Fundamentals of Financial Management Exam Solutions
Course Introduction
Fundamentals of Financial Management introduces students to the essential principles and practices of financial decision-making within organizations. The course covers key topics such as financial analysis, planning and control, working capital management, valuation of assets, capital budgeting, risk and return analysis, and the various sources of short- and long-term financing. Students will learn how managers use financial information to make strategic decisions, maximize shareholder value, and ensure the financial health of their organizations. Emphasis is placed on analytical tools and techniques that are widely used in the financial industry.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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16 Chapters
1175 Verified Questions
1175 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.
A)True
B)False Answer: False
Q2) Which of the following functions deals with the management of money?
A) Marketing
B) Investment
C) Financial services
D) Information systems
E) Managerial finance
Answer: C
Q3) Cultural differences do not impact the multinational corporations as they expand into different geographic regions.
A)True
B)False
Answer: False
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3
Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) Which of the statements is true about the values recorded in the balance sheet of a firm?
A) The book values of a firm's assets will be equal to the market values of the firm's assets.
B) The book values of a firm's liabilities will be higher than the market values of the firm's liabilities.
C) The equity section of a firm's liability represents the difference between the market value of the firm's assets and the market value of the firm's liabilities.
D) The book values of a firm's assets will be higher than the market values of the firm's assets.
E) The book values of a firm's debt will be very close to the market values of the firm's liabilities.
Answer: E
Q2) A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.
A)True
B)False
Answer: False
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) Listing requirements of a security, which has no maturity date, refer to the _____.
A) characteristics a firm must possess to be listed on a stock exchange
B) characteristics a firm must possess to be listed with the securities and exchange commission
C) characteristics a firm must possess to be listed on a debt exchange
D) characteristics a firm must possess to be listed on an options exchange
E) characteristics a firm must possess to be listed on a primary exchange
Answer: A
Q2) An over-the-counter market is a network of brokers and dealers, connected electronically by telephones and computers that provides for trading in securities not listed on the physical stock exchanges.
A)True
B)False
Answer: True
Q3) Dual listing of a stock leads to a decrease in the liquidity of the stock.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is
A) $1,918
B) $1,855
C) $2,097
D) $2,355
E) $1,784
Q2) The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.
A) discounting
B) compounding
C) amortization
D) consolidation
E) annualizing
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Securities that can be easily converted to cash in the market will have a low:
A) liquidity premium.
B) maturity risk premium.
C) inflation premium.
D) default risk premium.
E) real risk premium.
Q2) Which of the following is the yield of a bond that offers a risk-free rate of 4% and a risk premium of 2%?
A) 2%
B) 8%
C) 12%
D) 6%
E) 9%
Q3) The higher the expected rate of inflation:
A) the lower is the loss in purchasing power of investors.
B) the higher is the required rate of return on investment.
C) the lower is the maturity premium required by the investors.
D) the higher is the money supply in the economy.
E) the lower is the tax rate in the economy.
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Page 7
Chapter 6: Bonds Debtcharacteristics and Valuation
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Sample Questions
Q1) A bond's value will increase with increases in interest rate over time.
A)True
B)False
Q2) Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall.
A)True
B)False
Q3) A bond differs from a term loan in that:
A) a bond issue is negotiated between a financial institution and an investor.
B) a bond is sold to a financial institution only.
C) a bond is offered to the public at a variable coupon rate.
D) a bond has a high issuance cost.
E) a bond involves minimal formal documentation.
Q4) Changes in a firm's bond rating affect its ability to:
A) claim deductions in tax liability computation.
B) procure raw material in sufficient quantity for manufacturing processes.
C) increase the coupon rate on bonds issued to investors.
D) borrow long-term capital and the cost of such funds.
E) exercise a call provision on its bonds.
Page 8
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Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) In the EVA equation, the _____ is subtracted from the after-tax operating income to determine the economic value added.
A) marginal tax
B) operating cash flows
C) current intrinsic value
D) average cost of funds
E) total capital invested
Q2) Certificates representing ownership in stocks of foreign companies, which are held in a trust bank located in the country the stock is traded are called _____.
A) certificates of ownership
B) foreign stock funds
C) mutual funds
D) American depository receipts
E) investment bankers
Q3) A proxy fight is an attempt by a group to gain control of a firm by convincing its stockholders to give the group the authority to vote their shares in order to elect a new management team.
A)True
B)False
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Page 9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The chance of receiving an actual return that differs from the one that is expected is called _____.
A) probability distribution
B) beta
C) risk
D) change in beta
E) payoff
Q2) In a given portfolio, replacing an existing investment with a lower beta investment results in _____.
A) an increase in the expected rate of rate return of the portfolio
B) a decrease in the actual rate of return of the portfolio
C) a decrease in the required rate of return of the portfolio
D) an increase in the systematic risk of the portfolio
E) the portfolio beta moving toward 1.0
Q3) The relevant risk, the risk for which investors should be compensated, is that portion of the total risk that cannot be diversified away.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.
