Introduction to Financial Management Practice Questions
Course Introduction
Introduction to Financial Management provides students with a foundational understanding of the principles and practices involved in managing an organizations financial resources. The course covers key topics such as financial analysis, budgeting, time value of money, capital structure, investment decision-making, and risk management. Designed for students with little or no background in finance, it emphasizes practical applications and real-world problem-solving to equip learners with the tools necessary to make informed financial decisions within a business context.
Recommended Textbook
Financial Management Core Concepts 4th Edition by Raymond Brooks
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Chapter 1: Financial Management
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Sample Questions
Q1) All financial transactions have a buyer and a seller.
A)True
B)False Answer: True
Q2) According to the textbook,a good manager treats shareholders,customers,creditors,and employees equally.
A)True
B)False Answer: False
Q3) Which of the following is NOT an example of an agency cost?
A)Paying an accounting firm to audit your financial statements
B)Paying an insurance company to assure that building codes have been met for new construction
C)Paying a landscaping firm to maintain your firm's grounds
D)The cost of designing contracts that satisfy creditors that their concerns will be met Answer: C
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Page 3
Chapter 2: Financial Statements
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Q1) It is important to remember that the fundamental identity of accounting is the debit and credit recording activity where debits ________ equal credits.
A)never
B)seldom
C)sometimes
D)always
Answer: D
Q2) Which of the statements below is TRUE?
A)Accounting Identity is: Assets Liabilities - Owners' Equity.
B)Accounting Identity is: Assets Liabilities + Owners' Equity.
C)Accounting Identity is: Assets Owners' Equity - Liabilities.
D)Accounting Identity is: Liabilities Assets + Owners' Equity.
Answer: B
Q3) Additional information on a company's financial condition found in the annual report includes special issues concerning its debt or contingent accounts but not information on the potential impact of a pending lawsuit.
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) In the equation r = (FV/PV)<sup>1/n</sup> - 1,the r is sometimes referred to as the
A)interest rate
B)discount rate
C)growth rate
D)All of the above
Answer: D
Q2) In four years your oldest child will be in 10th grade,at which point you and your family plan to vacation in Europe.You estimate that you will need $25,000 for the trip.How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.25% per year?
A)$20,215.55
B)$20,998.34
C)$21,165.85
D)$21,435.77
Answer: C
Q3) Given enough time,you could double your money with a risk-free investment.
A)True
B)False
Answer: True
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Chapter 4: The Time Value of Money Part 2
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Q1) If for the next 35 years you place $4,000 in equal annual year-end-deposits into an account earning 8% per year,how much money will be in the account at the end of that time period?
A)$689,267.21
B)$777,169.56
C)$839,343.12
D)$2,606,942.58
Q2) If we discount the annual payments from winning the lottery at 10%,the corresponding present value is greater than if we discount the annual payments at 12%.
A)True B)False
Q3) On your first through fifth birthdays your parents placed $2,000 into your college fund (five total deposits of $2,000 each).The account has earned an average of 8.5% per year until today,your twenty-first birthday.How much money is in the account today?
A)$11,733.20
B)$37,219.70
C)$43,714.09
D)$42,383.41
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6
Chapter 5: Interest Rates
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Q1) We can write the true relationship between the nominal interest rate and the real rate and expected inflation as ________.
A)(1 + r)= (1 + r)× (1 + h*)
B)r = (1 + r*)× (1 + h)- 1
C)r* = (1 + r)× (1 + h)-1
D)r = (1 + r*)× (1 + h)+ 1
Q2) Monthly interest on a loan is equal to ________.
A)the beginning balance times the APR
B)the ending balance times the annual percentage rate
C)the ending balance times the periodic interest rate
D)the beginning balance times the periodic interest rate
Q3) A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates ________.
A)the real rate,expected inflation and a default risk premium
B)expected inflation,a default risk premium and a maturity premium
C)the real rate,expected inflation,and a maturity premium
D)the real rate,a default risk premium and expected inflation
Q4) What does the historical record of interest rates and inflation in the United States look like?
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Chapter 6: Bonds and Bond Valuation
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Q1) Bonds that pay interest tied to the earnings of the company are known as ________ bonds.
A)income
B)exotic
C)floating rate
D)variable earnings
Q2) 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
Q3) Douglas Distributing Inc.has issued 30-year semiannual coupon bonds with a face value of $1,000.If the annual coupon rate is 6% and the current yield to maturity is 7%,what is the firm's current price per bond?
A)$875.28
B)$1,000.00
C)$934.34
D)$466.79
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Chapter 7: Stocks and Stock Valuation
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Q1) Which of the statements below is FALSE?
A)Selling of shares is the selling of ownership in the company.
B)A company is said to go "public" when it opens up its ownership structure to the general public through the sale of common stock.
C)Companies choose to sell stock to attract permanent financing through equity ownership of the company.
D)Most companies have the resident expertise to complete an initial public offering (IPO)or first public equity issue.
