months ago for $36 per share, received two $50 dividend checks, and sold the stock today at $38 a share.
A) 5.56%
B) 8.33%
C) 11.11%
D) 6.94%
Answer: B
Q2) As a group, net savers are:
A) businesses
B) households
C) government
D) partnerships
Answer: B
Q3) Financial intermediaries include
A) securities brokers
B) commercial banks
C) securities dealers
D) all of the above
Answer: B
Page 4
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) The appropriate standard for comparison of financial ratios probably should be the
A) best firm in the industry
B) worst firm in the industry
C) industry average
D) better performing firms in the industry
Answer: D
Q2) Financial leverage ratios measure the
A) amount of interest paid by the firm
B) firm's use of fixed-charge financing
C) amount of equity funds retired by the firm
D) static ratio
Answer: B
Q3) A firm's price to earnings ratio is 8 and its market to book ratio is 2. If its earnings per share are $4.00, what is the book value per share?
A) $ 8.00
B) $32.00
C) $64.00
D) $16.00
Answer: D
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Page 5
Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) Last year Molex's net cash provided by operating activities was $14.1 million and its net cash used by investing activities was $20.7 million. If net cash provided by financing activities was $9.8 million, what was the net increase (or decrease) in cash and cash equivalents during the year? Molex started the year with $2.1 million in cash.
A) $44.6 million
B) $3.2 million
C) $25.0 million
D) $5.3 million
Q2) The percentage of sales forecasting method is used by management to forecast the amount of
A) profit expected for a given percentage increase in sales
B) capital financing needed to promote marketing efforts
C) cash needed to finance future sales growth
D) debt financing needed
Q3) In using the percentage of sales forecasting method the assumption is that
A) there is a direct relationship between long-term debt and sales
B) inventories will increase proportionately with sales
C) there is a direct relationship between notes payable and sales
D) retained earnings will increase proportionately with sales
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Page 6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) Explain the concept of interest and compare it to rate of interest.
Q2) What is the difference between the nominal interest rate and the effective interest rate?
Q3) The process of finding present values is frequently called
A) annualizing
B) compounding
C) discounting
D) leasing
Q4) A zero coupon bond with a $1,000 par value is selling for $356 and matures in 12 years. What is the implied discount rate (yield to maturity)?
A) 9%
B) 9.36%
C) 9.12%
D) 9.4%
Q5) ____ is the return earned by someone who has forgone current consumption.
A) the present value
B) principle
C) an annuity
D) interest
Q6) What is the net present value rule?
Page 7
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Sample Questions
Q1) What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?
A) $250.00
B) $362.31
C) $335.62
D) $1000.00
Q2) The required rate of return on an asset is a function of the ____.
A) risk associated with the asset
B) risk-free interest rate
C) age of the asset
D) risk associated with the asset and the risk-free interest rate
Q3) The value of a 15-year bond will change ____ for a given change in the required rate of return than the value of a 5 year bond.
A) more
B) less
C) the same percentage
D) exactly the same
Q4) List the advantages and disadvantages of long-term debt financing:
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Q5) What is the collateral used in collateral trust bonds and who is its primary user?
Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) From an accounting standpoint, stock dividends involve a transfer from the A) common stock account
B) cash account
C) retained earnings account
D) capital surplus account
Q2) AVIX has 6.8 million shares outstanding and the firm's charter provides for a majority voting procedure. The company has seven directors up for reelection. What is the minimum number of shares needed to ensure the election of one director?
A) 850,001
B) 5,950,001
C) 3,400,001
D) none of the above
Q3) The constant growth dividend valuation model does not hold when A) ke is greater than g
B) dividends are growing faster than 4 percent
C) g is greater than ke
D) the current dividend is known
Q4) When Google went public the firm sold its stock in an unusual way. What was that method and how did it impact future sales of IPOs?
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) The ____ is a statistical measure of the mean or average value of the possible outcomes.
A) probability distribution
B) standard deviation
C) expected value
D) coefficient of variation
Q2) If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is:
A) 2.86%
B) 7.02%
C) 4.70%
D) 6.48%
Q3) Arbitrage pricing theory is a model that relates expected returns on securities to
A) security risk and yield spreads
B) yield spreads and yield curve slope
C) anticipated economic factors
D) multiple risk factors
Q4) What is an efficient portfolio?
Q5) Why is risk an increasing function of time?
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In Step Video for this project?
A) $95,000
B) $99,000
C) $84,000
D) $107,000
Q2) A (n) ____ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.
