Introduction to Financial Management
Exam Questions
Course Introduction
Introduction to Financial Management provides students with a foundational understanding of the principles and practices involved in managing the financial resources of an organization. The course covers key topics such as financial analysis, planning and control, time value of money, capital budgeting, risk and return, and the management of working capital. Through theoretical frameworks and real-world case studies, students learn how financial decisions impact business operations and long-term strategic goals, equipping them with the practical skills necessary for effective financial decision-making in a variety of organizational settings.
Recommended Textbook
Foundations of Financial Management 15th 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) When a corporation uses the financial markets to raise new funds, the sale of securities is made in the
A)primary market.
B)secondary market.
C)online market.
D)third market.
Answer: A
Q2) "Credit default swaps" are one of several tools that Congress and the President of the United States have jointly developed to ease the financial crisis that began in 2008.
A)True
B)False
Answer: False
Q3) Inflation is assumed to be a temporary problem that does not affect financial decisions.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) A firm has $4,000,000 in its common stock account and $10,000,000 in its paid-in capital account. The firm issued 1,000,000 shares of common stock. What is the par value of the common stock?
A)$40 per share
B)$10 per share
C)$4 per share
D)$14 per share
Answer: C
Q2) The investments account represents a commitment of funds of at least one year or more.
A)True
B)False
Answer: True
Q3) Asset accounts on the balance sheet are listed in order of A)liquidity.
B)profitability.
C)size.
D)importance.
Answer: A
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) Ratios are not distorted by inflation.
A)True
B)False
Answer: False
Q2) Asset utilization ratios can be used to measure the effectiveness of a firm's managers.
A)True
B)False
Answer: True
Q3) A current ratio of 2 to 1 is always acceptable for a company in any industry.
A)True
B)False
Answer: False
Q4) Absolute values taken from financial statements are more useful than relative values.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) When using the percent-of-sales method in forecasting the funds needed, which of the following is not true?
A)As the dividend payout ratio increases, the required new funds also increase.
B)Required new funds decrease as profit margin increases.
C)Required new funds increase as the dividend payout decreases.
D)As the tax rate increases, the required new funds increase.
Q2) The key initial element in developing all pro forma statements is
A)a cash budget.
B)an income statement.
C)a sales forecast.
D)a collections schedule.
Q3) In forecasting a firm's cash needs for some future period
A)the percent-of-sales method is a "broad-brush" approach.
B)cash budgets are more exact than the percent-of-sales method.
C)a cash budget approach can deal effectively with both level and seasonal production schedules.
D)All of the options.
Q4) Profit is generally adequate to finance significant growth.
A)True
B)False
Page 6
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) The break-even point can be calculated as
A)variable costs divided by contribution margin per unit.
B)total costs divided by contribution margin per unit.
C)variable costs times contribution margin per unit.
D)fixed costs divided by contribution margin per unit.
Q2) Operating leverage emphasizes the impact of using fixed assets in the business.
A)True
B)False
Q3) Cash break-even analysis eliminates the depreciation expense and other non-cash charges from fixed costs.
A)True
B)False
Q4) If fixed costs rise while other variables stay constant
A)the break-even point rises.
B)the degree of operating leverage increases.
C)total profit declines.
D)All of the options
Q5) Financial leverage emphasizes the impact of using debt in the business.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) When the yield curve is downward sloping, generally a financial manager should
A)expect an economic boom.
B)utilize long-term financing.
C)increase investment and the level of financing overall.
D)utilize short-term financing.
Q2) By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent.
A)True
B)False
Q3) The "term structure of interest rates" refers to the relationship between yields on debt and their maturities.
A)True
B)False
Q4) According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline.
A)True
B)False
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8
Chapter 7: Current Asset Management
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Sample Questions
Q1) The 5 Cs of credit include "character, capital, capacity, conditions, and collateral."
A)True
B)False
Q2) We expect that we can receive annual incremental income after taxes of $25,000, including an adjustment for uncollectible accounts. What is the maximum commitment to A/R that we should be willing to assume if our firm's minimum required after-tax return is 8%?
A)$36,000
B)$312,500
C)$168,000
D)$180,000
Q3) Treasury bills are unique in that they trade on a premium basis.
A)True
B)False
Q4) Eurodollar certificates of deposit
A)are not marketable investments.
