Introduction to Financial Management
Final Test Solutions
Course Introduction
Introduction to Financial Management offers students a comprehensive overview of the fundamental principles and practices involved in managing a firm's financial resources. The course covers essential topics such as financial planning, analysis of financial statements, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Through case studies and real-world examples, students will learn how financial managers make strategic decisions to maximize shareholder value while balancing risk and profitability. This foundational course equips students with the analytical tools and decision-making skills essential for success in corporate finance and related fields.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) High quality initial public offerings are usually sold in a primary market, such as the New York Stock Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.
A)True
B)False
Answer: False
Q2) Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.
A)True
B)False
Answer: True
Q3) Businesses will increasingly rely on B2B Internet applications to speed up the cash flows through their firms.
A)True
B)False
Answer: True
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Chapter 2: Review of Accounting
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Sample Questions
Q1) The firm's price-earnings (P/E) ratio is influenced by its
A) capital structure.
B) earnings volatility.
C) sales, profit margins, and earnings.
D) all of these.
Answer: D
Q2) Which of the following would represent a source of funds and, indirectly, an increase in cash balances?
A) A reduction in accounts receivable
B) The repurchase of shares of the firm's stock
C) A decrease in net income
D) A reduction in notes payable
Answer: A
Q3) Total stockholders' equity consists of
A) preferred stock and common stock.
B) common stock and retained earnings.
C) common stock and capital paid in excess of par.
D) preferred stock, common stock, capital paid in excess of par and retained earnings.
Answer: D
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) If the company's accounts receivable turnover is increasing, the average collection period:
A) is going up slightly
B) is going down
C) could be moving in either direction
D) is going up by a significant amount
Answer: B
Q2) If government bonds pay 7.0% interest and insured savings accounts pay 5.0% interest, stockholders in a moderately risky firm would expect return-on-equity values of
A) 5.0%
B) 7.0%
C) 9.0%
D) above 7.0%, but the exact amount is uncertain.
Answer: D
Q3) Investors are most concerned with the liquidity ratios of a company.
A)True
B)False
Answer: False
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) As the dividend payout ratio declines more external funds are required.
A)True
B)False
Q2) The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash.
A)True
B)False
Q3) Pro forma financial statements are
A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) all of these.
Q4) The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
Q5) The primary purpose of the cash budget is to plan accounts payable payments.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) As the contribution margin rises, the breakeven point goes down.
A)True
B)False
Q2) If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.
A)True
B)False
Q3) Refer to the figure above. The Degree of Combined Leverage (D.C.L.) is
A) 3.08x
B) 5.45x
C) 2.25x
D) 6.83x
Q4) For Japanese firms that have high levels of operating and financial leverage, maintaining sales volume is of critical importance even at the cost of price.
A)True
B)False
Q5) Leverage works best when volume is increasing.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan their rate will be 9 percent. By how much will their earnings after tax change if they choose the more conservative financing plan instead of the more aggressive plan?
A) $10,000
B) ($10,800)
C) ($6,000)
D) $6,000
Q2) The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. A)True
B)False
Q3) Short-term interest rates have historically been more volatile than long-term rates. A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Characteristics of a money market deposit account include
A) a lower risk than money market funds.
B) insured by federal agencies.
C) generally a limit of three deposits or withdrawals per month.
D) all of these
Q2) Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit and desires to keep 100 units in safety stock. Assuming level production, what is their average inventory?
A) 200-300
B) 301-400
C) 401-500
D) 501-600
Q3) The three primary policy variables to consider when extending credit include all of the following except
A) credit standards.
B) the level of inflation.
C) the terms of trade.
D) collection policy.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) If Analog Computers can borrow at 8% for 3 years, what is the effective rate of interest on a $1,000,000 loan where a 15% compensating balance is required?
A) 11.18%
B) 17.27%
C) 9.40%
D) None of these
Q2) Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of $2,000. Its average daily sales are $3,000, and it collects accounts in 25 days. What is its net credit position? Note that a negative position implies receivables exceed payables.
