Fundamentals of Managerial Finance
Textbook Exam Questions
Course Introduction
Fundamentals of Managerial Finance introduces students to the essential concepts and tools necessary for effective financial management within an organization. The course covers key topics such as financial statement analysis, time value of money, risk and return, valuation of securities, capital budgeting, and the cost of capital. Emphasis is placed on applying financial theory to real-world decision-making, enabling students to understand how managers use financial information to plan, control, and make strategic business decisions. This foundational knowledge prepares students for advanced coursework in finance and equips them with practical skills needed in managerial roles.
Recommended Textbook
Principles of Managerial Finance Brief 6th Edition by Lawrence J. Gitman
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk.
A)True
B)False
Answer: True
Q2) Among solutions to the agency problem in publicly-held corporations are all of the following EXCEPT
A) stock options.
B) performance shares.
C) cash bonuses tied to goal achievement.
D) bonuses based on short-term results.
Answer: D
Q3) The conflict between the goals of a firm's owners and the goals of its non-owner managers is
A) the agency problem.
B) incompatibility.
C) serious only when profits decline.
D) of little importance in most large U.S. firms.
Answer: A
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) An implication of the Efficient Market Hypothesis is that it is very hard for an actively managed mutual fund to earn above average returns. This is true for all of the following reasons EXCEPT
A) new information is predictable and therefore already incorporated into the stock prices.
B) new information is by definition unpredictable, thus hard to incorporate into stock prices.
C) actively managed mutual funds typically charge fees of about 1.5%.
D) index funds make no attempt to analyze stocks.
Answer: A
Q2) The primary risk of mortgage-backed securities is that
A) the prices of housing will go down.
B) the prices of housing will increase.
C) the government will not be able to meet the guarantees on the cash flows.
D) homeowners may not be able to, or choose not to, repay their loans.
Answer: D
Q3) The marginal tax rate represents the rate at which additional income is taxed.
A)True
B)False
Answer: True
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called
A) the McCain-Feingold Act.
B) the Harkins-Oxley Act.
C) the Sarbanes-Harkins Act.
D) the Sarbanes-Oxley Act.
Answer: D
Q2) The current ratio for Dana Dairy Products in 2005 was ________. (See Table 3.2)
A) 1.58
B) 0.63
C) 1.10
D) 0.91
Answer: D
Q3) The ________ ratio is commonly used to assess the owner's appraisal of the share value.
A) debt
B) price/earnings
C) return on equity
D) return on total assets
Answer: B
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) Since depreciation and other non-cash charges represent a scheduled write-off of an earlier cash outflow, they should NOT be included in the cash budget.
A)True
B)False
Q2) Once sales are forecasted, ________ must be generated to estimate a variety of operating costs.
A) a production plan
B) a cash budget
C) an operating budget
D) a pro forma statement
Q3) Cash planning involves the preparation of the firm's cash budget. Without adequate cash regardless of the level of profits any firm could fail.
A)True
B)False
Q4) It would be correct to define Operating Cash Flow (OCF) as net operating profit after taxes minus depreciation.
A)True
B)False
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6
Chapter 5: Time Value of Money
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Sample Questions
Q1) Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent.
Q2) The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is
A) $ 50.
B) $200.
C) $518.
D) $ 77.
Q3) If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?
A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent
Q4) Calculate the combined future value at the end of year 3 of $1,000 received at the end of year 1, $3,000 received at the end of year 2, and $5,000 received at the end of year 3, all sums deposited at 5 percent.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A ________ gives purchasers inflation protection.
A) zero coupon bond
B) junk bond
C) floating rate bond
D) income bond
Q2) A foreign bond is issued in a host country's financial market, in the host country's currency, by a foreign borrower.
A)True
B)False
Q3) Bondholders will convert their convertible bonds into shares of stock only when the conversion price is greater than the market price of the stock.
A)True
B)False
Q4) High-risk, high-yield junk bonds have declined in popularity over time due to A) the decline in mergers and takeovers, which these bonds were used to finance.
B) the declining need of growth capital.
C) the stabilizing of interest rates.
D) a number of major defaults on these bonds.
Q5) Explain liquidity, default risk, and maturity risk premiums.
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Chapter 7: Stock Valuation
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Sample Questions
Q1) ________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.
A) Preferred stockholders
B) Common stockholders
C) Bondholders
D) Creditors
Q2) A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is ________.
