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Financial Strategy Midterm Exam - 2109 Verified Questions

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Financial Strategy

Midterm Exam

Course Introduction

Financial Strategy is a course that equips students with the analytical tools and frameworks necessary to make informed financial decisions within organizations. The course covers topics such as capital structure, dividend policy, mergers and acquisitions, valuation techniques, and risk management. Students learn how to align financial policies with business objectives, assess various sources of financing, and understand the impact of financial decisions on firm value. Emphasizing real-world case studies, the course fosters strategic thinking and practical skills essential for navigating complex financial environments and driving long-term corporate success.

Recommended Textbook

Contemporary Financial Management 13th Edition by R. Charles Moyer

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27 Chapters

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Page 2

Chapter 1: The Role and Objective of Financial Management

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Sample Questions

Q1) Many small business owners are diversified with respect to their personal wealth.

A)poorly

B)highly

C)well

D)90%

Answer: A

Q2) The most important managerial objective is to:

A)make MC=MR

B)maximize profits

C)minimize agency costs

D)none of these

Answer: D

Q3) All of the following are advantages of the corporate form of business organization

EXCEPT:

A)unlimited life

B)unlimited liability

C)flexibility in ownership change

D)ability to raise capital

Answer: B

Page 3

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Chapter 2: The Domestic and International Financial Marketplace

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Q1) Which of the following is not a correct statement about foreign currency futures?

A)futures contracts have a standardized maturity date

B)futures contracts are an exchange-traded agreement

C)futures contracts are not liquid

D)futures contracts are "marked to market" daily

Answer: C

Q2) The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price or return information is an example of market efficiency.

A)strong-form

B)weak-form

C)semiweak-form

D)semistrong-form

Answer: B

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Chapter 3: Evaluation of Financial Performance

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Q1) Nukin' Gnats Pest Control is trying to determine its cash flow per share.It has revenue of $50,000, $35,000 of expenses, $4,000 of depreciation and $3,000 of interest expense.The firm is in the 40% tax bracket.The firm has 75,000 shares of common stock outstanding.The firm has a $15 price per share.Its price to cash flow is:

A).0057

B).0098

C).0076

D).0029

Answer: D

Q2) What is the market price per share of Big Whoop, Inc.if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to book ratio of 1.5?

A)$16.20

B)$10.80

C)$7.20

D)$12.40

Answer: A

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Chapter 4: Financial Planning and Forecasting

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Q1) Calculate United's total assets if the firm expects sales to grow by 15% this year and the earnings after tax will be $50,000.United paid $20,000 in dividends last year and expects to increase dividends 10% this year.The firm will need additional financing of $25,000 to finance the expected growth.

A)$393,333

B)$590,000

C)$226,667

D)$616,000

Q2) Using a cash budget is more useful than the percentage of sales method because:

A)Only statement I is correct

B)Only statement II is correct

C)Both statements I and II are correct

D)Neither statement I nor II is correct

Q3) Strategic planning for a firm deals with which of the following items?

A)Only statement I is correct

B)Only statement II is correct

C)Both statements I and II are correct

D)Neither statement I nor II is correct

Q4) Explain the cash flow generation process:

Q5) What information does a long-term financial plan offer?

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Chapter 5: The Time Value of Money

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Sample Questions

Q1) When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years.What is your monthly payment?

A)$153.33

B)$637.86

C)$584.12

D)$559.78

Q2) Your firm, New Sunrise, has just leased a $28,000 BMW for you.The lease requires six beginning of the year payments that will fully amortize the cost of the car.What is the amount of the payments if the interest rate is 12 percent?

A)$6,810.99

B)$7,766.99

C)$6,423.74

D)$6,081.25

Q3) is the return earned by someone who has forgone current consumption.

A)the present value

B)principle

C)an annuity

D)interest

Q4) Compare the difference between compound interest and simple interest.

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Chapter 5: A: The Time Value of Money

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Q1) Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly.What is the effective rate the bank is charging you?

