Introduction to Financial Management
Midterm Exam
Course Introduction
Introduction to Financial Management provides students with foundational concepts and tools necessary for making sound financial decisions within organizations. The course covers key areas such as financial analysis, budgeting, capital structure, risk management, time value of money, and investment appraisal. Through theoretical learning and practical case studies, students develop an understanding of how financial managers plan, control, and direct financial resources to maximize organizational value. The course lays the groundwork for more advanced study in corporate finance and is essential for anyone pursuing a career in business, accounting, or finance.
Recommended Textbook
NEW Corporate Finance Online 1st Edition by Stanley Eakins
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16 Chapters
1371 Verified Questions
1371 Flashcards
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Page 2
Chapter 1: Overview of Finance
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Sample Questions
Q1) In the over-the-counter market,dealers are linked with the purchasers and sellers of securities through the ________ system.
A) NASDAQ
B) NYSE
C) AMEX
D) SEC
E) NYMEX
Answer: A
Q2) Which one of these would a financial advisor say is most important?
A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Answer: A
Q3) Money market securities have maturities of one year or less.
A)True
B)False
Answer: True
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Chapter 2: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The quick ratio is 1.0.Current assets are $100,000 and current liabilities are $80,000.What is the amount in the inventory account?
A) $20,000
B) $80,000
C) $125,000
D) $180,000
E) Cannot be determined with the information provided.
Answer: A
Q2) What is the current ratio if cash is $10,000,accounts receivable are $25,000,inventories are $30,000,accounts payable are $40,000,and accrued payroll is $15,000?
A) 2.00
B) 1.18
C) 1.13
D) 0.64
E) 0.73
Answer: B
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Chapter 3: Time Value of Money - Introduction
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Sample Questions
Q1) If a United States saving bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100,what is the annual rate of return on the bond?
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent
E) 10 percent
Answer: C
Q2) The amount of money that would have to be invested today at a given interest rate over a specific period in order to equal a future amount is called:
A) Future value
B) Present value
C) Future value interest factor
D) Present value interest factor
Answer: B
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Chapter 4: Time Value of Money - Streams and Valuations
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Sample Questions
Q1) Ty was seriously injured in a planking accident.He successfully sued the railway company and was awarded $700,000.The railway cannot afford to pay the lump sum immediately and would prefer to make ten annual payments (at the end of each of the next ten years).If the interest rate is 10%,then what size of payment makes Ty indifferent between the lump-sum and the payments?
A) $113,921.78
B) $70,000.00
C) $73,907.45
D) $109,074.06
E) $102,862.66
Q2) Jennifer presents a business plan to her bank's loan officer that predicts net cash flows for the first three years of $10,000,$15,000,and $8,000 respectively.If these cash flows occur at the end of each year and the discount rate is 4%,what is the total present value of these cash flows? (Round to the nearest whole dollar)
A) $29,397
B) $30,596
C) $35,683
D) $37,993
E) $31,114
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Page 6
Chapter 5: Risk and Return - Introduction
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Sample Questions
Q1) If General Motors expects profits of $50 million in a booming economy,what is the expected profit during a recession if this is the only other possibility and the overall expected profit is $35 million? The probability of a recession is 70%.
A) $35.00 million
B) $25.00 million
C) $23.45 million
D) $39.50 million
E) $28.57 million
Q2) You pay $1,000 to flip a two-sided,fair coin at the local fair.If you flip heads,you walk away with $3,000,a return of 200%.However,if you flip tails,you walk away with $250,a return of -75%.What is the standard deviation of the returns?
A) 0.1375%
B) 1.375%
C) 13.75%
D) 137.5%
E) 1,375%
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Chapter 6: Portfolio Theory
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Sample Questions
Q1) Risk that affects all firms is called
A) management risk.
B) nondiversifiable risk.
C) diversifiable risk.
D) total risk.
Q2) Which of the following statements is false?
A) Adding additional securities to a portfolio only reduces market risk.
B) The risk-return relationship relates only to market risk.
C) Reducing market risk usually implies sacrificing expected return.
D) The appropriate measure of risk should only consider the incremental risk a security adds to a well-diversified portfolio.
E) Investors are usually not fully compensated for bearing the total risk associated with a security.
Q3) The expected return on the market is 8% and the risk free rate is 3%.A stock has an expected return of 6.75% and a beta of 0.75.Where does the stock plot relative to the SML?
A) Below the SML
B) On the SML
C) Above the SML
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) In September 2000 the Pullman Group arranged a bond issue for the estate of the late Marvin Gaye.The collateral on the bonds (and source of cash flow for interest and principal payments)consisted of future royalties from classic songs such as "What's Going On," and "I Heard It Though The Grapevine." The bond issue had a $1,000 face value and a coupon rate of 5%.If the bond matures in 26 years,pays semiannual coupons,and the yield to maturity is 6%,what will the bond sell for? Calculate your answer to two decimal points.
A) $444.85
B) $869.17
C) $869.97
D) $871.35
E) $976.17
Q2) You can buy a bond with a face value of $1,000 and annual coupon payments of $80.The yield to maturity on bonds of similar risk is 7%.This bond should sell
A) at a discount.
B) at a premium.
C) at par.
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Page 9
Chapter 8: Stock Valuation and Market Efficiency
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Sample Questions
Q1) The last dividend on Spirex Corporation's common stock was $4.00,and the expected growth rate is 10%.If you require a rate of return of 20%,what is the highest price you should be willing to pay for this stock?
A) $44.00
B) $38.50
C) $40.00
D) $45.69
E) $50.00
Q2) A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent.If you require a 14% rate of return,what is the current dividend of this stock?