A) 4.00%
B) 6.00%
C) 8.00%
D) none of the above
Q3) The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock.
A)True
B)False
Q4) Calculate the estimated dividend for 2004. (See Table 7.2)
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Page 9
Chapter 8: Risk and Return
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Sample Questions
Q1) If a person's required return decreases for an increase in risk, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.
Q2) The standard deviation of a portfolio is a function only of the standard deviations of the individual securities in the portfolio and the proportion of the portfolio invested in those securities.
A)True
B)False
Q3) In the capital asset pricing model, the beta coefficient is a measure of A) economic risk.
B) diversifiable risk.
C) nondiversifiable risk.
D) unsystematic risk.
Q4) For the risk-indifferent manager, no change in return would be required for an increase in risk.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) As the volume of financing increases, the costs of the various types of financing will ________, ________ the firm's weighted average cost of capital. A) increase, lowering B) increase, raising C) decrease, lowering D) decrease, raising
Q2) Generally the least expensive source of long-term capital is A) retained earnings. B) preferred stock. C) long-term debt. D) short-term debt.
Q3) The amount of preferred stock dividends that must be paid each year may be stated in dollars or as a percentage of the firm's earnings.
A)True
B)False
Q4) The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.
A)True B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Which of the following capital budgeting techniques ignores the time value of money?
A) Payback
B) Net present value
C) Internal rate of return
D) Two of the above
Q2) Use the IRR approach to select the best group of projects. (See Table 10.7)
Q3) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 for the next three years is 3.33 years.
A)True
B)False
Q4) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 each year for the next three years is 0.333 years.
A)True
B)False
Q5) If the NPV is greater than the initial investment, a project should be accepted.
A)True
B)False
Q6) Use the NPV approach to select the best group of projects. (See Table 10.7)
Page 12
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) The change in net working capital regardless of whether an increase or decrease is not taxable because it merely involves a net build-up or reduction of current balance sheet accounts.
A)True
B)False
Q2) In a capital budgeting context, risk refers to
A) the chance that a project will prove unacceptable.
B) the degree of variability of cash flows.
C) Neither A nor B is correct.
D) both A and B are correct.
Q3) The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).
A) internal rate of return
B) investment opportunities schedule
C) risk-adjusted discount rate
D) annualized net present value
Q4) Calculate the risk-adjusted discount rates for project X and project Y. (See Table 11.11)
Q5) Calculate the incremental depreciation. (See Table 11.6)
Page 13
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists.
A)True
B)False
Q2) The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of earnings rather than on the maximization of share price.
A)True
B)False
Q3) The total leverage measures the combined effect of operating and financial leverage on the firm's risk.
A)True
B)False
Q4) Which plan has a higher degree of financial leverage and financial risk? (See Table 12.1)
Q5) The firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.
A)True
B)False
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Chapter 13: Payout Policy
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Sample Questions
Q1) The primary purpose of a stock split is to A) issue additional shares.
B) increase the dividend.
C) reduce the price of stock.
D) reduce trading activity.
Q2) Modigliani and Miller suggest that the value of the firm is not affected by the firm's dividend policy, due to A) the relevance of dividends.
B) the clientele effect.
C) the informational content.
D) the optimal capital structure.
Q3) Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of the firm's stock is unaffected by dividend policy. A)True
B)False
Q4) A shareholder receiving a stock dividend typically receives nothing of value. A)True
B)False
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) If the firm's credit period is decreased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease
Q2) In working capital management, risk is measured by the probability that a firm will become
A) liquid.
B) technically insolvent.
C) unable to meet long-term obligations.
D) less profitable.
Q3) A credit manager typically gives primary attention to ________ in extending credit to an applicant.
A) collateral and capacity
B) collateral and conditions
C) character and capacity
D) character and capital
Page 16
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) All of the following goods represent appropriate collateral for a secured loan to a school supply manufacturer EXCEPT
A) reams or rolls of paper.
B) unbound pages.
C) notebooks and binders.
D) index cards.
Q2) A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent. If the loan is for $100,000, how much interest in dollars will the firm pay? (Assume a 360-day year.)
A) $10,000
B) $30,000
C) $3,333
D) $1,000
Q3) Inventory is attractive as collateral since it normally has a market value greater than its book value, which is used to establish its value as collateral.
A)True
B)False
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