Managerial Finance Exam Bank
Course Introduction
Managerial Finance provides an in-depth examination of the financial decision-making processes within organizations. The course covers fundamental concepts such as financial statement analysis, budgeting, capital structure, risk assessment, time value of money, capital budgeting, and working capital management. Students will learn to evaluate investment opportunities, assess financing alternatives, and develop strategies to maximize shareholder value. Emphasis is placed on practical applications of financial theory, including the use of quantitative tools and real-world case studies, to prepare students for effective financial management and strategic planning roles in diverse business environments.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley
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Page 2
Chapter 1: An Overview of Finance
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Sample Questions
Q1) Which of the following is NOT one of the most important trends in managerial finance from the 1990s that continued into the twenty-first century?
A) Regulatory attitude of government
B) Ongoing adaptation of electronic technology
C) Focus on corporate liquidity
D) Continued globalization of business
E) All of the above
Answer: C
Q2) A major reason there has been a great deal of deregulation in the banking industry since the 1970s is due to the emergence of nonbank organizations and the need to increase competitiveness of U.S.banks and other financial institutions.
A)True
B)False
Answer: False
Q3) Managerial finance refers to analysis and management of one's investment portfolio.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Assets Instruments
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Q1) A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.
A) convertible security
B) call option
C) warrant
D) put option
E) callable security
Answer: D
Q2) An indexed bond has its value tied to an inflation index.As inflation increases the value of the bond increases and the issuer is responsible for the accumulated value which may become much greater than the original face value.
A)True
B)False
Answer: False
Q3) Current liabilities are liabilities that must be paid during the next twelve months.
A)True
B)False
Answer: True
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Chapter 3: Financial Markets and the Investment Banking Process
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Q1) The largest segment of the U.S.debt market is represented by the bond markets, where government, corporate, and foreign bonds are traded.
A)True
B)False
Answer: True
Q2) Market efficiency refers only to the speed at which financial transactions occur.
A)True
B)False
Answer: False
Q3) The primary role of financial markets is to help bring together borrowers and savers by facilitating the flow of funds from individuals and businesses that have surplus funds to individuals, businesses, and governments that have needs for funds in excess of their income.
A)True
B)False
Answer: True
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) Demand deposits represent the largest asset category for commercial banks.
A)True
B)False
Q2) Which of the following powers or tools of Federal Reserve monetary policy has the greatest impact on the money supply?
A) discount rate
B) Regulation Q
C) open market operations
D) bank examination
E) All of the above have about the same impact.
Q3) Which of the following is not a benefit associated with financial intermediaries?
A) reduced costs
B) fund indivisibility
C) financial flexibility
D) diversification of risk
Q4) Financial intermediaries generally take deposits from many savers and loan all their funds to a single firm.
A)True
B)False
Page 6
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds.Which of the possible bonds listed below best satisfies your uncle's criteria?
A) AAA bond with 10 years to maturity.
B) BBB perpetual bond.
C) BBB bond with 10 years to maturity.
D) AAA bond with 5 years to maturity.
E) BBB bond with 5 years to maturity.
Q2) If the United States is running a deficit trade balance with Great Britain, we would expect the value of the British pound to depreciate against the U.S.dollar.
A)True
B)False
Q3) Default risk premiums
A) are unrelated to the issuer of the security.
B) are higher for U.S.Treasury securities than for most corporate securities.
C) are higher for AAA bonds than for CCC bonds.
D) vary somewhat over time.
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Chapter 6: Business Organizations and the Tax Environment
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Q1) Deciding upon the form of organization for a business is an important financial decision with potentially significant consequences for the future wealth of the owners.
A)True
B)False
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
Q3) The primary goal of a publicly-owned firm interested in serving its stockholders should be to
A) Minimize the debt used by a firm.
B) Maximize expected EPS.
C) Minimize the chances of losses.
D) Maximize the stock price per share.
E) Maximize expected net income.
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Page 8
Chapter 7: Analysis of Financial Statements
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Q1) In accounting, emphasis is placed on determining net income.In finance, the primary emphasis also is on net income because that is what investors use to value the firm.However, a secondary consideration is cash flow because that's what is used to run the business.
A)True
B)False
Q2) From an investor's standpoint, predicting the future is the purpose of financial statement analysis.
A)True
B)False
Q3) The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements.This time sensitivity is especially true with respect to the firm's balance sheet.
A)True
B)False
Q4) A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.
A)True
B)False
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Chapter 8: Financial Planning and Control
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Sample Questions
Q1) Other things held constant, which of the following statements is correct if a firm currently is operating at its financial breakeven point?
A) EBIT must be greater than zero.
B) EBIT would equal zero if the firm is financed only with common stock (i.e., there is no debt or preferred stock).
C) EBIT would equal zero, hence EPS would be less than zero, if the firm has preferred stock but no debt.
D) EPS would equal zero only if the firm is financed with some amount of debt.
E) The firm would not be considered to have much financial risk, especially when compared to a firm that operates well above its financial breakeven point.
Q2) Refer to Trident Food Corporation.How many units of inventory must Trident Foods sell if it wants to operate at its financial breakeven point?