A) depreciation charge
B) operating expenditure
C) capital expenditure
D) capital gain
Q3) List the steps that a firm uses in the capital budgeting process:
Q4) What are the principles that should be applied when estimating cash flows for capital budgeting purposes?
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) The disadvantages of the payback approach include:
A) cash flows after the payback period are ignored in the calculation
B) payback ignores the time value of money
C) payback fails to provide an objective decision-making criterion
D) all of the above
Q2) The reason for a postaudit is to
A) help financial managers reduce errors in cash flow estimation
B) reduce the number of accepted risky projects
C) reduce the number of projects submitted
D) determine the correct required rate of return
Q3) What is the internal rate of return for a project that has a net investment of $76,000 and net cash flows of $20,507 per year for 7 years?
A) 16%
B) 17%
C) 18.2%
D) 19%
Q4) List the advantages and disadvantages of the payback method.
Q5) Explain why the internal rate of return method is more popular than the net present value method. What are some potential problems with relying on the IRR method?
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) All of the following are advantages of the NPV-payback approach to risk analysis except
A) it is easy and inexpensive to apply
B) it considers a project's liquidity
C) it explicitly considers the variability of a project's return
D) it is consistent with the notion that risk increases with futurity
Q2) A simulation analysis for a new acquisition has indicated that the expected NPV is $50 million with a standard deviation of $40 million. Assume that NPV is normally distributed. What is the probability that the project will be unacceptable?
A) 89.44%
B) 10.56%
C) 39.44%
D) 21.19%
Q3) When analyzing a sensitivity curve, the ____ the slope, the more sensitive the net present value is to a change in the computed variable.
A) more negative
B) steeper
C) more general
D) smaller
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) For firms subject to the 34% marginal tax rate, the after-tax cost of ____ is roughly two-thirds the cost of preferred stock.
A) retained earnings
B) new common stock
C) long-term debt
D) retained earnings and new common stock
Q2) How is the marginal cost of the various component capital sources determined?
Q3) If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects
A) its cost of capital will rise
B) the average risk premium for the firm will decline
C) the risk-free rate will increase as more risk is added
D) its cost of capital will fall
Q4) What are the reasons that the cost of external equity is greater than the cost of internal equity?
Q5) What is the investment opportunity curve and how is it accomplished?
Q6) In considering the SML concept, the required returns for any individual security are dependent on certain values. List and discuss those values.
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) Due to both financial distress and agency costs, a firm should have a capital structure that
A) contains all debt
B) contains all equity
C) contains both debt and equity
D) contains only long-term debt
Q2) What is the present value of the tax shield to a firm that has a capital structure consisting of $100 million of perpetual debt and $180 million of equity, if the average interest rate on debt is 9%, the return on equity is 13%, and the marginal tax rate is 40%?
A) $72 million
B) $40 million
C) $60 million
D) $3.6 million
Q3) The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the
A) optimal corporate structure
B) target financial structure
C) optimal capital structure
D) optimal degree of combined leverage
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Page 15
Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) In evaluating a firm's degree of financial leverage, financial risk is ____________ with an increase in DFL.
A) increased
B) decreased
C) not impacted
D) reflective of excess inventory
Q2) Last year Avator's operating income (EBIT) increased by 22 percent while its dollar sales increased by 15%. What is Avator's degree of operating leverage (DOL)?
A) 0.68
B) 2.0
C) 1.47
D) 0.32
Q3) The degree of combined leverage is equal to the degree of operating leverage ____ the degree of financial leverage.
A) added to B) divided by C) multiplied by D) subtracted from
Q4) Explain the difference between short-run costs and long-run costs.
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Chapter 15: Dividend Policy
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Sample Questions
Q1) Nova earned $7.20 per share and maintains a stable payout ratio of 60 percent. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share?
A) $4.32
B) $2.88
C) $2.20
D) cannot be determined from the information provided
Q2) A firm with stable earnings is usually more willing to
A) retain more earnings
B) have a higher dividend payout ratio
C) have a sinking fund agreement
D) seek aggressive growth
Q3) Which of the following is not a direct result of a stock dividend?
A) the number of shares outstanding is increased
B) the market price of each outstanding share is increased
C) the amounts shown in the firm's capital accounts are redistributed
D) the per-share price of the stock goes up
Q4) What are the factors that determine the dividend policy of a firm?
Q5) What is a DRIP and how does it work?
Q6) What are the procedures for repurchasing stock?
Page 17
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Chapter 16: Working Capital Policy and Short-term Financing
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Q1) What are accrued expenses and how are they handled as unsecured short-term credit?
