Introduction to Financial Management Exam Review
Course Introduction
Introduction to Financial Management provides students with an understanding of the fundamental principles and practices involved in managing an organizations finances. The course covers essential topics such as financial statement analysis, budgeting, time value of money, risk and return, capital structure, and short- and long-term financial planning. Through theoretical concepts and practical applications, students learn to make informed financial decisions, analyze investment opportunities, and understand the impact of financial management on organizational success. The course serves as the foundation for more advanced studies in finance and equips students with the skills necessary for roles in business and financial management.
Recommended Textbook
Financial Management Core Concepts 4th Edition by Raymond Brooks
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1932 Verified Questions
1932 Flashcards
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Page 2
Chapter 1: Financial Management
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Sample Questions
Q1) Limited liability is an advantage of the sole proprietorship.
A)True
B)False Answer: False
Q2) According to the textbook,a good manager treats shareholders,customers,creditors,and employees equally.
A)True
B)False
Answer: False
Q3) The means by which a company is financed refers to the firm's ________.
A)capital budgeting
B)capital structure
C)accounts receivable management
D)working capital management
Answer: B
Q4) The primary objective of the finance manager is to maximize the market value of equity of the company.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Financial Statements
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Sample Questions
Q1) Which of the following identities is FALSE?
A)Cash Flow to Creditors = Interest Expense - Net New Borrowing from Creditors
B)Net New Borrowing = Ending Long-term Liabilities - Beginning Long-Term Liabilities
C)Cash Flow to Owners = Dividends + Net New Borrowing from Owners
D)Net New Borrowing from Owners = Change in Equity
Answer: C
Q2) Which of the sections below is NOT contained in the annual report?
A)Prediction of competitors' returns
B)Company highlights
C)President's letter to the shareholders
D)Description of the company's activities (usually with pictures and graphs)
Answer: A
Q3) Cash flow from assets shows the success or failure of the operating decisions,while cash flow to creditors examines a portion of how the firm is financing the operations.
A)True
B)False
Answer: True
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4
Chapter 3: The Time Value of Money Part 1
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Sample Questions
Q1) Which of the following will result in a future value greater than $100?
A)PV = $50,r = an annual interest rate of 10%,and n = 8 years.
B)PV = $75,r = an annual interest rate of 12%,and n = 3 years.
C)PV = $90,r = an annual interest rate of 14%,and n = 1 year.
D)All of the future values are greater than $100.
Answer: D
Q2) In two years Brandon plans to enroll at Umpqua University,a prestigious university in the Pacific Northwest of the USA.If the current tuition is $23,500 per year and is expected to increase at a rate of 6% per year,how much will Brandon pay in tuition his first year of school? (His first tuition payment is exactly two years from today.)In his fourth year? (His last tuition payment is exactly 5 years from today)(Rounded to the nearest dollar.)
A)$23,500 and $29,668
B)$26,405 and $29,668
C)$23,500 and $31,448
D)$26,405 and $31,448
Answer: D
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Chapter 4: The Time Value of Money Part 2
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Sample Questions
Q1) Which of the following choices will result in a greater future value at age 65? Choice number 1 is to invest $3,000 per year from ages 20 through 26 (a total of seven investments)into an account and then leave it untouched until you are 65 (another 39 years).Choice number 2 is to begin at age 27 and make $3,000 deposits into an investment account every year until you are 65 years old (a total of 39 investments).Each account earns an average of 10% per year.(The investments are end-of-year payments.)
A)Choice 1 is better than choice 2 because it has a FV of $1,304,146.89,which is greater than choice 2 FV of $1,204,343.33.
B)Choice 2 is better than choice 1 because it has a FV of $1,304,146.89,which is greater than choice 1 FV of $1,204,343.33.
C)Choice 2 is better than choice 1 because it has a FV of $1,204,343.33,which is greater than choice 1 FV of $1,171,042.63.
D)Choice 1 is better than choice 2 because it has a FV of $1,288,146.89,which is greater than choice 2 FV of $1,204,343.33.
Q2) Discuss the nature and importance of the TVM equation.
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6
Chapter 5: Interest Rates
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Sample Questions
Q1) Which of the statements below is FALSE?