A)12.68%

B)10.00%

C)10.47%

D)10.83%

Q2) In the continuous compounding equation, "e" is the A)natural log to the base 10. B)base number in natural logarithms

C)natural log to the base 1. D)none of the above are correct

Q3) Brad deposited $5,250 into an account that earns 7% interest compounded continuously.How much money will he have in 15 years?

A)$15,002.67

B)$12,175.90

C)$13,957.14

D)$14,964.25

Q4) With continuous compounding, why is the effective rate higher than the nominal rate?

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Chapter 6: Fixed-Income Securities: Characteristics and Valuation

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Sample Questions

Q1) Grace Corp.has a zero-coupon bond outstanding that matures in 15 years.This bond is selling for $327.50 today and will pay $1,000 at maturity.What is the yield to maturity to the investor who buys the bond and holds it until maturity?

A)7.73%

B)9.33%

C)9.23%

D)9.77%

Q2) A General Electric 7½25 bond closed at 98.What is the current yield?

A)7.65%

B)7.81%

C)7.50%

D)7.34%

Q3) The value of a perpetual bond is equal to the annual interest payment divided by the:

A)risk-free rate

B)required rate of return

C)bank interest rate

D)after-tax historical cost of capital

Q4) How does a firm value an asset?

Q5) List the advantages and disadvantages of long-term debt financing:

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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance

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Sample Questions

Q1) Haulin' It Towing Company is selling a stock for $16.The stock just paid a dividend of $.60 and this dividend is expected to grow by 15% per year for three years.After that it will grow at a constant rate of 4%.The stock's beta is 1.7, the risk-free rate of interest is 1.75% and the market risk premium is 5.25%.Should you buy the stock? (Round to dollars and cents or two decimal points)

A)No, the stock is not a good value since it is only worth about $8.

B)No, the stock is not a good value since it is only worth about $12.

C)Yes, the stock is a good value since it should sell for about $25.

D)Yes, the stock is a good value since it should sell for about $18.

Q2) The zero growth method is used to value

A)common stock

B)required rate of return

C)bonds

D)preferred stock

Q3) Many preferred stocks are treated as in determining their values.

A)Fixed assets

B)Perpetuities

C)Convertible securities

D)Constant growth securities

Q4) List the responsibilities of investment bankers.

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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) Values of the can range from +1.0 to -1.0.

A)coefficient of variation

B)correlation coefficient

C)standard deviation

D)covariance

Q3) The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%.Determine the probability of earning a negative rate of return (i.e.less than 0%) on FTC common stock.(Note: Table V is required to work this problem.)

A)0.0228

B)2.00

C)0.5000

D)0.9772

Q4) Explain marketability risk and marketability premium.

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Chapter 9: Capital Budgeting and Cash Flow Analysis

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Sample Questions

Q1) Why should sunk costs not be considered when evaluating a project?

Q2) Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000.The line will be depreciated as a 7-year MACRS asset.With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000.If Ripstart expects to sell the new machine at the end of year 5 for $40,000, compute the net cash flow in the fifth year.The MACRS depreciation rate during the fifth year is 8.93% and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset.Assume the firm's marginal tax rate is 40 percent and that company does get to take the full benefit of year 5 depreciation.

A)$29,751

B)$53,736

C)$75,615

D)$69,751

Q3) List the steps that a firm uses in the capital budgeting process:

Q4) Most firms choose accelerated depreciation methods because

A)reported net income is higher

B)tax payments are made sooner, resulting in a lower deferred tax liability

C)operating expenses are correspondingly reduced

D)income taxes are deferred

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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations

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Sample Questions

Q1) TexMex is considering replacing its tortilla machine with a new model that sells for $46,000 including the cost of installation.The old machine has been fully depreciated and has a $0 salvage value.The new machine will be depreciated as a 3-year MACRS asset.Revenues are expected to increase $18,000 per year over the 5 year life of the new machine.At the end of 5 years the new machine is expected to have no salvage value.What is the IRR for this project if TexMex has a required rate of return of 14% and a marginal tax rate of 40%? Operating costs are not expected to increase from the current level of $8,000 per year.