Q2) If a firm shows a profit on the quarterly income statement, then A) there will be no need for additional financing B) the firm may need additional financing
C) the firm will increase its cash balance
D) all the above may be correct
Q3) If Swatch's inventory conversion period is 45 days, its payables deferral period is 35 days, and its receivables conversion period is 50 days, then its cash conversion cycle must be ____ days.
A) 60
B) 90
C) 30
D) cannot be determined from information given
Q4) The optimal level of working capital investment is the level that is expected to A) maximize return on total assets
B) maximize earnings per share
C) maximize shareholder wealth
D) minimize interest expenses
Q5) What is financial forecasting?
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Chapter 17: The Management of Cash and Marketable Securities
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Sample Questions
Q1) The objective of cash collection and disbursement policies is to
A) minimize storage costs
B) speed up collections and slow down disbursements
C) maximize the return on near cash equivalents
D) avoid using float
Q2) ____ are short-term debt instruments issued as part of a commercial transaction, with payment guaranteed by a commercial bank.
A) Negotiable certificates of deposit
B) Commercial paper
C) Repurchase agreements
D) Bankers' acceptances
Q3) ____ are processed through the Automated Clearing House (ACH) System.
A) Drafts
B) Wire transfers
C) Check-like electronic images
D) Floats
Q4) Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements.
Page 19
Q5) Name the three primary components (or sources) of float:
Q6) Why do firms hold liquid asset balances?
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Page 20
Chapter 18: Management of Accounts Receivable and Inventories
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Q1) Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the optimal ordering frequency?
A) 37 days
B) 32 days
C) 40 days
D) 51 days
Q2) A numerical credit scoring system may rate all of the following EXCEPT:
A) D & B credit rating
B) location of the business
C) financial characteristics of the applicant
D) current ratio of the applicant
Q3) All other things being equal, the application of a seasonal dating to the terms of credit offered by the firms below would be expected to generate additional sales for each firm except
A) a Christmas novelty manufacturer
B) an agricultural implements manufacturer
C) a wholesale frozen food supplier
D) a swimsuit manufacturer
Q4) What are the "five Cs of credit"and how are they used?
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Chapter 19: Lease and Intermediate-term Financing
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Sample Questions
Q1) Index Laboratories is considering leasing a thermoplastic molder. The lease would require 7 beginning of the year payments of $122,000 each. If Index capitalizes this lease for financial reporting purposes at a 12% rate, what asset amount will be reported initially on its balance sheet?
A) $623,625
B) $969,046
C) $556,808
D) $854,000
Q2) What are the disadvantages of leasing?
Q3) Ajax Capital has determined that the amount to be amortized on an extruder is $540,000. What annual lease payment must Ajax (lessor) require from the lessee if the required rate of return is 16%? Assume that the lease payments will be made at the beginning of each of the 7 years of the lease agreement and that the marginal tax rate is 40%.
A) $288,140
B) $222,827
C) $115,256
D) $192,093
Q4) Explain a leveraged lease.
Q5) What are the advantages of leasing?
Page 22
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Chapter 20: Financing With Derivatives
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Q1) The conversion premium of a convertible bond tends to be ____ when the conversion value is ____ the straight-bond value.
A) smallest, nearly equal to B) largest, less than C) largest, greater than D) largest, nearly equal to
Q2) The ____ the time remaining before an option expires, the ____ the option value. A) longer, lower B) shorter, higher C) longer, higher D) shorter, lower
Q3) Conversion price is:
A) the number of common stock shares owned after the conversion.
B) the effective price of the common stock per share obtained by converting. C) the market price of the common stock per share.
D) the difference between the market price of the common stock and the exercise price of the stock.
Q4) What variables affect the call option valuation?
Q5) Why would a company issue convertible securities instead of straight bonds?
Page 23
Q6) List some securities that have option features.
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Chapter 21: Risk Management
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Q1) Which of the following statements about diversification is/are correct?
I. Diversification may be able to reduce the risk of a portfolio to less than the weighted average risk of the assets.
II.Diversification is always prudent and should be expanded to include new, unrelated products whenever possible.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q2) Which of the following is generally used to enforce rights under patents and copyrights?
A) Legal action
B) Takeover threats
C) Diversification
D) Retained earnings
Q3) List five hedging strategies for risk management
Q4) What options does the buyer of a futures contract have at the time the futures contract matures?
Q5) What is a hedge?
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Chapter 22: International Financial Management
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Q1) Firms engaged in international transactions incur ____ because of fluctuations in the exchange rates among currencies.
