Fundamentals of Financial Management Review
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Course Introduction
Fundamentals of Financial Management introduces students to the core principles and practices essential to effective financial decision-making within business organizations. The course covers key topics such as time value of money, financial statement analysis, risk and return, asset valuation, capital budgeting, cost of capital, and working capital management. Students will learn how to analyze financial information, understand the role of financial markets, and assess the impact of financial decisions on organizational performance. Practical case studies and problem-solving exercises prepare students to apply theoretical concepts to real-world financial scenarios.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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Sample Questions
Q1) The three main functions in the investments area are sales, the decisions that firms make concerning their cash flows, and determining the optimal mix of securities for a given investor.
A)True
B)False Answer: False
Q2) During the 1930s, investment experts suggested that stock value should be determined by computing the present value of the future cash flows associated with the stock.
A)True
B)False Answer: False
Q3) In the early 1900s, the investments arena was dominated by a small group of very wealthy investors and opulent corporations.
A)True
B)False Answer: True
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Page 3
Chapter 2: Financial Assets Instruments
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Sample Questions
Q1) A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.
A)True
B)False
Answer: True
Q2) An option is a contract which gives its holder the right to buy (sell) an asset at a predetermined price within a specified period of time.
A)True
B)False
Answer: True
Q3) The income that an investor earns from municipal bonds is
A) exempt from federal, state, and local taxes.
B) generally exempt from federal taxes, but most states impose local taxes.
C) generally exempt from state and local taxes, but taxed federally.
D) fully taxed by federal, state, and local authorities.
Answer: B
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Chapter 3: Financial Markets and the Investment Banking Process
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Sample Questions
Q1) The New York Stock Exchange is primarily
A) A secondary market.
B) An organized auction market.
C) An over-the-counter market.
D) Answers a and b above are both correct.
E) Answers b and c above are both correct.
Answer: D
Q2) When a firm makes an earnings announcement that is different than what the analysts expected the market price of the firm's stock adjusts immediately.This is evidence consistent with markets being ____ efficient but not ____ efficient.
A) weak-form; strong-form
B) weak-form; semistrong-form
C) strong-form; semistrong-form
D) semistrong-form; strong-form
Answer: D
Q3) Market efficiency refers only to the speed at which financial transactions occur.
A)True
B)False
Answer: False
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) If bank managers lobby to maintain America's traditional "dual banking" structure, they want
A) an option of either federal or state bank chartering.
B) to maintain the right to make loans and take deposits.
C) the right to fight competition.
D) the option of remaining a bank or a bank holding company.
E) All of the above.
Q2) Federal deposit insurance has prevented the failure of depository institutions. A)True
B)False
Q3) Which of the following is not an asset of a bank?
A) business deposits
B) consumer loans
C) deposits in other banks
D) government securities
E) All of the above are bank assets.
Q4) When the Federal Reserve sells an asset to the private sector, the money supply declines.
A)True B)False
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) The ____ premium is compensation for possibility that the borrower will not be able to debt's interest and principal on time.
A) inflation risk
B) maturity risk
C) liquidity risk
D) default risk
Q2) Long-term interest rates reflect expectations about future inflation.Inflation has varied significantly from year to year in the past, and as a result, long-term rates can be expected to fluctuate more than short-term rates.
A)True
B)False
Q3) Which of the following assets is the most liquid?
A) Stock
B) Treasury bills
C) Corporate bonds
D) Cash
Q4) Inflationary pressures are usually strongest during business booms.
A)True
B)False
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Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) Which of the following statements is correct?
A) Given the multi-owner nature of most large corporations, agency costs associated with perquisite consumption are not really a problem.
B) Managers may operate in the stockholders' best interests, but they may also operate in their own personal best interests.As long as managers stay within the law, there simply are not any effective controls that stockholders can implement to control managerial decision making.
C) Shareholder agency costs include the opportunity costs associated with constraining managerial freedom but do not include managerial salaries.
D) An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
E) All of the above statements are false.
Q2) Profit maximization does not always lead to wealth maximization because
A) it does not consider the riskiness of the cash flows.
B) it does not consider the timing of the cash flows.
C) it does not consider the size of the cash flows.
D) two of the above are correct.
E) all of the above are correct
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Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) All of the following represent cash outflows to the firm except A) Taxes.
B) Interest payments.
C) Dividends.
D) Purchase of plant and equipment.
E) Depreciation.
Q2) If a firm borrows money from a bank or reduces its level of inventory, these are both examples of sources of funds.
A)True
B)False
Q3) A firm has a profit margin of 15 percent on sales of $20,000,000.If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?
A) 8.4%
B) 10.9%
C) 12.0%
D) 13.3%
E) 15.1%
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9
Chapter 8: Financial Planning and Control
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Sample Questions
Q1) To forecast the balance sheet, the firm must:
A) Project the asset requirement for the coming period.
B) Project the liabilities and equity that will be provided by normal operations.
C) Estimate the additional funds needed.
D) All of the above.
Q2) The Price Company will produce 55,000 widgets next year.Variable costs will equal 40 percent of sales, while operating fixed costs will total $110,000.At what price must each widget be sold for the company to achieve an EBIT of $95,000?
A) $2.00
B) $4.45
C) $5.00
D) $5.37
E) $6.21
Q3) If EBIT doubles when sales doubles, then the firm's degree of operating leverage must be exactly two.
