Introduction to Financial Management
Chapter Exam Questions
Course Introduction
Introduction to Financial Management provides students with a foundational understanding of the principles and practices involved in the financial decision-making process within organizations. The course covers essential topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Through real-world examples and case studies, students learn how to make informed decisions regarding investments, financing, and dividends to optimize firm value and achieve organizational objectives. This course is vital for anyone seeking a career in finance, accounting, or business management.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to allow for more speculative investments for average investors.
A)True
B)False
Answer: False
Q2) Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large enough to move to the primary market if they so desire.
A)True
B)False
Answer: False
Q3) One of the major advantages of a sole proprietorship is
A) that the owner has limited liability.
B) that stock in the proprietorship can be easily transferred.
C) that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm.
D) low operating costs.
Answer: D
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Page 3
Chapter 2: Review of Accounting
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Q1) Hoover Inc. has current assets of $350,000 and fixed plant assets of $650,000. Current liabilities are $100,000 and long-term liabilities are $250,000. There is $120,000 in preferred stock outstanding and the firm has issued 10,000 shares of common stock. What is the firm's total equity?
A) $1,000,000.
B) $530,000
C) $350,000
D) $650,000
Answer: D
Q2) One of the primary factors evaluated when a company is pursuing a leveraged buyout is
A) Net cash flow.
B) Free cash flow.
C) Cash flow from financing activities.
D) Cash flow from investing activities.
Answer: B
Q3) Accounting income is based on verifiably completed transactions.
A)True
B)False
Answer: True
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Chapter 3: Financial Analysis
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Sample Questions
Q1) The DuPont system of analysis emphasizes that profit generated by assets can be derived by a combination of profit levels and how fast an asset can turnover.
A)True
B)False
Answer: True
Q2) Trend and industry analysis provide all of the following information except A) benchmarking.
B) the progress of the company.
C) a basis for decision making about capital structure.
D) future information about the company.
Answer: D
Q3) In addition to comparison with industry ratios, it is also helpful to analyze ratios using A) future projections
B) historical data
C) only industry ratios provide valid comparisons.
D) trend analysis and historical comparisons.
Answer: D
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) The most significant purpose of the cash budget is to plan accounts payable payments.
A)True
B)False
Q2) A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO?
A) $2,750
B) $3,600
C) $3,300
D) $3,850
Q3) In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that
A) all sales were from the current production.
B) all sales were from the beginning inventory.
C) sales were from the current production until current production was depleted, and then sales were from the beginning inventory.
D) all sales were for cash.
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) If TechCor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and depreciation expense of $25,000, what is its cash breakeven in units?
A) 6,034 units
B) 11,458 units
C) 12,375 units
D) 45,833 units
Q2) As the contribution margin rises, the break-even point goes down.
A)True
B)False
Q3) Managers who are risk-averse and uncertain about the future would most likely minimize combined leverage.
A)True
B)False
Q4) Financial leverage primarily affects the asset side of the balance sheet.
A)True
B)False
Q5) The use of financial leverage must consider both risk and maximizing profit. A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Yield curves change daily to reflect
A) changing conditions in the money and capital markets.
B) new inflation expectations.
C) changing conditions in the overall economy.
D) All of the options are correct.
Q2) According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, short-term rates are expected to rise.
A)True
B)False
Q3) An inverted yield curve would suggest that
A) interest rates are expected to rise.
B) interest rates are expected to fall.
C) inflation is expected to rise in the future.
D) long-term rates are being pushed up by Federal Reserve policy.
Q4) The more short-term financing there is relative to long-term financing, the riskier the financial structure.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Some of the services provided around the clock by SWIFT are
A) international payments between banks.
B) foreign exchange.
C) trade finance transactions.
D) All of the options are true.
Q2) A Just-In-Time (JIT) inventory management program has all but which of the following requirements?
A) Quality production
B) Large safety stocks
C) Close ties between suppliers, manufacturers, and customers
D) Minimizing inventory levels
Q3) Automated clearinghouses are commonly used by consumers to make direct payments for
A) insurance premiums.
B) mortgage payments.
C) utility bills.
D) All of the options are true.
Q4) A cash discount typically lowers the average collection period of a firm.
A)True
B)False
Page 9
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Kenneth's Arrows and Bows borrows $15,000 for one year at an 8% annual interest rate. What is the effective rate of interest if the loan is discounted?