A) credit risk
B) political risk
C) market risk
D) exchange rate risk
Q2) In considering purchasing power parity, the relationship is:
I. not applicable due to tariffs.
II. is applicable in spite of trade barriers.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) A parent company's foreign investment risk exposure depends on the foreign subsidiary's net ____ position.
A) cash
B) equity
C) present value
D) working capital
Q4) How does a firm manage economic exposure due to changes in exchange rates?
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Chapter 23: Corporate Restructuring
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Q1) The reasons why a company may choose external growth by merger over internal growth include
A) economies of scale
B) more rapid growth
C) tax considerations and rapid growth
D) economies of scale, tax considerations, and more rapid growth
Q2) What is Essex's post-merger share price if the post-merger price/earnings ratio is 7.5, and the exchange ratio is 0.4. Assume total post-merger earnings are $43,740,000.
A) $60.75
B) $54.98
C) $64.80
D) $30.42
Q3) Which of the following terms are not associated with mergers and acquisitions?
A) white knight
B) tender offers
C) greenmail
D) declaration of bankruptcy
Q4) A new takeover defense is boardmail. How does it work?
Q5) How does a joint venture differ from a holding company?
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Chapter 24: Continuous Compounding and Discounting
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Q1) City Bank offers a 7 year CD with a nominal rate of interest of 7.0%. If compounding occurs continuously, what is the effective annual rate?
A) 7.25%
B) 6.77%
C) 7.32%
D) 7.00%
Q2) Fred deposited $5,000 in an account that promised a nominal interest rate of 8% compounded continuously for his daughter who will be going to college in 18 years. How much will she have in the account in 18 years?
A) $19,980
B) $20,054
C) $21,103
D) $21,694
Q3) With continuous compounding
A) the effective rate is higher than the nominal rate
B) the effective rate is higher than the logarithmic rate
C) the base "e" is the effective rate
D) all the above are correct
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Q1) ____ is (are) used when evaluating mutually exclusive investments having unequal lives.
A) Equivalent annual annuities
B) Replacement chains
C) Linear programming
D) a and b only
Q2) Marvec needs to replace an extruder and two replacements look good. Extruder A costs $102,000 and has a 10 year life. Extruder B costs only $56,000 but its expected life is 6 years. Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years. If Marvec's cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities. A) B, $564
B) B, $2,388
C) A, $1,646
D) A, $280
Q3) The importance of time discrepancies depends on several items when making capital budgeting decisions. State those items:
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Chapter 26: Breakeven Analysis
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Q1) The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes. The finished product sells for $60 with a variable cost per unit of $27. The company has fixed operating costs of $1,250,000. What is its breakeven point?
A) 22,187
B) 37,879
C) 56,124
D) 48,961
Q2) The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart. The finished product sells for $35 with a variable cost per unit of $21. The company has operating costs of $1,050,000. Using 100,000 units as a base, what is the degree of operating leverage?
A) 6.2
B) 5.7
C) 7.9
D) 4.0
Q3) How can a firm have more than one breakeven output point?
Q4) What are the possible uses for breakeven analysis?
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Chapter 27: Bond Refunding Analysis
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Q1) If interest rates decline, a firm should consider _______________ to take advantage of the lower interest rates.
A) selling fixed assets
B) stock sales
C) bond refunding
D) investing in marketable securities
Q2) When considering bond refunding, all of the following are important input items EXCEPT:
A) interest payments of old issue
B) weighted cost of capital
C) interest payments of new issue
D) after-tax cost of debt
Q3) In bond refunding analysis the ____ is believed to be the most appropriate discount rate.
A) after-tax cost of new debt
B) firm's marginal cost of capital
C) weighted average cost of capital
D) both b and c
Q4) What is the principal inflow and what is the principal outflow from a bond refunding situation?
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Chapter 28: Taxes
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/3398
Sample Questions
Q1) What is the tax liability in 2010 for a corporation with taxable income of $425,000?
A) $144,500
B) $132,750
C) $150,250
D) $122,700
Q2) Explain the difference between average tax rate and marginal tax rate.
Q3) AMX corporation had operating income of $420,000 in 2010; received $12,000 in interest income; paid $22,000 in interest; received $20,000 in dividends; and paid $50,000 in dividends. What is the tax liability for AMX?
A) $141,440
B) $146,200
C) $148,920
D) none of the above
Q4) How are dividends received by a corporation treated for tax purposes?
Q5) From a tax standpoint, the advantage of an S corporation is that
A) it avoids the double taxation of dividends
B) additional depreciation is allowed
C) it reduces dividend income
D) interest income is not taxed
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