A) $15,000
B) $1,000
C) ($1,000)
D) ($15,000)
Q3) A trust receipt acknowledges that the lender trusts the borrower to repay the loan before any dividends are paid.
A)True
B)False
Q4) Annual payment.
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The future value of an annuity assumes that the payments are received at the end of the year and that the last payment does not compound.
A)True
B)False
Q2) As the compounding rate becomes lower and lower, the future value of inflows approaches
A) 0
B) the present value of the inflows
C) infinity
D) need more information
Q3) In determining the interest factor (IF) for the present value of $1, one could use the reciprocal of the IF for the future value of $1 at the same rate and time period.
A)True
B)False
Q4) If you invest $10,000 at 10% interest, how much will you have in 10 years?
A) $13,860
B) $25,940
C) $3,860
D) $80,712
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The variable growth dividend model can be used for both constant and variable growth stocks.
A)True
B)False
Q2) Which of the following regarding preferred stock is true?
A) If the price decreases, required rate of return has decreased
B) If the required rate of return increases, the price decreases
C) If the required rate of return increases, the price increases
D) The price in the market remains at par
Q3) The risk premium is equal to the required yield to maturity minus both the real rate of return and the inflation premium.
A)True
B)False
Q4) Preferred stock has all but which of the following characteristics?
A) No stated maturity.
B) A fixed dividend payment that carries a higher precedence than common stock dividends.
C) The same binding contractual obligation as debt.
D) Preferred lacks the ownership privilege of common stock.
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Chapter 11: Cost of Capital
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Sample Questions
Q1) The financial managers of the firm decide on its cost of capital for financing projects.
A)True
B)False
Q2) A firm's cost of preferred stock is equal to the preferred dividend divided by the net price after flotation costs.
A)True
B)False
Q3) If the flotation cost goes up, the cost of retained earnings will A) go up.
B) go down.
C) stay the same.
D) slowly increase.
Q4) Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital.
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) If the capital budgeting decision includes a replacement analysis, then
A) a gain from the sale of the old asset will represent a tax savings inflow.
B) only incremental cash flows should be looked at.
C) the sale price and tax savings will increase the cash inflows throughout the asset's life.
D) two of the above.
Q2) In most capital budgeting decisions the emphasis should be on reported earnings rather than cash flows.
A)True
B)False
Q3) If projects are mutually exclusive
A) they can only be accepted under capital rationing.
B) the selection of one alternative precludes the selection of other alternatives.
C) the payback method should be used.
D) the net present-value should be used.
Q4) Most real estate property is depreciated over a 10 year period.
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 cost of capital is applied to projects with:
A) normal risk.
B) high risk.
C) no risk.
D) low risk.
Q2) The term "risk averse" means that
A) an individual refuses to take risks.
B) most investors and businessmen seek risk.
C) an individual will seek to avoid risk or be compensated with a higher return.
D) only investment proposals with no risk should be accepted.
Q3) Which of the following is a common approach in dealing with uncertainty?
A) Monte Carlo simulation
B) Internal rate of return
C) Net present value
D) Payback period
Q4) Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's stock price.
A)True
B)False
Page 15
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Chapter 14: Capital Markets
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Sample Questions
Q1) The net supplier of funds is the U.S. Treasury and other agencies of the government.
A)True
B)False
Q2) Which of the following was not a major supplier of funds to credit markets in 2008?
A) Households.
B) Government sponsored agencies.
C) Mutual funds and ETFs.
D) All of the above were major suppliers of funds.
Q3) Which of the following is not an example of indirect investment by a household?
A) Investment in a mutual fund's shares.
B) Investment in an original offering of corporate securities.
C) Investment in life insurance.
D) Savings deposit in a commercial bank.
Q4) Companies list their stock around the globe to
A) capitalize on the inefficiency inherent in foreign markets.
B) increase liquidity for their stockholders.
C) provide opportunities for the sale of new stock in foreign countries.
