Managerial Finance Exam Bank
Course Introduction
Managerial Finance examines the principles and techniques that managers use to make informed financial decisions within organizations. The course covers key topics such as financial statement analysis, budgeting, forecasting, risk and return assessment, capital structure, and investment appraisal. Through a combination of theory and real-world case studies, students learn how to apply financial concepts to planning, monitoring, and controlling organizational resources, with the aim of maximizing value and ensuring long-term financial sustainability.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) What type of company trades on an organized stock exchange?
A)A limited liability company
B)A private company
C)An "S" corporation
D)A public company
Answer: D
Q2) Explain the benefits of incorporation.
Answer: 1.Limited liability 2.Unlimited life 3.Access to capital markets/availability of outside funding
Q3) If you buy shares of Coca-Cola on the primary market:
A)Coca-Cola receives the money because the company has issued new shares.
B)you buy the shares from another investor who decided to sell the shares.
C)you buy the shares from the New York Stock Exchange.
D)you buy the shares from the Federal Reserve.
Answer: A
Q4) Explain the main differences between the NYSE and NASDAQ stock markets.
Answer: Key points: NYSE has physical location - NASDAQ is an electronic market. NYSE has one specialist in each stock and his role is to match buyers and sellers. NASDAQ has multiple market makers (dealers)in each stock who stand ready to trade on their own accounts.
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) IECE's Return on Assets (ROA)is:
A)5.0%
B)8.5%
C)7.5%
D)15.0%
Answer: B
Q2) Which of the following is (are)deducted from EBIT to determine net income?
A)Earnings per share
B)Interest expense
C)Corporate taxes
D)Both B and C
Answer: D
Q3) Accounts payable is a:
A)long-term liability.
B)current asset.
C)long-term asset.
D)current liability.
Answer: D
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Which of the following statements regarding arbitrage and security prices is INCORRECT?
A)We call the price of a security in a normal market the no-arbitrage price for the security.
B)In financial markets it is possible to sell a security you do not own by doing a short sale.
C)When a bond is underpriced,the arbitrage strategy involves selling the bond and investing some of the proceeds.
D)The general formula for the no-arbitrage price of a security is Price(security)= PV (All cash flows paid by the security).
Answer: C
Q2) When we express the value of a cash flow or series of cash flows in terms of dollars today,we call it the ________ of the investment.If we express it in terms of dollars in the future,we call it the ________.
A)present value; future value
B)future value; present value
C)ordinary annuity; annuity due
D)discount factor; discount rate
Answer: A
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Chapter 4: The Time Value of Money
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Q1) Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:
A)$42,825
B)$97,331
C)$67,998
D)$103,063
Q2) If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:
A)$18,519
B)$45,761
C)$9818
D)$20,000
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Chapter 5: Interest Rates
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Q1) The highest effective rate of return you could earn on any of these investments is closest to:
A)6.250%
B)6.267%
C)6.295%
D)6.310%
Q2) Which of the following statements is FALSE?
A)The actual return kept by an investor will depend on how the interest is taxed.
B)The equivalent after-tax interest rate is r(1 - ).
C)The highest interest rate,for a given horizon,is the rate paid on U.S.Treasury securities.
D)It is important to use a discount rate that matches both the horizon and the risk of the cash flows.
Q3) The effective monthly discount rate that you should use to evaluate the truck lease is closest to:
A)0.487%
B)0.498%
C)1.500%
D)1.535%
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Chapter 6: Valuing Bonds
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Q1) The amount that the price of bond "B" will change if its yield to maturity increases from 7% to 8% is closest to:
A)-$36
B)$9
C)$36
D)$39
Q2) The likely effect of a country printing additional currency to pay its debts is:
A)high inflation
B)devaluation of the currency
C)appreciation of the currency
D)A and B
Q3) Assuming that this bond trades for $1035.44,then the YTM for this bond is equal to:
Q4) The price per $100 face value of a three-year,zero-coupon,risk-free bond is closest to:
A)$93.80
B)$90.06
C)$89.16
D)$86.39
Q5) Plot the zero-coupon yield curve (for the first five years).