A)The Fisher Effect is the relationship between three items: the nominal rate,the real rate,and inflation.
B)In the Fisher Effect,r* is the real interest rate.
C)The product of the real rate and the inflation rate can be thought of as the additional compensation needed for the fact that the interest being earned during the year is not subject to inflation.
D)In the Fisher Effect,r is the nominal interest rate.
Q2) Becky is seeking to expand her stamp collection.Each year,stamps increase in price at a seven percent rate.She believes that if she invests her money for one year,she should be able to buy 24 stamps for what 23 stamps would cost today.What is her real interest rate or reward for waiting?
A)4.35%
B)3.35%
C)2.25%
D)1.00%
Q3) What does the historical record of interest rates and inflation in the United States look like?
Q4) Why are there different interest rates on loans and securities?
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Chapter 6: Bonds and Bond Valuation
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Sample Questions
Q1) According to bond rating agencies,a bond rated "AAA" has a higher probability of default than a bond with a "BBB" rating.
A)True
B)False
Q2) The interest rate banks charge to their best customers is the ________ rate.
A)variable
B)prime
C)discount
D)federal funds
Q3) Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?
A)When the yield to maturity and coupon rate are the same,the bond is called a par value bond.
B)A bond selling at a premium means that the coupon rate is greater than the yield to maturity.
C)When interest rates go up,bond prices go up.
D)A bond selling at a discount means that the coupon rate is less than the yield to maturity.
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8
Chapter 7: Stocks and Stock Valuation
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Sample Questions
Q1) Rogue Motors Inc.has a 11% required rate of return.The firm does not expect to initiate dividends for 10 years,at which time it will pay $2.00 per share in dividends.At that time,the firm expects its dividends to grow at 6% forever.What is an estimate of the firms' price in 10 years (P<sub>10</sub>)if its dividend at the end of year 10 is $2.00?
A)$42.40
B)$33.40
C)$31.20
D)$42.80
Q2) The dividend growth model has a limitation due to the necessity to have a non-growing dividend pattern in order for it to work.
A)True
B)False
Q3) An application of the capital asset pricing model,called the security market line,is more inclusive than the dividend growth model for pricing stocks and provides expected returns for companies based on their risk,the premium for taking on risk,and the reward for waiting and not on their historical pattern of dividends.
A)True
B)False
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Chapter 8: Risk and Return
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Sample Questions
Q1) What is the equation for the Security Market Line? Define each term.If an asset has a beta of 2.0,what type of return should it realize compared to the market portfolio?
Q2) Optimal risk reduction takes place when combining assets whose correlation coefficient is 0.0.
A)True
B)False
Q3) Felix bought a share of stock for $33.50 that paid a dividend of $.75 and sold six months later for $31.50.What was his dollar profit or loss and holding period return?
A)-$3.00,-9.52%
B)-$3.85,-12.22%
C)-$.1.25,-3.73%
D)-$3.85,-9.52%
Q4) The primary benefit of diversification is ________.
A)an increase in expected return
B)an equal reduction in risk and return
C)a reduction in risk
D)Diversification has no real benefit; it is a shell game promoted by investment advisors who are the only real winners.
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Page 10
Chapter 9: Capital Budgeting Decision Models
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Sample Questions
Q1) One of the underlying assumptions of the IRR model is that all cash inflow can be reinvested at the individual project's internal rate of return (IRR)over the remaining life of the project.
A)True
B)False
Q2) Wyatt and Zachary Enterprises (WZE)uses the Modified Internal Rate of Return (MIRR)when evaluating projects.WZE's cost of capital is 9.75%.What is the MIRR of a project if the initial cost is $1,200,000 and the project will last seven years,with each year producing cash inflows of $290,000? Should WZE accept this project according to the MIRR method? Explain.
Q3) Frameworks,Inc.is considering a five-year project that has an initial after-tax outlay or after-tax cost of $80,000.The respective future cash inflows from its project for years 1,2,3,4 and 5 are: $15,000,$25,000,$35,000,$45,000 and $55,000.Frameworks uses the net present value method and has a discount rate of 9%.Will Frameworks accept the project?
A)Frameworks accepts the project because the NPV is $129,455.25.
