Introduction to Financial Management
Final Exam Questions
Course Introduction
Introduction to Financial Management provides students with a comprehensive understanding of the fundamental principles and practices of financial decision-making within organizations. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Emphasis is placed on equipping students with practical tools and analytical techniques to assess financial performance, plan and control financial resources, and make informed investment and financing decisions. By the end of the course, students will have developed a solid foundation in financial management concepts essential for careers in business, finance, and related fields.
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CFIN5 5th edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Q1) The 11 "titles" in the Sarbanes-Oxley Act of 2002 establish standards for accountability and responsibility of financial reporting information for major corporations. Which of the following activities does the act provide rules that a corporation must abide by?
A) The corporation must have a committee that consists of an internal director nominated from the board to oversee the firm's audits.
B) The corporation's internal auditor will render an unbiased (independent) opinion concerning the firm's financial statement.
C) The corporation must maximize social welfare through funding of environmentally friendly activities.
D) The corporation must provide additional information about the procedures used to construct and report financial statements.
E) The firm's CEO and CFO must certify audit reports submitted to the Securities Exchange Commission.
Answer: D
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Chapter 2: Analysis of Financial Statements
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Q1) A firm's net income is the most appropriate measure to determine whether the management is maximizing the firm's stock price.
A)True
B)False
Answer: False
Q2) Which of the following ratios indicate how much investors are willing to pay for the firm's stock for each dollar of reported profits?
A) Earnings per share ratio
B) Market/book ratio
C) Price/earnings ratio
D) Return on equity ratio
E) Net profit margin ratio
Answer: C
Q3) The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.
A)True
B)False
Answer: False
Q2) William and Kate invest in two different securities carrying the same amount of risk.
However, William earned a 10 percent return and Kate earned a 7 percent return on their investments. The additional return on William's investment is considered a(n) _____.
A) risk adjusted return
B) justified return
C) abnormal return
D) efficient return
E) premium return
Answer: C
Q3) Dual listing of a stock leads to a decrease in the liquidity of the stock.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Q1) A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.
A) ordinary annuity
B) annuity due
C) uneven cash flow stream
D) lump-sum payment
E) compounded cash flow
Q2) Ordinary annuity is an annuity with payments that occur at the beginning of each period.
A)True
B)False
Q3) If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.
A) 10.82%
B) 11.50%
C) 12.20%
D) 12.85%
E) 13.57%
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Q1) Open market operations are operations in which:
A) the municipal authorities bring out policies that provide better social security benefits.
B) the government improves the infrastructure of the economy to attract foreign investors.
C) the Federal Reserve buys or sells Treasury securities to expand or contract the U.S. money supply.
D) private companies establish agencies to trade their stocks in the market.
E) the public establishes a non-profit entity to trade in the market on behalf of the community.
Q2) Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3?
A) 7%
B) 8%
C) 9%
D) 17%
E) 18%
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Chapter 6: Bonds Debtcharacteristics and Valuation
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Q1) On the maturity date, _____.
A) the maturity value of the debt is to be repaid
B) the first installment of the installment loan is due
C) the interest payment is due
D) the market interest rate rises above the coupon rate
E) the market price of the bond rises above the face value of the debt
Q2) Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets.
A) par value
B) a discount
C) a premium
D) the inflation adjusted interest rate
E) a floating interest rate
Q3) A bond's value will increase with increases in interest rate over time.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) A shareholder can transfer the right to vote to a second party, by means of an instrument known as _____.
A) arbitrage
B) allotment
C) consortium
D) rationing
E) proxy
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 percent rate of return, what is the current dividend on this stock?
A) $2.81
B) $3.00
C) $4.29
D) $4.75
E) $6.13
Q3) If we view P/E ratios as measures of payback, all else equal, higher earnings multipliers are better.
A)True
B)False
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Page 9
Chapter 8: Risk and Rates of Return
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Q1) Which of the following statements about the various types of risks is true?
A) Default risk is a nondiversifiable risk.
B) Interest rate risk is an unsystematic risk.
C) Inflation risk is a systematic risk.
D) Maturity risk is a firm-specific risk.
E) Political risk is a diversifiable risk.
Q2) Which of the following statements is true about the beta of a portfolio?
A) If the beta of a portfolio doubles, its required return also doubles.
B) If a stock has a negative beta, its required return is negative.
C) Higher beta stocks have more company-specific risk, but do not necessarily have more market risk.
D) If a portfolio's beta increases from 1.2 to 1.5, its required rate of return will increase by an amount equal to its market risk premium.
E) If the beta of a stock is three, the stock's relevant risk is thrice as volatile as the market portfolio.
Q3) Short-term investments have higher maturity risks as compared to long-term investments.
A)True
B)False
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Page 10
Chapter 9: Capital Budgeting Techniques
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Q1) The main reason that the NPV method is regarded as being conceptually superior to the IRR method, for the purpose of evaluating mutually exclusive investments, is that mutually exclusive projects have multiple IRRs.