A)21.0%

B)14.0%

C)19.3%

D)5.7%

Q2) What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000;Year 2 = $20,000;Year 3 = $25,000;Year 4 = $30,000?

A)17.3%

B)16.7%

C)15.7%

D)16.3%

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Chapter 10: A: Capital Budgeting: Decision Criteria and Real Option Considerations

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Sample Questions

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) What would be the equal annual annuity for Wallflowers Florist, Inc.if the cost of capital is 10% and the initial investment is $50,000 (rounded)?

\[\begin{array} { | c | c | }

\hline \text { Year } & \text { Cash Inflows } \\

\hline 1 & \$ 25,000 \\

\hline 2 & \$ 30,000 \\

\hline 3 & \$ 10,000 \\

\hline

\end{array}\]

A)$2,024

B)$5,033

C)$1,257

D)$8,358

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Chapter 11: Capital Budgeting and Risk

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Sample Questions

Q1) Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a risk-adjusted discount rate for its can division of 17 percent.A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years.Should Calco invest in this expansion?

A)Yes, NPV = $10,096

B)Yes, NPV = $9,896

C)No, NPV = -$5,276

D)No, NPV = -$9,896

Q2) What is the reason companies utilize the certainty equivalent approach in evaluating projects?

Q3) The the amount of debt in a firm's capital structure, the will be the firm's beta.

A)larger, larger

B)smaller, larger

C)larger, smaller

D)smaller, smaller

Q4) How can beta, a measure of systematic risk of a portfolio of securities, be used to judge the risk of a firm?

Q5) What are the weaknesses of the net present value/payback approach?

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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy

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Sample Questions

Q1) How is the marginal cost of the various component capital sources determined?

Q2) If a firm will use only equity funds during the current capital budgeting period then the is the correct capital cost to use for computing the cost of funds for the firm.

A)cost of equity capital

B)weighted cost of funds

C)historical cost of funds

D)all of these answers are correct

Q3) The cost of common stock equity may be estimated by using which of the following?

A)Earnings curve

B)Dupont analysis

C)Capital asset pricing model

D)Price/Earnings ratio

Q4) The optimal capital budget is indicated by the point at which the and the intersect.

A)depreciation schedule;investment opportunity schedule

B)investment opportunity curve;marginal cost of capital curve

C)investment opportunity curve;average cost of capital curve

D)efficient portfolio curve;marginal cost of capital curve

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Chapter 13: Capital Structure Concepts

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Sample Questions

Q1) The process of simultaneously buying and selling the same or equivalent securities in different markets to take advantage of price differences and make a profit is called:

A)option pricing

B)diversification

C)arbitrage

D)margining

Q2) The Modigliani-Miller theory that the value of the firm is independent of its capital structure is based on a(n) ?process.

A)reinvestment

B)capital asset pricing model

C)arbitraging

D)compound interest

Q3) There are many factors that influence a firm's business risk.List them.

Q4) The optimal capital structure is determined by several factors including all of the following except:

A)corporate capital gains

B)business risk

C)potential bankruptcy risk

D)agency costs

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Chapter 14: Capital Structure Management in Practice

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Q1) Dagger Company has a current capital structure consisting of$60 million in long-term debt with an interest rate of 9% and $60 million in common equity (12 million shares).The firm is considering an expansion plan costing $23 million.The expansion plan can be financed with additional long-term debt at a 12% interest rate or the sale of new common stock at $8 per share.The firm's marginal tax rate is 40%.Determine the indifference level of EBIT for the two financing plans.

A)-$30.24 million

B)$18.36 million

C)$30.24 million

D)$19.68 million

Q2) 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

Q3) List the five steps developed to assist financial managers in making capital structure decisions.