A) 2,000
B) 500
C) 4,800
D) 2,280
E) 6,800
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Chapter 9: Time Value of Money
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Sample Questions
Q1) Which of the following statements concerning the internal rate of return is false?
A) The internal rate of return for a capital budgeting project is the same for all firms regardless of their cost of capital.
B) A project is acceptable long as the project's internal rate of return is greater than the hurdle rate for the project.
C) The internal rate of return is dependent on the timing of the cash flows.
D) A project with a positive internal rate of return will always increase the value of the firm if the project is accepted.
E) You do not need to know the required rate of return to solve for the internal rate of return.
Q2) The present value of $3,000 to be received in 5 years at a 10% discount rate is $2000. A)True B)False
Q3) The effective annual rate of 5% compounded monthly is approximately 5.12%. A)True B)False
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Chapter 10: Valuation Concepts
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Sample Questions
Q1) Cold Boxes Ltd.has 100 bonds outstanding (maturity value = $1,000).The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually.The bonds mature in 5 years, and their current market value is $768 per bond.What is the annual coupon interest rate?
A) 8%
B) 6%
C) 4%
D) 2%
E) 0%
Q2) Trickle Corporation's 12 percent coupon rate, semiannual payment, $1,000 par value bonds mature in 25 years.The bonds currently sell for $1,230.51 in the market, and the yield curve is flat.Assuming that the yield curve is expected to remain flat, what is Trickle's most likely before-tax cost of debt if it issues new bonds today?
A) 4.78%
B) 6.46%
C) 7.70%
D) 9.56%
E) 12.92%
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Chapter 11: Risk and Rates of Return
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Sample Questions
Q1) Which of the following statements is most correct?
A) An increase in expected inflation could be expected to increase the required return on a riskless asset and on an average stock by the same amount, other things held constant.
B) A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
C) If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
D) If investors became more averse to risk, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
E) The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) Typically, according to the text, the MCC schedule is either horizontal or rising, which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital.The rising section of MCC schedule
A) Is caused by economies of scale in financing.
B) Would be eliminated (that is, the MCC schedule would be horizontal) if the firm retained all of its earnings.
C) Results from a change in the debt-to-assets ratio as the firm expands.
D) Occurs because the firm must, if it is to expand, be willing to take on riskier and riskier projects, and this causes an increase in the cost of capital.
E) Results from flotation costs associated with the sale of new common and preferred stock, along with higher debt costs, as the firm's rate of expansion increases.
Q2) Interest paid on corporate debt is tax deductible from the investor's point of view leading investors to accept a lower before-tax return on the corporation's debt.
A)True
B)False
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Chapter 13: Capital Budgeting
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Sample Questions
Q1) The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year.If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?
A) 8%
B) 14%
C) 18%
D) 5%
E) 12%
Q2) If a firm is considering purchasing an asset whose beta is greater than the current beta of the firm, it should use a discount rate greater than the firm's average required rate of return to evaluate the possible investment.
A)True
B)False
Q3) When calculating the cash flows for a project, you should include interest payments.
A)True B)False
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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Q1) If a firm uses no debt, the uncertainty inherent in projections of future returns on equity can be described as business risk.
A)True
B)False
Q2) Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
A)True
B)False
Q3) The higher a firm's time-interest-earned ratio, the higher the probability that the firm will default on its debt and experience financial distress.
A)True
B)False
Q4) If the firm's actual debt-to-assets ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity. A)True
B)False
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Chapter 15: Working Capital Management
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Sample Questions
Q1) Inventory financing can take the form of a
A) Blanket lien.
B) Trust receipt.
C) Warehouse receipt.
D) All of the above.
E) Answers a and b above.
Q2) Refer to East Lansing Appliances.What would be the incremental bad debt losses if the change were made?
A) $315,000
B) $260,500
C) $260,500 (bad debt losses would decline)
D) $315,000 (bad debt losses would decline)
E) $0 (no change would occur)
Q3) A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy.
A)True
B)False
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17
Chapter 16: Investment Concepts
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Sample Questions
Q1) The simple arithmetic average return differs from the geometric average return in that the geometric average takes into consideration compounding, or reinvestment, while the arithmetic average does not.
A)True
B)False
Q2) Refer to Portfolio.What was the two-year holding period return for the portfolio?
Assume any dividend payments are included in the market value shown above.
A) 38.5%
B) 27.8%
C) 35.8%
D) 30.7%
E) None of the above.
Q3) An individual's risk tolerance level depends on existing economic conditions.For example, when the economy is doing well an individual is more likely to have lower risk tolerance level.
A)True B)False
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Chapter 17: Security Valuation and Selection
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Q1) Fundamental analysts attempt to find the intrinsic value of a firm by evaluating information contained in financial statements, industry reports, and economic forecasts.
A)True
B)False
Q2) Technical analysis is used to determine when the economy is going to expand or contract in the future.
A)True
B)False
Q3) For the most part, lagging economic indicators are not very useful for investment analysis because they represent measures that tend to lag movements in the general economy.
A)True
B)False
Q4) Industries that include durable goods manufacturers generally are more sensitive to interest rate changes than industries that include staple goods firms.
A)True
B)False
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