B)Frameworks accepts the project because the NPV is 79,455.25.
C)Frameworks accepts the project because the NPV is $49,455.25.
D)Frameworks accepts the project because the NPV is less than zero.
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Page 11
Chapter 10: Cash Flow Estimation
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Sample Questions
Q1) Which of the statements below is TRUE?
A)The increase in working capital accounts necessary to support a project also provides for cost increases at the end of the project.
B)An increase in working capital can be brought about by an increase in inventory.
C)Decreases in accounts receivables constitute a use of cash flow because you are helping your customers finance their purchases.
D)Decreases in accounts payable constitute a source of cash flow because you are using your suppliers to help finance your business operations.
Q2) The financial manager needs help in producing the best estimates of the future costs of production.Where does this help come from?
A)Marketing manager
B)Production manager
C)Human resources manager
D)All of these
Q3) Name and describe three issues that can affect the incremental cash flow of a new project.
Q4) Briefly describe straight-line depreciation.
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12
Chapter 11: The Cost of Capital
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Sample Questions
Q1) Your firm has just issued a 15-year $1,000.00 par value,10% annual coupon bond for a net price of $964.00.What is the yield to maturity? Use a financial calculator to determine your answer.
A)10.60%
B)10.49%
C)10.44%
D)10.16%
Q2) Pricing preferred stock is most similar to pricing ________.
A)constant growth common stock
B)a perpetuity
C)a zero-coupon bond
D)a three-month Treasury bill
Q3) Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?
A)R<sub>d</sub> ÷ (1 + T<sub>c</sub>)
B)R<sub>d</sub> ÷ (1 - T<sub>c</sub>)
C)R<sub>d</sub> × (1 - T<sub>c</sub>)
D)R<sub>d</sub> × (1 + T<sub>c</sub>)
Q4) Define flotation costs and explain how they are used when estimating a firm's yield-to-maturity.
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Chapter 12: Forecasting and Short-Term Financial Planning
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Sample Questions
Q1) Firm E cash sales in January are $100,000,its accounts receivable payments for January are $100,000,its beginning cash for January is $50,000,and there are no other cash inflows for January.Its accounts payable payments for the January are $100,000 and its wages and salaries for January are $100,000,and its interest payments for January are $50,000.What is its net cash flow for January if there are no other cash flows?
A)$50,000
B)-$50,000
C)$150,000
D)-$150,000
Q2) Briefly explain the difference between a USE of cash and a SOURCE of cash.Give examples of each.Briefly explain why managers want to know the uses and sources of cash.
Q3) It is ________ of cash flow that is important to the financial manager.
A)the timing and amount
B)just the timing
C)just the amount
D)None of the above
Q4) When a company has excess funds,it has four options.Describe these options.What is the simplest thing to do with excess cash?
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Chapter 13: Working Capital Management
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Sample Questions
Q1) Which of the following is a consideration when a company decides which customers should receive credit?
A)The amount of potential business from the customer
B)The credit policies of competing firms
C)The results of credit screening
D)All are considerations that the company takes into account.
Q2) One way to reduce a firm's cash conversion cycle would be to have as many customers as possible pay using credit rather than cash.
A)True
B)False
Q3) Under ________ companies work with both their suppliers and their customers to reduce the time items are in inventory and the amount of inventory carried by a company.
A)ABC inventory management
B)EOQ inventory management
C)federal procurement programs
D)JIT inventory management
Q4) Explain why working capital is "recaptured" when a project draws to a close.
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Page 15
Chapter 14: Financial Ratios and Firm Performance
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Q1) Cross sectional ratio analysis compares the firm of interest with other firms or an industry benchmark whereas time-series ratio analysis typically compares the firm with itself over time.
A)True
B)False
Q2) Which of the statements below is TRUE?
A)DuPont analysis shows that ROE is Net Income Sales × \(\frac {\text {Sales }}{\text { Total Equity}}\) × \(\frac {\text {Total Equity }}{\text { Total Assets}}\) .
B)DuPont analysis shows that ROE is \(\frac {\text {Net Income }}{\text { Sales}}\) × \(\frac{\text { Sales}} {\text {Net Income }}\) × \(\frac {\text { Total Assets}}{\text {Total Equity }}\) .