Q4) What are the effects of leverage on shareholder wealth and the cost of capital?

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Chapter 14: A: Capital Structure Management in Practice

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Sample Questions

Q1) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.

Q2) Breakeven analysis is normally performed for a planning period of:

A)five years

B)one year or less

C)ten years

D)one month

Q3) The breakeven point occurs where total revenues intersect with:

A)market returns

B)the risk-free rate

C)total costs

D)total interest and taxes

Q4) Breakeven analysis can be used to assess risk.

A)financial

B)operating

C)sales

D)volume

Q5) How can a firm have more than one breakeven output point?

Q6) List the limitations of breakeven analysis:

Q7) What are the possible uses for breakeven analysis?

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Chapter 15: Dividend Policy

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Q1) Sadaplast has just declared a 25 percent stock dividend.The annual dividend, before the stock dividend was declared, was $1.00.Sadaplast intends to pay a dividend of $1.05 per share after the stock dividend is paid.What is the percentage increase in the cash dividend that will accompany the stock dividend?

A)6.25%

B)26.25%

C)31.25%

D)5.00%

Q2) Grabill Aerospace Company has just declared a 15% stock dividend.Immediately prior to the stock dividend, the stock was selling for $23 and had a P/E ratio of 14.Calculate the post-stock dividend price of Grabill's stock.

A)$26.45

B)$20.00

C)$26.22

D)$20.18

Q3) What effect does a stock split have on outstanding shares of stock and what is its purpose?

Q4) What are the procedures for repurchasing stock?

Q5) What is the signaling effect of dividend payments?

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Chapter 16: Working Capital Management

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Sample Questions

Q1) 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

Q2) Sherwood Packing had sales of $3.2 million and a gross profit margin of 35% last year.If Sherwood's inventory averaged $0.4 million last year, what was the length of the inventory conversion period?

A)130.4 days

B)70.2 days

C)195.5 days

D)45.6 days

Q3) All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt will tend to result in expected after-tax earnings for the firm.

A)large, lower

B)constant, higher

C)constant, lower

D)large, higher

Q4) Explain trade credit.

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Chapter 17: The Management of Cash and Marketable Securities

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Q1) Firms that have large multi-million dollar remittances use:

A)the Federal Reserve System

B)couriers

C)lockboxes

D)wire transfers

Q2) Name the three primary components (or sources) of float:

Q3) Which of the following is/are considered an intangible banking service?

A)Only statement I is correct

B)Only statement II is correct

C)Both statements I and II are correct

D)Neither statement I nor II is correct

Q4) In addition to providing their commercial customers with lines of credit and/or term loans, banks provide all of the following tangible services except:

A)handling of dividend payments

B)registration and transfer of a firm's stock

C)establishment of credit terms

D)cash management

Q5) Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements.

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Chapter 18: The Management of Accounts Receivable and Inventories

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Q1) For the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result in

A)increased sales

B)higher inventory investment and warehousing costs

C)lower receivables investment cost

D)an offer of a cash discount

Q2) Tool Mart sells 1,400 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

Q3) The objective of offering seasonal datings to customers is to

A)encourage customers to place their orders prior to the peak selling period

B)speed up the collection of accounts receivable

C)increase the firm's inventory storage costs

D)reduce the number of bad checks received from customers

Q4) What are seasonal datings as it applies to credit terms?

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Q5) What information could be used to judge the credit worthiness of a customer?

Chapter 19: Lease and Intermediate-Term Financing

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Q1) In the net advantage to leasing calculation, after-tax salvage value is discounted at the firm's

A)weighted (marginal) cost of capital

B)cost if internal equity capital

C)cost of external equity capital

D)after-tax marginal cost of borrowing

Q2) Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years.Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0.Actual salvage value is expected to be $8,000 at the end of 4 years.If Wrenn requires a 12 percent after-tax return on the lease, what is the lease payment that Wrenn will require from Contech? Assume a marginal tax rate of 40%.Under the terms of the lease, payments will be made at the beginning of each of the 4 years.