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Chapter 7: Investment Decision Rules
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Q1) Which of the following statements is FALSE?
A)The IRR investment rule will identify the correct decision in many,but not all,situations.
B)By setting the NPV equal to zero and solving for r,we find the IRR.
C)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
D)The simplest investment rule is the NPV investment rule.
Q2) Which of the following statements is FALSE?
A)In general,the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
B)The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
C)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
D)If the cost of capital estimate is more than the IRR,the NPV will be positive.
Q3) If the discount rate for project B is 15%,then what is the NPV for project B?
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) The incremental EBIT for the Shepard Industries project in year one is closest to:
A)$360
B)$750
C)$595
D)$510
Q2) Which of the following statements is FALSE?
A)Depreciation expenses have a positive impact on free cash flow.
B)Free Cash Flow = (Revenues - Costs - Depreciation)× (1 - <sub>c</sub>)- Capital Expenditures - NWC + <sub>c</sub> × Depreciation.
C)The firm cannot use its earnings to buy goods,pay employees,fund new investments,or pay dividends to shareholders.
D)The depreciation tax shield is the tax savings that results from the ability to deduct depreciation.
Q3) How does scenario analysis differ from sensitivity analysis?
Q4) Epiphany would like to know how sensitive the project's NPV is to changes in the discount rate.How much can the discount rate vary before the NPV reaches zero?
Q5) What is sensitivity analysis?
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A)The most common valuation multiple is the price-earnings (P/E)ratio.
B)You should be willing to pay proportionally more for a stock with lower current earnings.
C)A firm's P/E ratio is equal to the share price divided by its earnings per share.
D)The intuition behind the use of the P/E ratio is that when you buy a stock,you are in sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.
Q2) Taggart's market capitalization is closest to:
A)$25 billion
B)$31 billion
C)$40 billion
D)$50 billion
Q3) If DM has $500 million of debt and 14 million shares of stock outstanding,then what is the price per share for DM Corporation?
Q4) Calculate the enterprise value for DM Corporation.
Q5) What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Assume that you purchased Ford Motor Company stock at the closing price on December 31,2008 and sold it at the closing price on December 30,2009.Your realized annual return for the year 2009 is closest to:
A)-45.1%
B)-44.5%
C)-48.5%
D)-47.3%
Q2) The standard deviation of the overall payoff to Bank A is closest to:
A)$689,000
B)$751,000
C)$2,179,000
D)$2,375,000
Q3) The beta for security "Z" is closest to:
A)-1.00
B)-0.25
C)0.00
D)0.25
Q4) Which pharmaceutical company faces less risk?
Q5) Do expected returns for individual stocks increase proportionately with volatility?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) The volatility of the alternative investment that has the lowest possible volatility while having the same expected return as Google is closest to:
A)18.0%
B)22.5%
C)23.4%
D)35.0%
Q2) Which of the following statements is FALSE?
A)The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio.
B)The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights.
C)The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio.
D)The volatility declines as the number of stocks in a portfolio grows.
Q3) Will adding the precious metals fund improve your portfolio?
Q4) The variance on a portfolio that is made up of a $6000 investments in Microsoft and a $4000 investment in Wal-Mart stock is closest to:
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Chapter 12: Estimating the Cost of Capital
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Q1) Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The bondholders expected loss rate in the event of default is 50%.Assuming the economy is in recession,then the expected return on Rearden Metal's debt is closest to:
A)0.6%
B)1.6%
C)4.6%
D)6.0%
Q2) Which of the following statements is FALSE?
A)All investors should demand the same efficient portfolio of securities in the same proportions.
B)The Capital Asset Pricing Model (CAPM)allows corporate executives to identify the efficient portfolio (of risky assets)by using knowledge of the expected return of each security.
C)If investors hold the efficient portfolio,then the cost of capital for any investment project is equal to its required return calculated using its beta with the efficient portfolio. D)The CAPM identifies the market portfolio as the efficient portfolio.
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) The market value for Chihuahua is closest to:
A)$10.0 million
B)$12.5 million
C)$12.0 million
D)$15 million
Q2) The tendency of uninformed individuals to overestimate the precision of their knowledge is known as:
A)overconfidence bias.