A)True
B)False
Q2) Which of the following results from a negative cash flow that occurs at the end of a project's life in addition to the initial investment in the project?
A) Higher return from the investment in the project
B) Lower project terminal value as compared to the cost of the project
C) Negative net cash flow from the project
D) More than one internal rate of return (IRR) of the project
E) Shorter payback period for the project
Q3) Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.
A)True
B)False
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11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) Chovita Sports Company evaluated a project as a low-risk project. Chovita generally evaluates projects that are less risky than average by adjusting its required rate of return by 2 percent. If Chovita expects 12% return on average risk projects, then it should expect a return of _____ for a less-risky project.
A) 8%
B) 12%
C) 16%
D) 10%
E) 48%
Q2) A project with more corporate risk than average will also have:
A) less political risk.
B) more beta risk.
C) less project risk.
D) less exchange rate risk.
E) less depreciation risk
Q3) If an asset being considered for acquisition has a beta of zero, its expected return will be equal to the risk-free rate.
A)True
B)False
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Page 12
Chapter 11: The Cost of Capital
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Sample Questions
Q1) The next year's net income of Byron Corporation is projected to be $21,000, and its payout ratio is 30 percent. Its target capital structure is 40 percent debt and 60 percent common equity. What is the retained earnings break point?
A) $35,000
B) $24,500
C) $6,300
D) $12,600
E) $8,400
Q2) The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock.
A)True
B)False
Q3) The target capital structure of a firm is the capital structure that:
A) minimizes the operating risk of the firm's assets.
B) maximizes the tax shield created by debt.
C) minimizes the default risk of long-term debt.
D) maximizes the price of the firm's stock.
E) minimizes the risk premium paid on long-term debt.
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Chapter 12: Capital Structure
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Sample Questions
Q1) Which of the following statements is true of capital structures around the world?
A) There have been no significant observed differences between the capital structures of U.S. corporations and their German and Japanese counterparts.
B) Different countries use essentially the same international accounting conventions with respect to reporting assets on a historical versus replacement cost basis.
C) An analysis of both bankruptcy and equity reporting costs leads to the conclusion that U.S. firms have more equity and less debt than firms in Japan and Germany.
D) Equity monitoring costs are higher in the United States than in Japan and Germany.
E) Debt monitoring costs are lower in the United States than in Japan and Germany.
Q2) The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good.
A)True
B)False
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14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) The information content hypothesis proposes that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization.
A)True
B)False
Q2) The theory that investors regard dividend changes as signals of management's earnings forecasts is called the _____.
A) information content hypothesis
B) dividend relevance theory
C) clientele effect
D) free cash flow hypothesis
E) residual dividend policy
Q3) Firms with a large number of acceptable capital budgeting projects generally have high dividend-payout ratios.
A)True
B)False
Q4) A firm repurchases stock to distribute excess funds.
A)True
B)False
Page 15
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) The average cash conversion cycle of U.S. firms is more than twice the average cash conversion cycle of European firms.
A)True B)False
Q2) The inventory conversion period of a firm is equivalent to the average age of its inventory.
A)True B)False
Q3) Compensating balances to be maintained with the bank decrease the effective rate on a loan.
A)True
B)False
Q4) Maturities of commercial paper range from:
A) one month to nine months.
B) one month to twelve months.
C) one year to three years.
D) one year to ten years.
E) five years to ten years.
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) Which of the following inventory management techniques gives the optimal amount of inventory to be purchased?
A) Economic order quantity model
B) Lockbox system
C) Payables system
D) Outsourcing arrangement
E) Quantity discount model
Q2) Which of the following statements is correct regarding cash budgets?
A) Cash disbursements for credit purchases are not included in cash budgets.
B) Only cash inflow from cash sales are included in cash budgets.
C) The target cash balance set in cash budgets are fixed.
D) Cash budgets do not include cash flow through investment activities.
E) Cash budgets include the tax expenses of a firm.
Q3) Concentration banking is one way for a firm to speed up the receipt of payments from customers.
A)True
B)False
Q4) A firm should adopt a new credit policy if it reduces the value of the firm.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) The percentage change in earnings before interest and tax (EBIT) associated with a given percentage change in sales is known as the _____.
A) degree of financial leverage
B) degree of total leverage
C) degree of operating leverage
D) degree of combined leverage
E) degree of contribution margin leverage
Q2) Lumpy assets are assets that cannot be acquired in small increments; they must be obtained in large, discrete amounts.
A)True
B)False
Q3) A firm utilizes 75 percent of its plant capacity to produce the current year's sales of $3,000 million. Which of the following is the full-capacity sales of the firm?
A) $2,000 million
B) $2,200 million
C) $3,000 million
D) $3,450 million
E) $4,000 million
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