B)are used by banks to loan out funds to anyone seeking U.S.dollars.
C)pay interest rates usually lower than the rates on U.S.treasury bills.
D)are European currencies deposited into international U.S.branch banks.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from
A)declining interest rates.
B)rising interest rates.
C)inflation.
D)changes in hedging activities.
Q2) Which of the following is not a true statement about commercial paper?
A)Finance paper is sold directly to the lender by the finance company.
B)Finance paper is also referred to as direct paper.
C)Dealer paper is sold directly to the lender by a finance company.
D)Industrial companies, utility firms, or finance companies too small to sell direct paper sell dealer paper instead.
Q3) The term "credit crunch" refers to a period in which the interest rate on credit is so high that firms cannot afford to borrow money.
A)True
B)False
Q4) The most common form of short-term financing is a bank loan.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The interest factor for a future value (FV<sub>IF</sub>) is equal to (1 + i)<sup>n</sup>.
A)True
B)False
Q2) Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?
A)About 12%
B)About 13%
C)About 9%
D)About 10%
Q3) The future value is the same concept as the way money grows in a bank account. A)True B)False
Q4) The interest factor for the future value of a single sum is equal to (1 + n)<sup>i</sup>.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) An issue of common stock is selling for $57.20. The year-end dividend is expected to be $2.32, assuming a constant growth rate of 4%. What is the required rate of return?
A)10.3%
B)10.1%
C)8.1%
D)None of these options
Q2) Firms with an expectation for great potential tend to trade at low P/E ratios. Price will be driven up by expectations, yet earnings are not yet realized or strong. The numerator is higher, the denominator lower, resulting in a higher P/E.
A)True
B)False
Q3) The value of a common stock is based on its
A)past performance.
B)historic dividends.
C)current earnings.
D)value of future benefits to the holder.
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12
Chapter 11: Cost of Capital
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Sample Questions
Q1) If a firm's bonds are currently yielding 6% in the marketplace, why would the firm's cost of debt be lower?
A)Interest rates have changed.
B)Additional debt can be issued more cheaply than the original debt.
C)There should be no difference; the cost of debt is the same as the bond's market yield.
D)Interest is tax-deductible.
Q2) Tobin's Barbeque has a bank loan at 8% interest and an after-tax cost of debt of 6%. What will the after-tax cost of debt be when the loan is due if a new loan is taken out yielding 11%.
A)7.52%
B)8.25%
C)13.33%
D)None of these options
Q3) In determining the cost of debt, yields and prices of the firm's outstanding bonds could be used.
A)True
B)False
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) For high-IRR investments, it is perfectly acceptable to assume that reinvestment will occur at an equally high, if not higher, rate.
Under the IRR assumption, it may be unrealistic to assume reinvestment at that high resulting rate can occur.
A)True
B)False
Q2) Capital rationing
A)is a way of preserving the assets of the firm over the long term.
B)is a less than optimal way to arrive at capital budgeting decisions.
C)assures stockholder wealth maximization.
D)assures maximum potential profitability.
Q3) There are several disadvantages to the payback method, among them:
A)Payback ignores the time value of money.
B)Payback emphasizes receiving money back as fast as possible for reinvestment.
C)Payback is basic to use and understand.
D)Payback can be used in conjunction with time-adjusted methods of evaluation.
Q4) The payback method is not really a theoretically correct approach.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Using the risk-adjusted discount rate approach, the firm's weighted average cost of capital is applied to projects with A)no risk.
B)low risk.
C)normal risk.
D)high risk.
Q2) The higher the possible outcomes fall from the expected outcome of an investment, the higher the risk and the lower the required rate of return by investors. The higher the risk, the higher the consequent required rate of return.
A)True
B)False
Q3) Which investment has the least amount of risk?
A)Standard deviation = $450, expected return = $4,500
B)Standard deviation = $600, expected return = $400
C)Standard deviation = $500, expected return = $800
D)Standard deviation = $400, expected return = $5,000
Q4) A common stock with a beta of 1.0 is said to be of equal risk with the market.
A)True B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The Securities Act of 1933 is primarily concerned with A)original issues of securities.
B)secondary trading of securities.
C)the national securities markets.
D)protecting customers of bankrupt securities firms.
Q2) Foreign investors have preferred to invest in the United States EXCEPT for which of the following reasons?