Q2) Even though a company sets a limit on the number of shares it will sell,before selling any of them,the company must receive authorization to market the shares from the Securities and Exchange Commission (SEC).
A)True
B)False
Q3) Most academic research supports markets as ________ efficient.
A)weak-form
B)semi-strong-form
C)strong-form
D)not at all
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Chapter 8: Risk and Return
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Q1) What is the possible range for a correlation coefficient? For purposes of diversification,what type of correlation coefficient among asset returns is preferred by investors? Explain why.
Q2) Janet bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38.What was her dollar profit or loss and holding period return?
A)$0.72,7.55%
B)$3.88,8.95%
C)$4.60,9.68%
D)$3.88,9.68%
Q3) Both assets A and B plot on the SML.Asset A has an expected return of 15% and a beta of 1.7.Asset B has an expected return of 12% and a beta of 1.1.What is the risk-free rate of return?
A)5.0%
B)6.5%
C)11.5%
D)It cannot be determined from this information.
Q4) Define diversification.What are the benefits to diversification? Will diversification always lead to greater expected portfolio returns?
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Page 10
Chapter 9: Capital Budgeting Decision Models
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Q1) Which of the statements below is TRUE of the payback period method?
A)It ignores the cash flow after the initial outflow has been recovered.
B)It is biased against projects with early-term payouts.
C)It incorporates time-value-of-money principles.
D)It focuses on cash flows after the initial outflow has been recovered.
Q2) Spotify,Inc.is considering a five-year project that has an initial outlay or cost of $22,000.The future cash inflows from its project for years 1,2,3,4 and 5 are $15,000,$15,000,$15,000,$15,000 and -$41,000,respectively.Compute both IRRs.Given these IRRs,compute the two NPVs.If Spotify's true cost of borrowing for this project is 10%,would Spotify choose the project?
Q3) The Internal Rate of Return (IRR)Model suffers from three problems.Which of the below is NOT one of these problems?
A)Comparing mutually exclusive projects
B)Cumbersome computations not resolvable by the latest technology
C)Incorporates the IRR as the reinvestment rate for the future cash flows
D)Multiple IRRs
Q4) Describe three of the six decision models used in capital budgeting decision-making and briefly evaluate their effectiveness.
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Chapter 10: Cash Flow Estimation
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Sample Questions
Q1) A firm is considering purchasing two assets.Asset A will have a useful life of 12 years and cost $3 million; it will have installation costs of $400,000 and a salvage or residual value of $400,000.Asset B will have a useful life of 8 years and cost $2.5 million; it will have installation costs of $300,000 and a salvage or residual value of $800,000.Which asset will have a greater annual straight-line depreciation?
A)Asset A has $30,000 more in depreciation per year.
B)Asset A has $37,500 more in depreciation per year.
C)Asset B has $30,000 more in depreciation per year.
D)The depreciation per year is the same for each asset.
Q2) Which of the statements below is FALSE?
A)A company could show a loss for the operating period but have generated positive cash flow for the business.
B)Profits are an accounting measure of performance during a specific period of time.
C)To obtain the operating cash flow,given the net income,we add back depreciation and subtract taxes.
D)Cash flow is an accounting measure of performance during a specific period of time.
Q3) Explain why one must be careful when accounting for erosion costs.
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Chapter 11: The Cost of Capital
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Q1) The formula for the adjusted WACC = \(\frac { D } { V }\) × R<sub>d</sub> + \(\frac { \mathrm { PS } } { \mathrm { V } }\) × R<sub>ps</sub> + \(\frac { E } { V }\) × R<sub>e</sub> × (1 - T<sub>c</sub>).
A)True
B)False
Q2) ________ refers to the way a company finances itself through some combination of loans,bond sales,preferred stock sales,common stock sales,and retention of earnings.
A)Capital structure
B)Cost of capital
C)Working capital management
D)NPV
Q3) ________ refers to a method of matching a single project of a company to another company with a single business focus in an effort to assign an appropriate level of risk to the project.
A)Ghosting
B)Pure play
C)Outside assignment
D)Subjective assignment
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Chapter 12: Forecasting and Short-Term Financial Planning
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Q1) An aspect of short-term financial planning is forecasting operating cash flow and ultimately the profitability of the company in the coming period.This type of financial planning typically uses forecasted ________.
A)balance sheets
B)income statements
C)statements of cash flow
D)all of these
Q2) We can condense the items that require cash outflow into basic categories.Which of the below is a basic category?
A)Accounts payable for materials and supplies
B)Capital expenditures
C)Wages,taxes,and other operating expenses of the business
D)All of these
Q3) Once all the expenditures and receipts are determined,a financial manager can determine the probability of cash excess or cash shortfall in upcoming periods.
A)True
B)False
Q4) Briefly describe the costs included in the production process.
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Chapter 13: Working Capital Management
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Q1) Ready Tees,an online retailer of t-shirts,orders 80,000 t-shirts per year from its manufacturer.Ready will order t-shirts 12 times over the next year.Ready receives the same number of t-shirts each time it orders.The carrying cost is $0.25 per shirt per year.What is the annual carrying cost of the t-shirt inventory (rounded to the nearest dollar)?