A) Less than 8.5%
B) More than 8.5% but less than 9.5%
C) More than 9.5% but less than 10.5%
D) More than 10.5%
Q2) The largest source of short-term funds for most companies is suppliers (trade credit).
A)True
B)False
Q3) The "financial futures market"
A) is a place in Chicago where future stocks are traded.
B) allows for the delivery of financial instruments at a future point in time.
C) is of particular value to small investors in managing their portfolios.
D) is a place in Chicago where future stocks are traded and is of particular value to small investors in managing their portfolios
Q4) Compensating balances represent unfair hidden costs of borrowing.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Present value is the opposite of the future value.
A)True
B)False
Q2) The shorter the length of time between a present value and its corresponding future value,
A) the lower the present value, relative to the future value.
B) the higher the present value, relative to the future value.
C) the higher the interest rate used in the discounting to the present value.
D) None of these options are correct.
Q3) Using semiannual compounding rather than annual compounding will increase the future value of an annuity.
A)True
B)False
Q4) To calculate "Future or Present Values of an "Annuity Due," we must assume that payments happen twice as often.
A)True
B)False
Q5) The formula PV = FV(1 + n)<sup>i</sup> will determine the present value of $1.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Preferred stock would be valued the same as a common stock with a zero dividend growth rate.
A)True
B)False
Q2) The required return by investors is directly influenced by all of the following except:
A) Inflation
B) U.S. Treasury rates
C) Dividends
D) Risk
Q3) In estimating the market value of a bond, the coupon rate should be used as the discount rate.
A)True
B)False
Q4) A stock that has a high required rate of return because of its risky nature will usually have a high P/E ratio.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Retained earnings represent an internal source of funds that is raised without the payment of interest or cost to the firm's stockholders.
A)True
B)False
Q2) The only difference in the cost of retained earnings (K<sub>e</sub>) and the cost of new common stock (K<sub>n</sub>) is the flotation cost on new common stock.
A)True
B)False
Q3) The cost of debt needs to consider tax, while the cost of stock does not need to consider tax.
A)True
B)False
Q4) A firm's cost of financing, in an overall sense, is equal to its A) weighted average cost of capital.
B) required yield that investors seek for various kinds of securities.
C) required rate of return that investors seek for various kinds of securities.
D) all of these options are true.
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Chapter 12: The Capital Budgeting Decision
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Q1) If the capital budgeting decision includes a replacement analysis, then
A) a gain from the sale of the old asset will represent a tax savings inflow.
B) only incremental cash flows should be considered.
C) the sale price and tax savings will increase the cash inflows throughout the asset's life.
D) net present value can no longer be measured in replacement analysis.
Q2) Under MACRS depreciation, taxes paid in the first year of an asset's life are subtracted from the base used to calculate depreciation expense.
A)True
B)False
Q3) Capital rationing assumes that
A) a limited amount of capital is available.
B) a limited amount of investments are available.
C) maximum profitability will be obtained.
D) a limited amount of investments are available and maximum profitability will be obtained.
Q4) Under capital rationing, a firm will maximize profitability.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The coefficient of variation is calculated to help correlate the standard deviation and the relative expected value of an investment, which makes it easier to compare different sized investments.
A)True
B)False
Q2) If possible outcomes are D and probabilities are P, the standard deviation is defined as ? =
\(\sqrt { \sum ( D - D ) ^ { 2 } P }\)
A)True
B)False
Q3) In order to reduce risk, one should diversify into areas that are positively correlated with current areas of involvement.
A)True
B)False
Q4) When choosing portfolios of assets, management should try to achieve the highest possible return at a given level of risk.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The NASDAQ market is the primary market for international securities.
A)True
B)False
Q2) All of these are recognized as important influences in the development of the banking crisis of 2008 and the resulting credit crisis EXCEPT
A) Consumers, especially homeowners, took on too much debt.
B) Too many subprime loans were repackaged and sold as securities.
C) The U.S. government promised to buy unlimited amounts of debt from FHLB.
D) Real estate prices collapsed.
Q3) The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the accuracy of their firm's financial statements.
A)True
B)False
Q4) Corporations tend to shift from debt financing to equity financing during bull markets.