A)$11,385

B)$28,463

C)$18,975

D)$21,252

Q3) What are the advantages of leasing?

Q4) Explain a leveraged lease.

Q5) In a leveraged lease, what items secure the mortgage bonds of the lender?

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Chapter 20: Financing with Derivatives

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Q1) A warrant has an exercise price of $15.The underlying common stock has a market price of $10.The formula value of a warrant would be

A)$5

B)$0

C)-$5

D)cannot be determined from the information given

Q2) The the expected stock price volatility, the the value of the call option.

A)greater, higher

B)lower, higher

C)greater, lower

D)lower, lower

Q3) Conversion of a convertible security may be forced by the issuing company by

A)raising the interest rate

B)calling the securities for redemption

C)lowering the dividend on common stock

D)none of these are methods of forcing conversion

Q4) What is the difference between a conversion price and a conversion ratio?

Q5) List some securities that have option features.

Q6) Why would a company issue convertible securities instead of straight bonds?

Q7) What is an interest rate swap? Describe how they are used.

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Chapter 20: A: Financing with Derivatives

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Q1) Why would a corporation consider bond refunding?

Q2) 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

Q3) Why is the after-tax cost of debt used in bond refunding analysis?

Q4) In a bond refunding analysis, the net investment calculation includes

A)aftertax call premium

B)flotation cost of new debt

C)overlapping interest

D)all of these

Q5) When a bond is called, the old issue is retired and the bondholder receives:

A)new, lower interest rate bonds

B)new corporate stock

C)a cash payoff

D)treasury stock

Q6) What is the principal inflow and what is the principal outflow from a bond refunding situation?

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Chapter 21: Risk Management

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Q1) In the futures market, losers must pay winners each day.This is called:

A)paying up

B)selling short

C)taking a long position

D)marking to market

Q2) Which of the following is a motive for using insurance to manage risk?

A)Premiums, no matter how high, are consistent and easy to budget.

B)The firm intends to make money from the insurance company if a specified loss happens.

C)The firm does not want to be concerned with small, inconsequential losses and chooses to have the insurance company handle them.

D)Insurance can provide protection against events that can cause financial distress.

Q3) All of the following are reasons to reduce financial distress EXCEPT:

A)enhanced debt capacity.

B)reduced WACC.

C)better currency exchange ratio.

D)ensure adequate cash flows.

Q4) List some nonhedging risk management strategies.

Q5) List five hedging strategies for risk management

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Chapter 22: International Financial Management

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Q1) The states that the differences in interest rates between two countries should be offset by equal, but opposite, changes in the future spot exchange rate.

A)expectations theory

B)interest rate parity

C)purchasing power parity

D)international Fisher effect

Q2) Which of the following trade policies will tend to decrease the supply of the country's currency in the foreign exchange market?

A)imposition of tariffs

B)imposition of export quotas

C)financing exports with low interest loans

D)imposition of tariffs and export quotas

Q3) What is the nominal interest rate in Canada if the real rate of return is 2.5% and the expected inflation rate was 4.5%

A)7.00%

B)6.89%

C)7.11%

D)7.07%

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Chapter 23: Corporate Restructuring

Available Study Resources on Quizplus for this Chatper

75 Verified Questions

75 Flashcards

Source URL: https://quizplus.com/quiz/22897

Sample Questions

Q1) A(n) is a situation in which a failing business is permitted to lengthen the amount of time it has to meet its obligations with creditors.

A)assignment

B)composition

C)extension

D)insolvency

Q2) Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg's current market price.

A)0.375

B)2.22

C)0.45

D)0.288

Q3) In a , the acquiring company effectively announces that it will pay a certain price above the current existing price for a merger candidate's shares.

A)leveraged buyout

B)tender offer

C)equity carve-out

D)divestiture

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