A)True
B)False
Q2) Project A has a pattern of high cash inflows in the early years, while Project B has majority of its cash inflows in the later years. At the current required rate of return, Projects A and B have identical NPVs. Assuming that interest rates are increasing, other things held constant, this change will cause B to become more preferable than A.
A)True
B)False
Q3) A capital budgeting project is acceptable if the rate of return required for a project is greater than the project's internal rate of return.
A)True
B)False
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Chapter 10: Project Cash Flows and Risk
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Q1) Which of the following statements is true regarding a replacement decision?
A) The benefits resulting from the new investment is treated as an inflow.
B) The net cash flow from the sale of an old equipment is treated as an outflow at t = 0 (initial investment outlay).
C) The depreciation expenses on the new equipment is treated as an outflow.
D) Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0 (initial investment outlay).
E) An increase in the net working capital is treated as an inflow when the project begins (initial investment outlay) and as an outflow when the project ends (terminal cash flow).
Q2) Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?
A) Sensitivity Analysis
B) Pure play method
C) Accounting beta method
D) Capital asset pricing model (CAPM) method
E) Net present value (NPV) analysis
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12
Chapter 11: The Cost of Capital
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Questions
Q1) Oval Inc. has just paid a dividend of $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year, indefinitely. The firm plans to issue common stock at $16. The firm's investment bankers believe that new issues of common stock would have a flotation cost equal to 4 percent of the current market price. Which of the following is the cost of newly issued common stock? (Round off the answer to two decimal places.)
A) 14.16 percent
B) 10.15 percent
C) 15.36 percent
D) 13.80 percent
E) 16.92 percent
Q2) The after-tax cost of debt is used to calculate the weighted average cost of capital since we are concerned with the after-tax cash flows of the firm.
A)True
B)False
Q3) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.
A)True
B)False
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Page 13
Chapter 12: Capital Structure
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Q1) The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.
A)True
B)False
Q2) Which of the following is an example of business risk?
A) Default risk
B) Prepayment risk
C) Strategic risk
D) Currency risk
E) Equity risk
Q3) As a general rule, the optimal capital structure is the one that:
A) maximizes expected EPS and the price per share of common stock.
B) minimizes the interest rate on debt and maximizes the expected earnings per share.
C) minimizes the required rate on equity and maximizes the stock price.
D) maximizes the price per share of common stock and minimizes the weighted average cost of capital.
E) minimizes the expected earnings per share and maximizes the weighted average cost of capital.
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) Which of the following statements is true about the free cash flow hypothesis?
A) Firms should distribute earnings based on investors' preferences toward current income and future income.
B) Firms should distribute earnings that can be reinvested at a very profitable rate.
C) Firms should pay dividends when free cash flows in excess of capital budgeting needs exist.
D) Firms that retain free cash flows have higher values than firms that distribute free cash flows.
E) Firms should never distribute their free cash flows.
Q2) According to the information content hypothesis, a lower-than-expected dividend increase, or an unexpected reduction, generally would result in a price decline.
A)True
B)False
Q3) Firms using the constant payout ratio dividend policy offer to reinvest dividends in the stocks of the dividend-paying firm.
A)True
B)False
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Page 15
Chapter 14: Managing Short-Term Financing Liabilities
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Q1) Grant Technologies is planning to get a 210-day $300,000 simple interest loan from its bank with a quoted interest rate of 11 percent and a 20% compensating balance requirement. Assuming there are 360 days in a year and Grant currently holds no funds at the lending bank, what is the annual percentage rate (APR) of the loan? (Round your answer to two decimal places.)
A) 13.05%
B) 13.35%
C) 12.85%
D) 13.75%
E) 12.55%
Q2) Which of the following types of short-term credits increases (decreases) automatically, or spontaneously, as a firm's operations expand (contract)?
A) Promissory notes
B) Lines of credit
C) Commercial paper
D) Trade credits
E) Accruals
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Chapter 15: Managing Short-Term Assets
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Q1) Fashion Clothier's economic order quantity (EOQ) for dyes is 14,000 units. If the total demand is 196,000 units per period, carrying cost per unit is 25% of inventory value, purchase price is $10, and fixed costs per order is $30, then the total inventory cost is_____.
A) $18,280
B) $23,250
C) $14,750
D) $13,000
E) $17,920
Q2) Which of the following will help a firm accelerate the collection of customers' payments and the conversion of those payments into cash?
A) Lockbox arrangement
B) Controlled disbursement accounts
C) Economic order quantity
D) Payables concentration
E) Zero-balance accounts
Q3) Money market instruments are held as marketable securities.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Q1) If a firm does not meet its forecasted sales level, leverage will result in a magnified loss in income compared to what is expected. This will occur because production facilities might not be expanded appropriately.
A)True
B)False
Q2) The degree of financial leverage (DFL) is defined as the percentage change in _____ that results from a given percentage change in earnings before interest and tax (EBIT).
A) sales
B) net operating income (NOI)
C) operating fixed costs
D) net income
E) earnings per share (EPS)
Q3) Financial leverage occurs because of the existence of fixed financial costs such as _____.
A) insurance expenses
B) preferred dividends
C) common stock dividends
D) depreciation
E) rent
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