A)True
B)False
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10
Chapter 9: Time Value of Money
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Sample Questions
Q1) Which of the following statements is correct?
A) The PV of an ordinary annuity will be larger than the PV of an annuity due, other things held constant.
B) The effective annual rate will always be greater than the simple rate except in situations where the periodic rate is equal to the simple rate.
C) If you were borrowing money from a bank, and the simple interest rate was 10 percent, you would be better off if the bank used daily rather than quarterly compounding.
D) If you were borrowing money from a bank, and the simple interest rate was 10 percent, daily compounding, you would be better off if the bank used a 365-day year rather than a 360-day year.
E) $100 placed in a bank account which pays 6 percent will double faster if the bank pays interest annually rather than daily.
Q2) Solving for the interest rate associated with a stream of uneven cash flows, without the use of a calculator, usually involves a trial and error process.
A)True
B)False
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Page 11
Chapter 10: Valuation Concepts
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Sample Questions
Q1) Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40.If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
A) $619
B) $674
C) $761
D) $828
E) $902
Q2) Which of the following will generally result in a higher price for a bond?
A) Higher coupon rate.
B) Longer maturity.
C) Shorter maturity.
D) Higher required rate of return.
Q3) The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.
A)True
B)False
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Page 12
Chapter 11: Risk and Rates of Return
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Sample Questions
Q1) Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)
A) When held in isolation, Stock A has greater risk than Stock B.
B) Stock B would be a more desirable addition to a portfolio than Stock A.
C) Stock A would be a more desirable addition to a portfolio than Stock B.
D) The expected return on Stock A will be greater than that on Stock B.
E) The expected return on Stock B will be greater than that on Stock A.
Q2) Assume there are only three possible states of nature for the economy in the future: boom, normal, and recession.If there is a 25% chance of a recession and a 30% chance of a boom, then what is the probability of a normal economy in the future?
A) 45%
B) 30%
C) 25%
D) 100%
Q3) Investment risk can be measured by the variability of all the investment's returns, both "good" and "bad."
A)True
B)False
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) The cost of debt outstanding or the historical cost of debt is the appropriate component cost of debt that should be used in the firm's investments decisions.
A)True
B)False
Q2) The investment opportunity schedule is a graph of the firm's investment opportunities ranked in order of the projects' expected rates of return.
A)True
B)False
Q3) Publicly placed bonds do not typically involve flotation costs due to the availability of publicly placed funds, but privately placed debt typically does involve flotation costs because of the difficulty involved in raising private funds.
A)True
B)False
Q4) ____ is the portion of net income not paid out in the form of dividends.
A) Par value
B) Paid in capital
C) Retained earnings
D) Common equity
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Page 14
Chapter 13: Capital Budgeting
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Sample Questions
Q1) California Mining is evaluating the introduction of a new ore production process.Two alternatives are available.Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use.Production Process B also requires an initial investment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year.Management believes that a risk-adjusted discount rate of 12 percent should be used for Process A.If California Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B?
A) 8%
B) 10%
C) 12%
D) 14%
E) 16%
Q2) Only the incremental after-tax cash flows associated with a capital project are relevant in capital budgeting.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) If we consider only agency costs associated with the issuance of debt, then this implies that the firm should move toward 100 percent debt financing.
A)True
B)False
Q2) A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.
A)True B)False
Q3) The degree of financial risk is the single most important determinant of a firm's capital structure.
A)True
B)False
Q4) Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used.
A)True B)False
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Chapter 15: Working Capital Management
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Sample Questions
Q1) Refer to East Lansing Appliances.What would be the incremental bad debt losses if the change were made?
A) $315,000
B) $260,500
C) $260,500 (bad debt losses would decline)
D) $315,000 (bad debt losses would decline)
E) $0 (no change would occur)
Q2) The economic ordering quantity will rise due to an increase in which of the following variable(s)?
A) Product demand (sales).
B) Carrying costs.
C) Ordering costs.
D) Both a and b above.
E) Both a and c above.
Q3) Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.
A)True
B)False
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Page 17
Chapter 16: Investment Concepts
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Sample Questions
Q1) A ____ order is an order to execute at the best price available when the transaction reaches the market.
A) limit
B) stop
C) trade
D) market
Q2) You have an arrangement with your brokerage firm that allows you to purchase stock on margin with an initial margin requirement of 25 percent and a broker loan rate of 10 percent.What is the maximum amount of stock you can purchase on margin if you have $20,000 to invest?
A) $150,000
B) $72,000
C) $80,000
D) $22,000
E) $200,000
Q3) When an investor places a stop order, he or she is telling the broker to "stop" an order that was placed previously but hasn't been executed yet.
A)True
B)False
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Page 18
Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) An investor who uses the P/E ratio approach to value a firm's common stock would simply multiply the most recently reported earnings per share (EPS) by the current dividend per share to determine the value.
A)True
B)False
Q2) Industries generally go through life cycles similar to the human life cycle in the first years of an industry's life growth is substantial, yet operations are somewhat unstable, while in its later years, the industry has attained greater stability, but growth slows and perhaps even declines.
A)True
B)False
Q3) The means by which the Federal Reserve influences economic conditions in the United States is called ____.
A) Deficit spending
B) Fiscal policy
C) Monetary policy
D) Gross domestic product
E) Business cycle
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