A)Less stringent regulation of securities markets
B)The political stability of the U.S.government
C)The U.S.dollar is the world's international currency.
D)All of these options are reasons that foreign investors prefer to invest in the United States.
Q3) Regional exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.
A)True
B)False
Q4) The "capital structure" of the firm consists of long-term debt and equity.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Smaller investment banking houses may handle distributions for relatively unknown corporations on a "best-efforts" basis.
A)True
B)False
Q2) Shelf registration has nearly eliminated competition in the investment banking industry.
Shelf registration does not directly impact competition. It is used as a comprehensive vehicle for issues in advance for up to two years.
A)True
B)False
Q3) Dilution of earnings occurs because
A)a new issue of common stock creates more shares outstanding, which often reduces earnings per share temporarily.
B)the company suffers a decline in earnings after taxes.
C)the investment banker collects an underwriting fee.
D)All of these options
Q4) The term "underwriter" is synonymous with risk-taker or risk-bearer.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) A floating rate bond has a reasonably stable price, but actual interest payments received change often over the life of the bond.
A)True
B)False
Q2) A financial lease has many of the characteristics of a long-term debt obligation.
A)True
B)False
Q3) The value of bonds will move opposite general market interest rates.
A)True
B)False
Q4) A debenture represents
A)unsecured debt.
B)secured debt.
C)a long document covering every detail of a bond issue.
D)debt that is subordinate to preferred stock.
Q5) The "yield to maturity" is the internal rate of return on a bond.
A)True B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) The effect of a rights offering on a stockholder is
A)to increase his/her wealth.
B)to increase his/her wealth only if the new stock is purchased.
C)to decrease his/her wealth unless the stock is purchased.
D)to decrease his/her wealth if nothing is done.
Q2) Participating preferred stock is advantageous to common stockholders.
A)True
B)False
Q3) Which of the following best represents a benefit of a rights offering?
A)Rights offerings increase return on equity.
B)Rights offerings substantiate higher debt-to-equity ratios.
C)Rights offerings have lower margin requirements.
D)None of these options
Q4) American Depository Receipts
A)have annual reports and financial statements presented in English.
B)pay dividends in dollars.
C)are more liquid and less expensive to buy than foreign stock.
D)All of these are true.
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) The repurchase of a corporation's own stock will generally have a negative impact on its price.
A)True
B)False
Q2) A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase.
A)True
B)False
Q3) The primary purpose of a stock split is to
A)indicate the firm's desire to retain funds.
B)increase the investor's overall wealth.
C)reduce the threat of a takeover by creating more shares.
D)bring the stock price to a lower trading range.
Q4) The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.
A)True
B)False
Q5) The stockholders' equity portion of Brimstone Tire Company follows:
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Chapter 19: Convertibles, Warrants and Derivatives
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Q1) If market rates of interest change, the "floor value" of a convertible bond can change.
A)True
B)False
Q2) A forced conversion will typically alter the corporate balance sheet favorably.
A)True
B)False
Q3) A step-up in the conversion price refers to
A)the ability of the company to step up the maturity of the bond to an earlier date.
B)the provision that decreases the conversion ratio the longer a convertible bond is held.
C)a refunding of a convertible bond when the conversion value equals the pure bond value.
D)None of these options
Q4) Conversion premiums are influenced heavily by expectations of future stock performance.
A)True
B)False
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21
Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Vertical integration is usually prohibited or severely restricted by government antitrust regulations.
A)True
B)False
Q2) If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm, the surviving firm will automatically get an increase in earnings per share.
A)True
B)False
Q3) In a merger, two or more companies are combined to form an entirely new entity.
A)True
B)False
Q4) 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.
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Chapter 21: International Financial Management
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Q1) A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the least amount of political risk.
A)True
B)False
Q2) The Export-Import Bank (Exim bank)
A)lends money to foreign purchasers of U.S.goods.
B)issues letters of credit.
C)makes parallel loans.
D)makes fronting loans.
Q3) As exchange rates change, they
A)change the relative purchasing power between countries.
B)can affect imports and exports between those two countries.
C)will affect the flow of funds between the countries.
D)All of these options are true.
Q4) The value of a country's currency may increase by
A)continuous excessive government spending.
B)a stock market rally in that country.
C)an increase in that country's money supply.
D)More than one of the options
Q5) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
Page 23
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