A) $3.00
B) $3.30
C) $4.29
D) $4.75
E) $6.13
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) The underlying cause of ranking conflicts between the NPV and IRR methods is differing:
A) Initial cost.
B) Reinvestment rate assumption.
C) Cash flow timing.
D) Profitability indices.
E) Errors in calculating the discount rate.
Q2) The Seattle Corporation has been presented with an investment opportunity which will yield end of year cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $150,000 today,and the firm's cost of capital is 10%.What is the NPV for this investment?
A) $135,984
B) $18,023
C) $219,045
D) $51,138
E) $92,146
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11
Chapter 10: Capital Budgeting - Cash Flows
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Sample Questions
Q1) A project having the conventional pattern of cash flows exhibits all of the following EXCEPT
A) a terminal cash flow.
B) initial investment.
C) operating cash outflows.
D) operating cash inflows.
Q2) The relevant cash flows for a proposed project are the incremental after-tax cash outflows and the resulting cash inflows.
A)True
B)False
Q3) The relevant cash flows for capital budgeting analysis are
A) incremental cash flows.
B) ordinary cash flows.
C) necessary cash flows.
D) consistent cash flows.
Q4) Operating cash flow (OCF)is calculated by adding back depreciation to the net operating profit after taxes.
A)True B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Wilson's Cabinets has bonds outstanding that mature in eight years,have a 6 percent coupon and pay interest annually.These bonds have a face value of $1,000 and a current market price of $1,020.What is the company's pre-tax cost of debt?
A) 5.68 percent
B) 6.19 percent
C) 6.34 percent
D) 6.82 percent
E) 7.57 percent
Q2) Pan American Airlines' shares are currently trading at $69.25 each.The yield on Pan Am's debt is 4% and the firm's beta is 0.7.The T-Bill rate is 4% and the expected return on the market (E (k<sub>M</sub>))is 9%.The company's target capital structure is 25% debt and 75% equity.Pan American Airlines pays a combined federal and state tax rate of 35%.What is Pan Am's cost of debt (after tax)?
A) 2.6%
B) 3.0%
C) 3.3%
D) 3.5%
E) 4.0%
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) If sales increase 25%,EBIT increases 50%,debt increases 75%,and working capital increases 12.5%,what is the degree of operating leverage?
A) 2
B) 5
C) 3
D) 6
E) 4
Q2) A 20% increase in sales causes EPS to rise from $4.00 to $6.50.Assuming the firm has no debt,what is its degree of operating leverage (DOL)?
A) 1.00
B) 1.50
C) 1.57
D) 3.13
E) 2.25
Q3) Under the Static Tradeoff Theory,the optimal debt-to-equity ratio is higher than under Modigliani and Miller (with taxes).
A)True
B)False
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14
Chapter 13: Dividends, repurchases, and Splits
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Sample Questions
Q1) Cripple Creek Distilleries Inc.is an all equity company with 20M shares outstanding.It's stock last closed at $20.Cripple Creek has too much cash.The CEO,Levon Helm,wants to distribute the excess cash with an open market stock repurchase.He is contemplating buying back $5M worth of shares at a price of $20.What will the stock price be after completion of the repurchase?
A) $19.00
B) $19.25
C) $19.50
D) $19.75
E) $20.00
Q2) On Thursday,February 7,Baretta Pistols Inc.declared a $0.75 per share dividend to be paid on Monday,April 15; the date of record will be Thursday,March 18.Baretta's stock closed $17.25 on the last cum-dividend date.What will the opening price be on the ex-dividend date? (Assume perfect markets.)
A) $15.75
B) $16.50
C) $17.50
D) $17.25
E) $18.00
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Chapter 14: Financial Planning
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Sample Questions
Q1) Referring to Gerald's Produce,what are Gerald's total cash outflows (disbursements)in February?
A) $2,500
B) $3,100
C) $7,500
D) $8,100
E) $10,600
Q2) Referring to Gerald's Produce,what are Gerald's collections from customers expected to be in March?
A) $2,500
B) $5,000
C) $7,500
D) $10,000
E) $20,000
Q3) Referring to Cool Looks,what is the cash balance at the end of November?
A) $17,150
B) $19,150
C) $19,750
D) $21,250
E) $22,000
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Chapter 15: The Management of Working Capital
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Sample Questions
Q1) In one sense,holding cash is a waste of resources.
A)True
B)False
Q2) A company is offering a discount with terms 3/15 net 40.What is the discount rate associated with this offer?
A) 3%
B) 15%
C) 40%
D) 20%
E) 5%
Q3) The inventory method that relies on deliveries coming right before they are needed is:
A) Just-in-Time
B) Basket
C) LIFO
D) FIFO
Q4) Shortage costs can be enormous.
A)True
B)False
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Chapter 16: International Finance
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Sample Questions
Q1) What is the percentage change in price for an American importer of Indian sitar music cassettes if the Indian rupee/U.S.dollar exchange rate goes from 12 rps./$ to 14rps./$ and the price of a cassette is 50 rupees?
A) 16.7%
B) 14.4%
C) +20.2%
D) +16.5%
E) +14.2%
Q2) Exchange rates are reported as fractions with the ________ in the denominator and the ________ in the numerator.
A) counter rate; base rate
B) base rate; counter rate
C) foreign currency; domestic currency
D) domestic currency; foreign currency
Q3) The ________ is as close to a worldwide currency as there is.
A) British pound
B) U.S. Dollar
C) Euro
D) Canadian Dollar
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Page 18