D) b and c are correct.
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16
Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) When a company first goes public, a registration statement must be filed with the New York Stock Exchange.
A)True
B)False
Q2) An investment banker acts as a middleman between a corporation needing funds and investors with funds.
A)True
B)False
Q3) Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering.
A)True
B)False
Q4) The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to expand their staffs.
A)True
B)False
Q5) A market maker transacts in stocks as a broker.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) A bond with a coupon rate of 6.5%, maturing in 10 years at a value of $1,000 and a current market price of $950, will have a yield to maturity (using the approximation formula) of
A) between 6% and 6.5%
B) between 6.5% and 7%
C) between 7% and 7.5%
D) between 7.5% and 8%
Q2) What discount rate is used in the net present value of the refunding decision?
A) The before tax cost of the new debt.
B) The after-tax cost of new debt.
C) The weighted average cost of capital.
D) The after-tax cost of total firm capital.
Q3) Bonds may be recalled only if there is a specific call provision in the bond.
A)True
B)False
Q4) An operating lease is generally a long-term, non-cancelable obligation.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is the price of Tricki expected to be when it begins trading ex-rights?
A) $47.23
B) $44.00
C) $44.09
D) $45.00
Q2) The par value on a preferred stock entitles the holder:
A) priority on all cumulative dividends.
B) an established amount of money if the company is liquidated.
C) a minimum amount of convertible common stock.
D) None of these.
Q3) American Depository Receipts (ADRs) are certificates that give foreign stockholders a legal claim on U.S. companies' foreign stock.
A)True
B)False
Q4) Stock purchased through a rights offering may carry lower margin requirements.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The dividend yield is the dividend divided by the stock price.
A)True
B)False
Q2) One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.
A)True
B)False
Q3) In the initial stage (Stage I), the corporation
A) has a product yet to be accepted in the marketplace.
B) anticipates rapid growth in sales and earnings.
C) needs all its earnings for reinvestment in new assets.
D) all of these
Q4) Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) All of the following are advantages to the corporation of issuing convertibles except:
A) provides a low-cost financing alternative for large, high-quality companies
B) used when believe stock is undervalued
C) generally lower cost than straight debt
D) provides access for small co's to debt market
Q2) The conversion premium of a convertible is generally greater when the market price of the stock is below the conversion price.
A)True
B)False
Q3) The conversion premium is the greatest and the downside risk the smallest when
A) the conversion value equals the pure bond value.
B) the conversion value is greater than the pure bond value.
C) the conversion value is less than the pure bond value.
D) the stock price is expected to go up drastically.
Q4) When a company has a convertible bond in its capital structure,
A) it can reduce its debt-to-equity ratio by calling the bond.
B) there is no effect on the firm's earnings per share.
C) there is no advantage to the firm in forcing conversion of the bonds.
D) all of these.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Synergy is
A) the 2 + 2 = 3 effect.
B) the 2 + 2 = 4 effect.
C) the 2 + 2 = 5 effect.
D) always present in a merger.
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 E.P.S.
A)True
B)False
Q3) The typical merger premium is
A) 0-20%
B) 40%
C) 40-60%
D) 60-80%
Q4) It is possible to merge with a company which results in the same earnings per share but still lowers the new firm's cost of capital.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) The term balance of payments refers to the flow of economic transactions between the residents of one country and the residents of another.
A)True
B)False
Q2) Assume that you had dollar quotes for the Japanese Yen and the British Pound. If you want to know the Yen/Pound exchange rate, you would rely on
A) forward rates.
B) cross rates.
C) the Wall Street Journal.
D) hedge ratios.
Q3) Which of the following is true of forward and spot rates?
A) The premium or discount is usually between 7-10%
B) Spot and forward transactions generally occur on the organized exchange
C) The length of a forward contract is generally between 1 and 6 months
D) None of these
Q4) Balance of payments is a method of keeping the foreign exchange market in equilibrium.
A)True
B)False
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