Introduction to Financial Management
Pre-Test Questions
Course Introduction
Introduction to Financial Management offers students a foundational understanding of the principles and practices involved in effective financial decision-making within organizations. This 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. Students learn how managers use financial information to plan, evaluate, and control operations while maximizing firm value and ensuring financial stability. By the end of the course, students will be equipped with essential tools and concepts necessary for informed financial analysis and responsible business decision-making.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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Page 2
Chapter 1: Foundations
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Sample Questions
Q1) When valuing a firm's stocks and bonds, finance professionals place equal significance on accounting results and cash flows.
A)True
B)False
Answer: False
Q2) The essence of finance is the process of raising capital (money), exclusively through the sale of bonds.
A)True
B)False
Answer: False
Q3) A person buying a ____ is called an investor.
A) bond
B) stock
C) mutual fund
D) All of the above
Answer: D
Q4) C-corporations issue real assets, such as debt, in order to raise money.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) The relevant tax rate for investment decisions is the:
A) average rate.
B) lowest rate.
C) marginal rate.
D) effective rate.
Answer: C
Q2) Which of the following would cause a decrease in cash?
A) Lengthening the time it takes to collect receivables from 15 to 30 days
B) Selling fixed assets for more than book value
C) An increase in accrued salaries expense
D) Paying suppliers in 60 days versus 45 days
Answer: A
Q3) One of the most significant exemptions for most people is interest on a home mortgage.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) What is the cost of sales for a firm with a gross margin of 30 percent, ROS of 4 percent, and earnings after taxes of $20,000?
A) $200,000
B) $350,000
C) $150,000
D) None of the above
Answer: B
Q2) Asset management ratios indicate:
A) how well a firm is using its assets to support sales.
B) how efficiently a firm is allocating its liabilities.
C) the return on assets.
D) the profitability of the firm.
Answer: A
Q3) ____ indicate the firm's capacity to meet its debt obligations, both short term and long term.
A) Liquidity ratios
B) Asset management ratios
C) Debt management ratios
D) Profitability ratios
Answer: C
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Chapter 4: Financial Planning
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Sample Questions
Q1) Which of the following is true of the financial plan in a reasonably well managed company?
A) The plan should ideally follow the aggressive optimism strategy.
B) The plan should establish measurable goals which result in bonus compensation if achieved.
C) Its stretch goals serve as targets toward which the organization strives and always achieves.
D) Its stretch goal faces a risk of overstating achievable performance because of the bottom-up phenomenon.
Q2) A good business plan shows enough supporting detail to indicate that it is the product of careful thinking.
A)True
B)False
Q3) Holding all other things constant, additional debt financing needed would be reduced with an INCREASE in the firm's:
A) dividend payout
B) return on Sales
C) cost Ratio
D) tax Rate
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Page 6
Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Through financial intermediaries, individuals invest directly in firms' stocks and bonds.
A)True
B)False
Q2) Stocks, and bonds are long-term investment vehicles. They are similar in that both have stipulated terms that designate the maturity of the investment.
A)True
B)False
Q3) CDOs can be valued easily and are priced on the basis of their annualized yields.
A)True
B)False
Q4) Financial markets include:
A) capital markets.
B) money markets.
C) primary markets.
D) secondary markets.
E) All of the above
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Chapter 6: Time Value of Money
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Sample Questions
Q1) What is the Present Value (PV) of the following series of cash flows using an 8% discount rate? \(\begin{array}{lc}
\text { Year } & \$ \\
\hline 1 & 500 \\
2 & 300 \\
3 & 0 \\
4 & 400 \\
5 & 400
\end{array}\)
A) Less than $1200
B) $1201 - $1250
C) $1251 - $1300
D) $1301 - $1350
E) More than $1350
Q2) The annual effective rate of interest is a function of:
A) the annual nominal rate of interest.
B) the number of compounding intervals per year.
C) the imbedded annuity.
D) a and b
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Page 8
Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Maturity risk exists because the prices of longer-term bonds fluctuate more in response to:
A) government policy changes.
B) company policy changes.
C) industry changes.
D) interest rate changes.
Q2) If an investor requires a 10 percent return on a $1000 bond with a 7% coupon rate, what will the investor be willing to pay for the bond today if it matures in 8 years and interest is paid semiannually? What if interest is compounded and paid annually?
A) $839.95; $837.43
B) $1,194.80; $837.33
C) $837.43; $839.95
D) $840.45; $1,194.80
Q3) Explain call provisions on a bond. How does it help bond-issuers?