A)True
B)False
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Page 16
Chapter 15: Investment Banking: Public and Private
Placement
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Q1) Market stabilization
A) is the action by the managing investment banker to keep the price of newly issued securities from falling below the issue price to the public.
B) usually lasts 2 to 3 days, but can last up to 30 days if a security is difficult to distribute.
C) cannot always maintain high initial prices-a case in point being the Facebook issue, sold in May of 2012.
D) all of these options are true.
Q2) Private placement eliminates the expensive and lengthy registration process with the Securities and Exchange Commission.
A)True
B)False
Q3) Which of the following is a characteristic of leveraged buyouts?
A) Buyouts are usually financed by debt.
B) Some corporate assets are often sold after the buy-out is completed.
C) Funds for the buy-out are raised through securities markets.
D) all the options are characteristics of a leveraged buyout.
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) The benefits of debt to the corporation include all of the following EXCEPT
A) Tax-deductible interest payments
B) Increases the stock value when used heavily
C) Fixed obligation
D) Generally a lower overall cost than equity
Q2) A bond can only be easily refunded if it has a call feature.
A)True
B)False
Q3) The initial floating rate bond price is inversely related to changes in interest rates.
A)True
B)False
Q4) Bonds provide stable pricing because they offer a fixed coupon rate and maturity date unlike stocks.
A)True
B)False
Q5) Homebuilding companies, like D.R. Horton Inc., realized significant losses in 2008-2009, but have realized gains since then.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Q1) Stock classes may differ in voting rights, dividend rights, and claims to income during company elimination.
A)True
B)False
Q2) To the individual recipient, preferred stock dividends offer no tax advantage over bonds.
A)True
B)False
Q3) North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are required to purchase one share. The value of a right is ________.
A) $0.11
B) $1.11
C) $1.00
D) $1.50
Q4) Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.
A)True
B)False
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Page 19
Chapter 18: Dividend Policy and Retained Earnings
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Q1) When a firm raises its dividends, the information content is usually positive for investors.
A)True
B)False
Q2) One reason that investors may prefer stock dividends over cash dividends is so the investor is provided with some growth or life cycle information about the company.
A)True B)False
Q3) Dividends may be relevant to distribute because they help resolve uncertainty about the firm and its future.
A)True
B)False
Q4) A stock dividend is often used when the company has high cash levels, but feels that a stock dividend would be more beneficial to the investors.
A)True B)False
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Page 20
Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) In one stroke through forced conversion, the balance sheet changes, the debt becomes equity, and the debt disappears. The result is that the debt-to-equity ratio and the debt-to-asset ratio decline.
A)True
B)False
Q2) The owner of a call has
A) the right and the obligation to buy an asset at a given price.
B) the right and the obligation to sell an asset at a given price.
C) the right but not the obligation to buy an asset at a given price.
D) the right but not the obligation to sell an asset at a given price.
Q3) A pure bond value is the value of a non-convertible bond with the same amount of risk as the convertible bond being measured.
A)True
B)False
Q4) The theoretical floor value for a convertible bond is its A) conversion price.
B) conversion value.
C) par value.
D) pure bond value.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as
A) horizontal integration.
B) vertical integration.
C) synergy.
D) the portfolio effect.
Q2) A "takeover tender offer" lets a company attempt to acquire a target firm against its will.
A)True
B)False
Q3) An example of a horizontal merger would be
A) Pepsi and Sears.
B) McDonald's and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca-Cola and Dr Pepper.
Q4) Leveraged buyouts are restricted to "outside" tender offers.
A)True
B)False
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Page 22
Chapter 21: International Financial Management
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Q1) Which of the following statements is true about international equity (stock) markets?
A) Japanese households are large investors in common stock.
B) Commercial banks are generally not involved in the international securities business.
C) Some foreign investors are more risk-averse than their counterparts in the United States and prefer dividend income over less certain capital gains.
D) Foreign exchanges never include the listing of U.S. firms.
Q2) When Country A's currency strengthens against Country B's, citizens of Country A will
A) pay less to buy Country B's products.
B) pay more to buy Country B's products.
C) pay more to buy domestically produced products.
D) not be affected by the change in their currency's value.
Q3) Forward contracts tend to be created on organized exchanges like the International Money Market of the Chicago Mercantile Exchange.
A)True
B)False
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