Introduction to Financial Management Review
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Course Introduction
Introduction to Financial Management offers students a foundational understanding of financial decision-making in organizations. The course explores essential topics such as financial analysis, planning, and control, the time value of money, risk and return, capital budgeting, sources of financing, and working capital management. Students will learn to interpret financial statements, evaluate investment opportunities, and understand the role of finance in strategic planning. Through practical examples and case studies, the course equips students with the skills necessary to support effective financial management in both personal and professional contexts.
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CFIN 3 3rd Edition by Scott Besley
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18 Chapters
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1302 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Management may expropriate wealth from bondholders to shareholders through which of the following actions:
A) take on new ventures with much greater risk than was anticipated by creditors.
B) take on more debt to increase the returns to shareholders.
C) issue more stock than was anticipated by creditors.
D) answers a and b are correct.
E) answers b and c are correct.
Answer: A
Q2) One way to state the decision framework most useful for carrying out the firm's objective is that the financial managers should seek that combination of assets,liabilities,and capital which will generate the largest expected projected income over the relevant time horizon.
A)True
B)False
Answer: False
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Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) All of the following represent cash outflows to the firm except A) Taxes.
B) Interest payments.
C) Dividends.
D) Purchase of plant and equipment.
E) Depreciation.
Answer: E
Q2) A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.
A)True
B)False
Answer: False
Q3) Funds supplied by common stockholders mainly includes capital stock,paid-in capital,and retained earnings,while total equity is comprised of common equity plus preferred stock.
A)True
B)False
Answer: True
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Chapter 3: The Financial Environment: Markets, institutions, and Investment Banking
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Sample Questions
Q1) The market for newly issued stock by firms that were private is normally called
A) the seasoned equity market.
B) the over-the-counter market.
C) the initial public offering market.
D) the secondary market.
E) the stock market.
Answer: C
Q2) One advantage of common stock as a source of funds is that the underwriting and distribution costs of common stock are usually much lower than those for debt.
A)True
B)False
Answer: False
Q3) A publicly owned corporation is simply a company whose shares are held by the investing public,which may include other corporations and institutions.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) Because we usually assume positive interest rates in time value analyses,the present value of a three-year annuity will always be less than the future value of a single lump sum,if the annuity payment equals the original lump sum investment.
A)True
B)False
Q2) Solving for the interest rate associated with a stream of uneven cash flows,without the use of a calculator,usually involves a trial and error process.
A)True
B)False
Q3) By definition,what type of annuity best describes payments such as rent and magazine subscriptions (assuming the costs do not change over time)?
A) ordinary annuity
B) annuity due
C) nonconstant annuity
D) annuity in arrears
Q4) A perpetuity is an annuity with perpetual payments.
A)True
B)False
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6
Chapter 5: The Cost of Money
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Sample Questions
Q1) A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket?
A) 12.50%
B) 17.50%
C) 7.00%
D) 14.00%
E) 9.00%
Q2) Assume that the current yield curve is upward sloping,or normal.This implies that
A) Short-term interest rates are more volatile than long-term rates.
B) Inflation is expected to subside in the future.
C) The economy is at the peak of a business cycle.
D) Long-term bonds are a better buy than short-term bonds.
E) None of the above statements is necessarily implied by the yield curve given.
Q3) The yield curve is downward sloping,or inverted,if the long-term rates are higher than the short-term rates.
A)True
B)False
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Page 7
Chapter 6: Bonds Debt-Characteristics and Valuation
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Sample Questions
Q1) A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000.What is the amount of tax that an investor in the 30 percent tax bracket would pay during the first year of owning the bond?
A) $7.57
B) $10.41
C) $15.89
D) $20.44
E) $25.22
Q2) A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.
A)True
B)False
Q3) LIBOR is an acronym for London Interbank Offer Rate,which is an average of interest rates offered by London banks to U.S.corporations.
A)True B)False
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8
Chapter 7: Stocks Equity-Characteristics and Valuation
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Sample Questions
Q1) When management controls more than 50% of the shares of the firm,they must be concerned with the potential of a proxy fights than can lead to takeovers of the firm and the replacement of management.
