Fundamentals of Financial Management
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Course Introduction
Fundamentals of Financial Management introduces students to the essential concepts and principles of financial management within organizations. The course explores topics such as time value of money, financial statement analysis, risk and return, capital budgeting, cost of capital, and working capital management. Emphasis is placed on practical decision-making tools and strategies that financial managers use to maximize the value of a firm, including financial planning, investment evaluation, and financing decisions. Through real-world case studies and problem-solving exercises, students develop a foundational understanding of how financial decisions impact the overall success and sustainability of a business.
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Financial Management Core Concepts 2nd Edition by Raymond Brooks
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Chapter 1: Financial Management
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Q1) All financial transactions have a buyer and a seller.
A)True
B)False
Answer: True
Q2) Which of the following is NOT a capital budgeting question?
A) The choice of which long-term assets to purchase to meet the firm's business goals
B) The choice of what type of business a firm wants to operate
C) The proper mix of stocks and bonds to issue for financing assets
D) None of the above are capital budgeting questions.
Answer: C
Q3) Managing the firm's short-term financing activities is known as ________.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
Answer: D
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Chapter 2: Financial Statements
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Q1) Which of the following identities is TRUE?
A) Operating Cash Flow = EBIT + Depreciation - Taxes
B) Net Capital Spending = Ending Net Fixed Assets - Depreciation
C) Change in Net Working Capital (NWC) = Current Assets - Current Liabilities
D) Cash Flow from Assets = Operating Cash Flow + Net Capital Spending
Answer: A
Q2) Explain the three main areas of the balance sheet.
Answer: The three main areas of the balance sheet are assets, liabilities, and owners' equity. Assets include items of economic value owned by the company--they can be physical (like buildings), financial (like accounts receivable), or intellectual (like patents). Assets also include cash itself. Liabilities are the amounts of mone that the company owes to others, such as payroll to employees, taxes to government, borrowed money to banks, and bills for materials or services to creditors. Owners' equity is what is left over from the assets after all liabilities have been settled.
Q3) EBIT (earnings before interest and taxes) is obtained by adding together revenue and operating expenses.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Time Value of Money Part 1
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Q1) The Rule of 72 is a rule of thumb for estimating the interest rate necessary to double your money, given a period of time.
A)True
B)False
Answer: True
Q2) Current annual dividends for Simpson's Frozen Foods Inc., are $1.35 per share. Four years ago, dividends per share were exactly $1.00. What has been the rate of growth for Simpsons dividends per share?
Answer: r = (FV/PV)<sup>1/n</sup> - 1 = ($1.35/$1.00)<sup>1/4</sup> - 1 = 7.79% per year.
Q3) Consider the TVM equation: The future value is always greater than the present value, even if the interest rate is negative.
A)True
B)False
Answer: False
Q4) Given enough time, you could double your money with a risk-free investment.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Time Value of Money Part 2
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Q1) You have a choice between a lottery lump sum payout of $10,000,000 today or a series of twenty-five annual annuity payments (first payment one year from today). At a discount rate of 6.50%, how large must the annual annuity payments be to make you indifferent between the two choices?
A) $819,814.81
B) $873,102.77
C) $769,779.17
D) $400,000.00
Q2) Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. How large is the payment at the end of year ten if the crane is financed at a rate of 8.50% as a discount loan?
A) $228,611.56
B) $127,500
C) $3,391,475.16
D) There is not enough information to answer this question.
Q3) You sign a contract to pay back all of the interest and principal of a loan at the maturity date. This is an example of an interest-only loan.
A)True
B)False
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Page 6
Chapter 5: Interest Rates
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Q1) The real rate is 2.50% and inflation is 3.25%. What is the approximate nominal rate?
A) 5.75%
B) 5.25%
C) 3.25%
D) 1.25%
Q2) If we want to get some idea about a(n) ________ over time between two specific assets, we can compare the returns on top-rated corporate bonds and U.S. government bonds.
A) inflation premium
B) default premium
C) maturity premium
D) liquidity premium
Q3) Why are there different interest rates on loans and securities?
Q4) The most common shape for a yield curve is upward sloping.
A)True
B)False
Q5) You invest $25,000 at an annual rate of 7.25% for one year. What is the difference in interest earned if you invest this money on a daily basis instead of an annual basis?
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Chapter 6: Bonds and Bond Valuation
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Q1) Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?
A) Putable bond
B) Callable bond
C) Convertible bond
D) Junior bond
Q2) Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.
A) bills, bonds, notes
B) notes, bills, bonds
C) notes, bonds, bills
D) bonds, bills, notes
Q3) The Department of the Treasury offers three types of "bonds" for sale: Treasury bills, Treasury munis, and Treasury bonds.