B)herd behavior.
C)familiarity bias.
D)disposition bias.
Q3) The alpha for the fad follower's portfolio is closest to:
A)-0.9%
B)0.0%
C)3.6%
D)6.0%
Q4) What does the existence of a positive alpha investment strategy imply?
Q5) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) What is Luther's enterprise value?
A)$16 billion
B)$10.5 billion
C)$24 billion
D)$20 billion
Q2) Which of the following statements is FALSE?
A)Modigliani and Miller's conclusion verified the common view,which stated that even with perfect capital markets,leverage would affect a firm's value.
B)We can evaluate the relationship between risk and return more formally by computing the sensitivity of each security's return to the systematic risk of the economy.
C)Investors in levered equity require a higher expected return to compensate for its increased risk.
D)Leverage increases the risk of equity even when there is no risk that the firm will default.
Q3) What is a market value balance sheet and how does it differ from a book value balance sheet?
Q4) Show mathematically that the stock price of RC won't change following the debt issuance and share repurchase.
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Chapter 15: Debt and Taxes
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Q1) Which of the following statements is FALSE?
A)Even after adjusting for personal taxes,the value of an unlevered firm exceeds the value of a levered firm,and there is a tax advantage to using debt financing.
B)In Modigliani and Miller's setting of perfect capital markets,firms could use any combination of debt and equity to finance their investments without changing the value of the firm.
C)When firms raise new capital from investors,they do so primarily by issuing debt.
D)In most years aggregate equity issues are negative,meaning that firms are reducing the amount of equity outstanding by buying shares.
Q2) In 2005,the effective tax rate for debt holders was closest to:
A)58%
B)35%
C)40%
D)65%
Q3) Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered for the year 2004.
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Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs.Suppose that at the start of the year,MI has no debt outstanding,but has 5.6 million shares of stock outstanding.If MI issues debt of $125 million due next year and uses the proceeds to repurchase shares,the share price following the announcement of the repurchase will be closest to:
A)$23.90
B)$23.75
C)$25.00
D)$5.15
Q2) If Nielson Motors invests in only those projects which are beneficial to the stockholders,then the total debt overhang associated with accepting these project(s)is closest to:
A)$22.5 million
B)$36.0 million
C)$38.0 million
D)$57.5 million
Q3) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) The effective tax disadvantage for retaining cash in 2000 is closest to:
A)15.00%
B)13.35%
C)14.75%
D)35.00%
Q2) Which of the following statements is FALSE?
A)Firms adjust dividends relatively infrequently,and dividends are much less volatile than earnings.This practice of maintaining relatively constant dividends is called dividend signaling.
B)When a firm increases its dividend,it sends a positive signal to investors that management expects to be able to afford the higher dividend for the foreseeable future.
C)The average size of the stock price reaction increases with the magnitude of the dividend change,and is larger for dividend cuts.
D)When managers cut the dividend,it may signal that they have given up hope that earnings will rebound in the near term and need to reduce the dividend to save cash.
Q3) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) The NPV of this project using the WACC method is closest to:
A)$10 million
B)$13 million
C)$42 million
D)$71 million
Q2) Dusty Donuts has zero coupon debt with a face value of $10 million due in 3 years,and no other debt outstanding.The risk-free rate is 4%,but due to default risk the yield to maturity on the debt is 10%.Dusty's believes that in the event of default,10% of the losses are attributable to bankruptcy and distress costs.Estimate the present value of the distress costs.
A)$138 million
B)$138 thousand
C)$1.38 million
D)$1.38 thousand
Q3) The unlevered cost of capital for Armadillo Industries is closest to:
Q4) Calculate the NPV for Iota's new project.
Page 20
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) The unlevered beta for Nike is closest to:
A)0.70
B)1.00
C)1.50
D)0.60
Q2) The free cash flow to equity in 2010 is closest to:
A)6255
B)10,684
C)11,559
D)18,394
Q3) The amount of the increase in net working capital for Ideko in 2007 is closest to:
A)$4090
B)$4685
C)$3665
D)$5230
Q4) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
Q5) What is the purpose of the sensitivity analysis?
Page 21
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