C)DuPont analysis shows that ROE is \(\frac {\text {Net Income}}{\text {Total Assets }}\) × \(\frac {\text {Total Assets }}{\text {Net Income}}\) × \(\frac{\text {Total Assets }}{\text { Sales}}\) .
D)DuPont analysis shows that ROE is \(\frac{\text {Net Income }}{\text {Sales }}\) × \(\frac{\text {Sales }}{\text { Total Assets}}\) × \(\frac{\text {Total Assets }}{\text { Total Equity}}\)
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Chapter 15: Raising Capital
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Q1) Firms move in an orderly fashion through each stage of the business life cycle without skipping any of the steps.
A)True
B)False
Q2) With a line of credit,the bank is compensated ________.
A)based on the outstanding balance of the loan
B)based on the principal value of the credit line
C)exclusively with a fixed annual payment
D)based on a fixed interest rate tied to the T-bill rate
Q3) The venture capitalist's objective is to help small business owners qualify for loans when they may not be able to qualify through the normal lending policies of a commercial lender.
A)True B)False
Q4) Citizens' Bank of Business commercial loans are currently posted as having an 8.50% APR,with monthly payments due over a three-year period.If your firm takes out a $25,000 loan,what is the monthly payment,and what is the EAR? Use a financial calculator to determine your answer.
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Chapter 16: Capital Structure
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Q1) Which of the statements below is FALSE?
A)When a company performs well,it can handle more debt and benefit the owners.
B)Borrowing from debt lenders at one rate and investing the money in the business and making a higher rate is bad for the owners.
C)Assume that the more debt the company has sold,the better off the shareholders are.This is the case where the earnings reflect a return greater than the cost of debt.
D)Financial leverage is the degree to which a firm or individual utilizes borrowed money to make money.
Q2) APM Inc.is in the property management business and has a required return on its assets of 14%.It can borrow in the debt market at 7%.If there are no taxes and M&M's proposition II holds,what is the cost of equity if there is 30% equity financing and 70% debt financing?
A)55%
B)40%
C)30%
D)16%
Q3) Describe the Static Theory of Capital Structure.
Q4) Why is financial leverage attractive?
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Page 18
Chapter 17: Dividends, Dividend Policy, and Stock Splits
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Sample Questions
Q1) According to the text,which of the following four cash flows should be LAST in order of priority for a firm?
A)Cash to pay off debts in a timely fashion
B)Cash to maintain operations
C)Cash dividends
D)Cash for reinvesting
Q2) The decision to pay a cash dividend is within the jurisdiction of the shareholders.
A)True
B)False
Q3) A liquidating dividend is a dividend that a company pays out routinely to shareholders,often quarterly and often the same from quarter to quarter.
A)True
B)False
Q4) Legal capital equals the par value of common stock minus the paid-in-excess of par on the common shares.
A)True
B)False
Q5) Identify and define three reasons for stock splits.
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Chapter 18: International Financial Management
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Sample Questions
Q1) Assume that you manage a firm that faces transaction exposure.Your company manufactures and sells scooters around the world.You just completed a large sale of scooters to a chain of stores in Sweden and received a promised payment of 1,100 krona per scooter.You have already sold 2,500 scooters and are now awaiting payment.The exchange rate today is 8.5 krona per dollar.What will be your sales receipt in krona,and what amount of dollars will these kronas convert to at today's exchange rate?
A)2,750,000 kronas and about 428,571 dollars
B)3,000,000 kronas and about 323,529 dollars
C)2,750,000 kronas and about 323,529 dollars
D)3,000,000 kronas and about 428,571 dollars
Q2) Which of the equations below represents an appropriate discount rate for a project?
A)Discount Rate = Real Rate - Default Premium + Risk Premium of Project
B)Discount Rate = Real Rate + Inflation + Risk Premium of Project
C)Discount Rate = Real Rate + Inflation - Risk Premium of Project
D)Discount Rate = Risk-free Rate + Inflation + Risk Premium of Project
Q3) Describe business risk and political risk.
Q4) Describe transaction,operating,and translation exposure.
Q5) Assume the cross rate is off.Explain what you can do to exploit this situation.
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