A)True
B)False
Q2) Scubapro Corporation currently has 500,000 shares outstanding and plans to issue 200,000 more shares in a seasoned equity offering.The current shareholders have preemptive rights on any new issue of stock by Scubapro Corporation.An investor with 20,000 shares who exercises his preemptive rights on the new stock issue will have the right to buy how many stocks?
A) 200,000 shares
B) 120,000 shares
C) 80,000 shares
D) 12,000 shares
E) 8,000 shares
Q3) One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm to make payments to stockholders.
A)True
B)False
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Page 9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Assume Stock A has a standard deviation of 0.21 while Stock B has a standard deviation of 0.10.If both Stock A and Stock B must be held in isolation,and if investors are risk averse,we can conclude that Stock A will have a greater required return.However,if the assets could be held in portfolios,it is conceivable that the required return could be higher on the low standard deviation stock.
A)True
B)False
Q2) All else equal,risk averse investors generally require __________ returns to purchase investments with __________ risks.
A) higher; lower B) lower; higher C) higher; higher
D) None of the above is correct.
Q3) If I know for sure that the market will have a positive return over the next year,to maximize my rate of return,I should increase the beta of my portfolio.
A)True B)False
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) Capitol City Transfer Company is considering building a new terminal in Salt Lake City.If the company goes ahead with the project,it must spend $1 million immediately (at t = 0)and another $1 million at the end of Year 1 (t = 1).It will then receive net cash flows of $0.5 million at the end of Years 2-5,and it expects to sell the property and net $1 million at the end of Year 6.All cash inflows and outflows are after taxes.The company's required rate of return is 12 percent,and it uses the modified IRR criterion for capital budgeting decisions.What is the project's modified IRR (MIRR)?
A) 11.9%
B) 12.0%
C) 11.4%
D) 11.5%
E) 11.7%
Q2) Small businesses probably make less use of the DCF capital budgeting techniques than large businesses.This may reflect a lack of knowledge on the part of small firms' managers,but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for those firms.
A)True
B)False
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11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100.To operate the machine,$200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3.The machine will produce sales revenues of $900/year for 3 years; variable operating costs (excluding depreciation)will be 50 percent of sales.Operating cash inflows will begin 1 year from today (at Time 1).The machine will have depreciation expenses of $500,$300,and $200 in Years 1,2,and 3,respectively.The company has a 40 percent tax rate,enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative,and a 10 percent required rate of return.Inflation is zero.What is the project's NPV?
A) $6.24
B) $7.89
C) $8.87
D) $9.15
E) $10.41
Q2) In cash flow estimation,the presence of externalities has no direct cash flow effects.
A)True
B)False
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Page 12
Chapter 11: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is correct?
A) Suppose a firm is losing money and thus, is not paying taxes, and that this situation is expected to persist for a few years whether or not the firm uses debt financing. Then the firm's after-tax cost of debt will equal its before-tax cost of debt.
B) The component cost of preferred stock is expressed as r<sub>ps</sub>(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest.
C) The reason that a cost of capital is assigned to retained earnings is because these funds are already earning a return in the business, the reason does not involve the opportunity cost principle.
D) The bond-yield-plus-risk-premium approach to estimating a firm's cost of common equity involves adding a subjectively determined risk-premium to the market risk-free bond rate.
E) None of the above is a correct statement.
Q2) 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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Sample Questions
Q1) Generally,as debt is substituted for equity,risk,as measured by the coefficient of variation of EPS,increases.This negative effect works against the positive effect of substituting debt for equity,which is that higher leverage increases expected EPS.
A)True
B)False
Q2) According to MM,in a world without taxes,the optimal capital structure for a firm should approach 100 percent debt financing.
A)True
B)False
Q3) Refer to Copybold Corporation.What is the difference between the EPS forecasts for Feast and Famine under the conservative capital structure?