Q4) The rate of return offered by a security is the interest rate that makes the present value of the security's future cash flows equal to its selling price.
A)True
B)False
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Page 9
Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) A prospectus may contain a price range for the IPO stock and not the exact offering price.
A)True
B)False
Q2) When a call option is out of the money, its intrinsic value is zero but its time premium may be positive.
A)True
B)False
Q3) Since preferred stock has a fixed dividend payment similar to the interest on bonds, preferred dividends are tax deductible under the U.S. tax code.
A)True
B)False
Q4) Which class of investors do not have claims on the income and assets of the firm prior to preferred shareholders?
A) Bondholders
B) Creditors
C) Lenders such as banks
D) Common shareholders
Q5) Are growth rate models such oversimplifications of reality that they're useless?
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Chapter 9: Risk and Return
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Sample Questions
Q1) Ken Howard has a two stock portfolio consisting of Acton Inc. and Boron Corp. Assume the following conditions exist. \(\begin{array}{l}
\text {Return on the market }&=13 \% \\
\text {3 month Treasury bill rate }&=6 \% \\
\text { Acton's beta}&=1.15 \\
\text {Boron's beta }&=1.40\\
\text { Market value of Ken's investment in Acton}&=\$ 125,000 \\
\text {Market value of Ken's investment in Boron }&=\$ 250,000 \\
\text { }&\$ 375,000
\end{array}\) What does the SML predict is Ken's required rate of return for the overall portfolio?
A) 15.24%
B) 14.93%
C) 23.12%
D) 20.90%
Q2) Changes in the rate of inflation is an element of unsystematic risk.
A)True
B)False
Q3) How can a stock have different risk characteristics in and out of a portfolio?
Q4) What is the market risk premium?
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) According to one study done some time ago, most small firms use the _____ method to evaluate capital projects.
A) NPV
B) IRR
C) payback
D) PI
Q2) Capital rationing:
A) is a technique for allocating scarce financial resources among viable projects.
B) determines which projects pass the NPV and/or IRR tests.
C) implies that all projects with positive NPVs should be undertaken.
D) generally gives terrible results when done intuitively.
Q3) Which of the following statement(s) is(are) true for the application of the IRR in a capital budgeting decision?
A) The IRR must exceed the cost of capital to warrant undertaking the project.
B) The project's IRR is dependent on the project's cost of capital.
C) The IRR is similar to a bond's yield in that both generate a zero NPV.
D) a and c
Q4) When can IRR and NPV give different results? Explain how this can happen.
Q5) What are some of the practical reasons for capital rationing?
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Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) The following data is associated with a proposed replacement project: A machine that originally cost $25,000 and was depreciated on a straight line basis has one year of its expected 5-year life remaining. Its current market value is $12,000. The corporate tax rate is 34%. The cash flow from disposing of the old machine, is:
A) $12,000.
B) $ 9,620.
C) ($ 9,620.)
D) $14,380.
Q2) Financing costs such as interest costs should be included in the cash flow estimates for evaluating a project.
A)True
B)False
Q3) The relevance of a sunk cost to the evaluation of a capital budgeting project depends on how recently in the past the cost was incurred.
A)True
B)False
Q4) Define sunk costs and explain their role in capital budgeting.
Q5) Define opportunity costs and explain their role in capital budgeting.
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) If the IRR is 10% APR for two projects, then ____.
A) the projects have equally risky cash flows
B) the projects have the same discount rate
C) the NPVs of the projects are the same
D) the expected cash flows of the projects may be the same despite having different values for variance
Q2) As is true of financial investments, the cash flow patterns on different capital budgeting projects tend to be very similar.
A)True
B)False
Q3) The ____ makes risky projects less acceptable by simply lowering the cash flow estimates themselves.
A) overlay approach
B) pure play method
C) certainty equivalent approach
D) accounting beta method
Q4) What is Monte Carlo simulation? How is it used in the capital budgeting?
Q5) Explain the certainty equivalent approach.
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Chapter 13: Cost of Capital
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Sample Questions
Q1) It would generally be considered wise for a company to invest in a business that is expected to return 14 percent, when the amount invested is borrowed at 12 percent.
A)True
B)False
Q2) In the calculation of a firm's cost of capital, the component cost of debt is expressed on a pre-tax basis.
A)True
B)False
Q3) Because people are less concerned about the precision of the capital structure than they are about the accuracy of component costs, a target structure is often combined with the current component costs in arriving at a WACC.
A)True
B)False
Q4) The investment opportunity schedule (IOS) and the MCC viewed together identify which capital projects should or should not be undertaken.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) The degree of total leverage is equal to the degree of operating leverage ____ the degree of financial leverage.