A)True
B)False
Q4) A callable bond allows the bond issuer to "call-in" the bond prior to maturity.
A)True
B)False
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Chapter 7: Stocks and Stock Valuation
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Q1) In applying the constant dividend model with infinite horizon to price a stock for purchase, we assume the company will pay dividends forever and that we will hold onto our stock forever.
A)True
B)False
Q2) The term "preferred" comes from the fact that preferred shareholders receive all past (if cumulative) and present dividends before common shareholders can receive any cash dividends -- in other words, their dividend claims are preferred over common stock dividend claims.
A)True
B)False
Q3) Bonds are different from stocks because ________.
A) bonds promise fixed payments for the length of their maturity
B) bonds give payments only after other owners are paid
C) bonds do not have maturity dates
D) bonds promise growth in earnings
Q4) A bull market is a prolonged declining market.
A)True
B)False
Q5) Describe two basic rights that stock ownership gives.
Page 9
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Chapter 8: Risk and Return
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Q1) Define the terms systematic risk and unsystematic risk. Be sure to explain the difference between the two. Which type of risk can be diversified away? How do we measure the remaining type of risk? Evaluate the statement: "If we could just make our investment portfolio large enough, we could completely eliminate risk and earn a market portfolio rate of return with the risk of a risk-free investment."
Q2) Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expected return of 13.1%. Asset C has a beta of .50 and an expected return of 7.50%. The risk-free rate is 4%. If you wish to hold a portfolio consisting of assets B and C, and have a portfolio beta equal to 1.0, what is the expected return of the portfolio?
A) 4.0%
B) 7.5%
Q3) The holding period return (HPR) is the return measured from the initial purchase to the final sale of the investment without regard to the length of time the investment is held.
A)True
B)False
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Chapter 9: Capital Budgeting Decision Models
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Q1) Acme, Inc. is considering a four-year project that has an initial outlay or cost of $80,000. The respective future cash inflows for years 1, 2, 3 and 4 are: $40,000, $40,000, $30,000 and $30,000. Acme uses the discounted payback period method and has a discount rate of 12%. Will Acme accept the project if its payback period is two and one-half years?
Q2) Which of the following may be TRUE regarding mutually exclusive capital budgeting projects?
A) There is need for only one project, and both projects can fulfill that current need.
B) By using funds for one project, there are not enough funds available for the other project.
C) There is a scarce resource that both projects would need.
D) All of the above
Q3) The ________ method is economically sound and properly ranks projects across various sizes, time horizons, and levels of risk, without exception for all independent projects.
A) NPV
B) Discounted Payback Period
C) Profitability Index
D) Modified IRR
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Page 11
Chapter 10: Cash Flow Estimation
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Q1) To get the operating cash flow, given the net income, we add back ________.
A) cost of goods sold
B) depreciation
C) taxes
D) EBIT
Q2) Erosion is the additional cash generated by a new project beyond the current cash flow with the addition of a specific new project.
A)True
B)False
Q3) Churchill Ltd. purchases an asset for $150,000. This asset qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. Churchill has a tax rate of 35%. If the asset is sold at the end of four years for $40,000, what is the cash flow from disposal?
A) $36,089
B) $35,072
C) $34,931
D) $33,678
Q4) Explain why one must be careful when accounting for erosion.
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Chapter 11: The Cost of Capital
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Q1) Which of the following would NOT be considered a cost of debt financing?
A) The required return on a bank loan
B) The required return on preferred stock
C) The yield-to-maturity of a bond issue
D) The required return on money borrowed from a venture capitalist
Q2) Unused capital budget funds are assumed to earn the same rate of return as the average IRR of accepted projects.
A)True
B)False
Q3) Generally speaking, when the information is available, investors prefer to use ________ rather than ________ when evaluating a firm.
A) past data, current data
B) market values, book values
C) current data, market values
D) book values, market values
Q4) The textbook labels preferred stock as "hybrid equity financing." Identify and explain the features of preferred stock that give it the designation of "hybrid equity financing."
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Chapter 12: Forecasting and Short-Term Financial Planning
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Q1) A company's cash sales in January are $200,000, its accounts receivable payments for January are $100,000, its beginning cash for January is $50,000, and there are no other cash inflows for January. Its accounts payable for January are $200,000 and its wages and salaries for January are $100,000, and its interest payments for January are $50,000. What is its net cash flow for January if there are no other outflows for January?
Q2) A line of credit is unsecured, that is, there is no pledge of specific assets backing the loan. But companies can pledge assets against borrowed funds. These are called secured loans.