A)$417
B)$833
C)$5,000
D)$10,000
Q2) ________ is the collective term used to describe a firm's decisions as to how customers will qualify for credit,what payment plan is allowed to creditors,and how overdue bills will be collected.
A)Credit history
B)Credit policy
C)Collection policy
D)Payment policy
Q3) Working capital does NOT depreciate like capital assets.
A)True
B)False
Q4) Explain why working capital is "recaptured" when a project draws to a close.
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Chapter 14: Financial Ratios and Firm Performance
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Q1) The revenue is $10,000,the cost of goods sold is $2,000,the selling,general and administrative expenses are $3,000,addition to retained earnings are $2,000,and depreciation is $1,000.What is the EBIT?
A)-$1,000
B)$2,000
C)$3,000
D)$4,000
Q2) The higher the current ratio,the better.
A)True
B)False
Q3) The net income is $100,sales are $200,total assets are $500,and total equity is $300.According to the DuPont method of financial ratio analysis,ROE is about 33.33%.
A)True
B)False
Q4) The Balance Sheet is the recording of the business activities over the past business cycle.
A)True
B)False
Q5) Name and describe three of the five classes of financial ratios.
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Chapter 15: Raising Capital
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Q1) ________ employer businesses (businesses that employ others besides the owners)will close within the first six years.
A)Two out of every five
B)One out of every two
C)Three out of every five
D)Seven out of every ten
Q2) The 7(a)Loan Guaranty Program of the Small Business Administration (SBA)delivers loans through ________ that are guaranteed by ________.
A)the SBA; commercial lenders
B)banks; the Federal Reserve System
C)commercial lenders; state government
D)commercial lenders; the SBA
Q3) SBA guarantee loans have an interest rate that is on average ________.
A)the same as current market rates on business loans
B)lower than current market rates on business loans
C)higher than current market rates on business loans
D)the same as mortgage loans
Q4) Explain the difference between chapter 7 and chapter 11 bankruptcy.Which group of claimants generally stands last in a chapter 7 filing?
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Chapter 16: Capital Structure
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Q1) Worldwide Inc.is an import-export company specializing in products from Canada,Australia,and the West Coast.It can borrow in the debt market at 8%.Its cost of equity with 30% D/V ratio is 13%.Its corporate tax rate is 30%.If the M&M world of taxes holds true,what is the WACC for the firm with a 30% D/V financing?
A)11.90%
B)11.05%
C)10.78%
D)9.44%
Q2) IBM Inc.has a project that costs $150,000.It has a 50% chance of paying off $300,000 and a 50% chance of paying off $50,000.What is the expected payoff and the expected profit or loss from the new project?
A)The expected payoff is $175,000 and the expected profit is $25,000.
B)The expected payoff is $25,000 and the expected profit is $25,000.
C)The expected payoff is $175,000 and the expected loss is $175,000.
D)The expected payoff is $100,000 and the expected loss is $10,000.
Q3) Two different individuals or companies can go to the same bank and request exactly the same amount of funding for their projects and yet can be required to pay different costs for their funds.Why? Can we find a parallel situation in the bond and equity markets? Explain.
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Chapter 17: Dividends, Dividend Policy, and Stock Splits
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Q1) Compare and contrast a sticky dividend policy with a residual dividend policy.Which policy is more widely used by large corporations? What advantages does that policy have over the other?
Q2) Stockholders may have covenants stating that a company cannot pay dividends unless sufficient cash is currently available to cover the next coupon interest payments.
A)True
B)False
Q3) DRIPs (dividend reinvestment plans)generally have few or no transaction costs.
A)True
B)False
Q4) The decision to pay a cash dividend is within the jurisdiction of ________.
A)the SEC
B)the board of directors of the firm
C)the firm's largest labor union
D)the largest shareholders of the firm
Q5) A reverse split is the consolidation of a company's stock into a lesser number of outstanding shares.
A)True
B)False
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Chapter 18: International Financial Management
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Q1) The Big Mac Index demonstrates the concept of Purchasing Power Parity.If the current price of a Big Mac hamburger in the United States is $3.55,and the current price of the same burger in Germany is 3.15,what is the implied exchange rate of dollars per euro?
A)$0.8873/
B)$1.1270/
C)$1.2421/
D)$1.3333/
Q2) The current indirect exchange rate is 21 pesos per dollar.The cash inflow in pesos is 100,000 in two years and the discount rate is 9%.During this time,the anticipated annual inflation rate is 6% in the United States and 14% in Mexico.What is the present value of the 100,000 pesos in U.S.dollars after conversion from pesos to dollars if you are using current and forward exchange rates?
A)$3,419.02
B)$3,465.21
C)$4,062.14
D)$4,427.74
Q3) Describe business risk and political risk.
Q4) Describe transaction,operating,and translation exposure.
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