A) $1.00
B) $0.80
C) $2.20
D) $0.44
E) $0
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) The dividend payout ratio,on average,for companies in the United States is higher than for companies in Japan.
A)True
B)False
Q2) Ducheyne Electric recently declared a 15 percent stock dividend.On the date of the stock dividend Ducheyne had 16 million shares outstanding priced at $46 per share in the market.An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account.If retained earnings was $280 million prior to the transaction,what was the dollar amount of retained earnings after the transfer?
A) $280.0 million
B) $110.4 million
C) $234.0 million
D) $277.6 million
E) $169.6 million
Q3) The dividend irrelevance theory says that the firm's dividend policy has no effect on either its value or its cost of capital.
A)True
B)False
Page 15
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Chapter 14: Working Capital Policy
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Sample Questions
Q1) A firm following an aggressive approach to working capital policy will finance all of the fixed assets with __________,and some of the firm's permanent current assets will be financed with __________.
A) short-term nonspontaneous sources of funds; long term capital
B) commercial paper; long term capital
C) long term capital; short-term nonspontaneous sources of funds
D) long term capital; corporate bonds
E) short-term nonspontaneous sources of funds; corporate bonds
Q2) Firms following a restricted current asset policy are likely to __________ holdings of cash and have a __________ credit policy on sales.
A) have large; conservative
B) minimize the; conservative
C) have large; liberal
D) minimize the; liberal
E) have zero; liberal
Q3) The inventory conversion period is calculated by dividing inventory by the cost of goods sold per day.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?
A) It normally stimulates sales.
B) To meet competitive pressures.
C) To increase the firm's deferral period for payables.
D) All of the above.
E) Both a and b above.
Q2) Two commonly used methods of monitoring receivables are the DuPont method and the aging schedule.
A)True
B)False
Q3) If the average collection period or days sales outstanding is increasing the firm should consider easing its credit policy to allow credit to more of its customers.
A)True
B)False
Q4) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
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Chapter 16: Managing Short-Term Liabilities Financing
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Sample Questions
Q1) Most secured short-term business borrowings involves the use of __________ as collateral.
A) real estate
B) marketable securities
C) equipment
D) inventory
E) None of the above.
Q2) The maturity of most bank loans is short-term.Bank to business loans are frequently 90-day notes which are often rolled over,or renewed,at the end of their maturity.
A)True
B)False
Q3) Accounts receivable financing,especially the factoring of accounts,is a very flexible source of funds.Once the factoring procedure has been established,funds from this type of financing will automatically increase as the firm increases its sales.
A)True
B)False
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Chapter 17: Financial Planning and Control
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Sample Questions
Q1) The degree of operating leverage has which of the following characteristics?
A) The closer the firm is operating to breakeven quantity, the smaller the DOL.
B) A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.
C) The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume).
D) The DOL relates the change in net income to the change in net operating income.
E) If the firm has no debt, the DOL will equal 1.
Q2) The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.
A)True
B)False
Q3) Everything else equal,the higher the DFL is for a firm,the closer its operations are to its financial breakeven point.
A)True
B)False
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Page 19
Chapter 18: project Cash Flows and Risk
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Sample Questions
Q1) Which of the following statement completions is incorrect? For a profitable firm,when MACRS accelerated depreciation is compared to straight-line depreciation,MACRS accelerated allowances produce
A) Higher depreciation charges in the early years of an asset's life.
B) Larger cash flows in the earlier years of an asset's life.
C) Larger total undiscounted profits from the project over the project's life.
D) Smaller accounting profits in the early years, assuming the company uses the same depreciation method for tax and book purposes.
E) None of the above (All of the above are correct.)
Q2) Other things held constant,which of the following would increase the NPV of a project being considered?
A) A shift from MACRS to straight-line depreciation.
B) Making the initial investment in the first year rather than spreading it over the first 3 years.
C) A decrease in the discount rate associated with the project.
D) The sale of the old machine, in a replacement decision, at a capital loss rather than at book value.
E) An increase in required working capital.
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Page 20