A)True
B)False
Q3) A company's cash sales for the month are $200,000 and its accounts receivable payments for the month are $100,000. What is its total incoming cash flow for the month if its beginning cash for the month is $50,000 and there are no other cash inflows for the month?
A) $100,000
B) $150,000
C) $300,000
D) $350,000
Q4) Describe some uses of excess cash.
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Chapter 13: Working Capital Management
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Q1) Typically, changes in net working capital are considered in the estimation of cash flows associated with a new project.
A)True
B)False
Q2) The time between when a raw material is ordered and received and when it is paid for is called the cash conversion cycle.
A)True
B)False
Q3) When a business customer buys on credit from another business, the seller of the product will often offer an extended payment period for the product or service, but with an incentive to delay payment of the bill in an effort to earn a finance charge.
A)True
B)False
Q4) Explain why working capital is "recaptured" when a project draws to a close.
Q5) The time delay between when a check is written and when funds are available to the payee is called the float.
A)True
B)False
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Chapter 14: Financial Ratios and Firm Performance
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Q1) Financial analysts provide recommendations to their clients about what company to buy (invest) but not what company to sell (divest).
A)True
B)False
Q2) From the financial statements, we can look at specific performance areas of a company by selecting key pieces of information and analyzing this information ________.
A) at a point in time
B) over a specific time horizon
C) at a point in time or over a specific time horizon
D) All of these
Q3) Which of the following statements is TRUE?
A) The current ratio is current assets divided by current liabilities.
B) Total asset turnover is net income divided by total assets.
C) The cash coverage ratio equals cash divided by current liabilities.
D) The quick ratio equals current assets - current liabilities divided by current liabilities.
Q4) Name and describe three of the five classes of financial ratios.
Q5) Briefly describe what benchmarking does.
Q6) Describe the three components of the DuPont ratio.
Page 16
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Chapter 15: Raising Capital
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Q1) A typical banker's acceptance would involve two firms and their commercial banks.
A)True
B)False
Q2) The firm commitment method of compensation for investment bankers is always more risky financially for issuing firms than the best-effort method.
A)True
B)False
Q3) Jensen Wholesalers has a $150,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 8% of the loan as a compensating balance and pay interest at an annual rate of 7.50% on the entire amount. If the firm borrows the maximum amount for one year, what is the EAR on this loan?
A) 7.50%
B) 8.15%
C) 8.35%
D) 8.67%
Q4) List the five active phases of a business life cycle as identified by the textbook. Do all business go through these five phases?
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Chapter 16: Capital Structure
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Q1) Which of the statements below is FALSE?
A) The "riskier" borrower will most likely have to pay a lower cost for funds.
B) In the bond market, we see different rates as the different yields on bonds for different companies.
C) In the equity market, we see different rates as the different required returns for companies due to their different betas.
D) In general, the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.
Q2) The more ________ used, the greater the leverage a company employs on behalf of its owners.
A) debt
B) equity
C) debt and equity
D) All of these
Q3) Why is financial leverage attractive?
Q4) All markets are open to all borrowers.
A)True
B)False
Q5) Describe the Static Theory of Capital Structure.
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Chapter 17: Dividends, Dividend Policy, and Stock Splits
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Q1) The ________ theory of stock splits states that firms want their shares to trade in a range between $20-$40 per share.
A) preferred trading range
B) signaling hypothesis
C) increased liquidity
D) market hubris
Q2) DRIP is an acronym for Dividend Renewal or Initiation Plan.
A)True
B)False
Q3) In a world with no taxes and no transaction costs, dividend policy is irrelevant.
A)True
B)False
Q4) Historically, the average price per share for stocks traded on the New York Stock Exchange (NYSE) has been in the $50 - $75 range.
A)True
B)False
Q5) Identify and define three reasons for stock splits.
Q6) List and describe three reasons for a low-dividend-payout policy.
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Chapter 18: International Financial Management
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Q1) One way to minimize the threat of nationalization in a host country is to maintain key elements of operations safely within the firm.
A)True
B)False
Q2) Financial managers are not well served if they continue to apply basic financial tools such as NPV when evaluating international operations.
A)True
B)False
Q3) Which of the statements below is TRUE?
A) The foreign rate is derived by pricing two currencies against a third.
B) All domestic rates can be computed using a setup with American rates and European rates with the U.S. dollar as the home currency.
C) The opportunity to make a profit without risk by exchanging three currencies is known as triple arbitrage.
D) When cross rates are out of line, there can be an arbitrage opportunity.
Q4) The Euro-to-Canadian rate is the reciprocal of the Canadian-to-Euro rate.
A)True
B)False
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