A) added to B) divided by C) multiplied by D) subtracted from
Q2) Which of the following is accepted wisdom regarding the optimal capital structure?
A) For most firms, the optimal capital structure is somewhere between 30% and 50% debt.
B) A firm with good profit prospects and little to no debt is probably missing an opportunity by not using borrowed money if interest rates are reasonable.
C) Debt levels above 60% create excessive risk and should be avoided.
D) All of the above
Q3) What are the two different types of risk in the context of leverage?
Q4) EBIT-EPS analysis tells management exactly how much leverage to use.
A)True B)False
Q5) Explain the breakeven analysis.
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Chapter 15: Dividends
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Sample Questions
Q1) A firm with an aggressive expansion policy would seek investors who favor income generated by the cash stream of dividends rather than investors who favor income through capital appreciation.
A)True
B)False
Q2) The signaling effect implies that dividends do indeed affect stock prices.
A)True
B)False
Q3) From an accounting standpoint, stock splits are accomplished by:
A) increasing the number of shares outstanding.
B) increasing par value of existing shares.
C) reducing the par value of existing shares.
D) a and c
Q4) Firms often offer shareholders the option of receiving new shares instead of cash dividends. Such a plan has the advantage of raising new equity without incurring flotation costs.
A)True
B)False
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Chapter 16: The Management of Working Capital Multiple
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Sample Questions
Q1) Supporting working capital with long-term financing is:
A) risky, but inexpensive.
B) conservative, but expensive.
C) expensive and risky.
D) conservative and inexpensive.
Q2) The primary objective of offering a cash discount is to:
A) reduce the investment in receivables.
B) reduce the number of bad checks received from customers.
C) encourage customers to place their orders prior to the peak selling period.
D) None of the above
Q3) A revolving-credit agreement between a firm and its bankers:
A) is a contractual agreement between the firm and its bank.
B) does not need to be "cleaned up" during the term of the arrangement.
C) involves payment of a commitment fee to the bank.
D) All of the above
Q4) Short-term loans are generally used to:
A) finance permanent additions to working capital.
B) finance additions to fixed assets.
C) finance seasonal working-capital requirements.
D) retire equity, thus changing a firm's capital structure.
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Chapter 17: The Management of Working Capital
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Sample Questions
Q1) While a firm's bad debts should rise as it relaxes its credit standards, its ACP should fall.
A)True
B)False
Q2) A revolving credit agreement is a guaranteed line of credit.
A)True
B)False
Q3) Accruals tend to be directly related to a firm's level of operations.
A)True
B)False
Q4) Due to administrative costs, warehousing is an expensive source of financing.
A)True
B)False
Q5) A low level of cash may force the firm to interrupt operations.
A)True
B)False
Q6) By foregoing the prompt payment discount offered in terms of 1/10, net 30, the customer is effectively borrowing at rate of 36.5%.
A)True
B)False
Page 19
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) Merger analysis is always a straightforward exercise in capital budgeting.
A)True
B)False
Q2) What is the resulting capital structure after an LBO if prior to the deal the firm had $225Min equity and $10M in debt, and the acquiring group bought the company's stock at book value contributing $20M of its own money and borrowing the rest?
A) Debt $10M; Equity $215M
B) Debt $215M; Equity $10M
C) Debt $215M; Equity $20M
D) Debt $225M; Equity $10M
Q3) It is generally accepted that horizontal mergers (between competitors) decrease competition. Imagine a three firm industry in which the competitors' market shares are as follows:
\(\begin{array}{ll}
\text { A } & 26 \% \\
\text { B } & 20 \\
\text { C } & 54 \%
\end{array}\) Is it possible that a merger between A and B would increase competition in the industry to the benefit of customers?
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Page 20
Chapter 19: International Finance
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Sample Questions
Q1) The currencies of ____ have traditionally not been convertible.
A) China
B) Great Britain
C) Russia
D) a and c
E) All of the above
Q2) The forward market enables companies to transfer foreign exchange risk to professionals who are in the business of bearing such risks.
A)True
B)False
Q3) The direct and indirect quotes on the Swiss franc are 0.75 and 1.33, respectively. The direct and indirect quotes on Poland's zloty are 0.25 and 3.94, respectively. How many zloty will it cost a Polish merchant to purchase a watch priced at 270 Swiss francs.
A) 90 zloty
B) 154 zloty
C) 810 zloty
D) 2400 zloty
Q4) Why do governments influence exchange rates from time to time? How do they do it?
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