Managerial Finance Exam Practice Tests
Course Introduction
Managerial Finance focuses on the principles and techniques essential for effective financial decision-making in organizations. The course covers topics such as financial analysis, planning and control, capital budgeting, asset management, and the evaluation of investment opportunities. Students learn to apply financial concepts and analytical tools to real-world business scenarios, emphasizing the role of the financial manager in strategic planning and resource allocation. Through case studies and practical exercises, the course prepares students to analyze financial statements, assess risk and return, and develop strategies that enhance firm value and support organizational objectives.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) A company that requires that its top officers own common stock in the company that is at least equal to their annual salary is:
A) Ford Motor Company
B) Tucson Electric Power Company
C) Panhandle Eastern
D) Anheuser-Busch
Answer: A
Q2) The limitations of the profit maximization goal include:
A) It lacks a time dimension (i.e., it is static)
B) It fails to consider risk
C) The definition of profit is ambiguous
D) All the above are limitations
Answer: D
Q3) Financial management draws heavily on the following related disciplines:
A) accounting
B) macroeconomics
C) microeconomics
D) all of the above
Answer: D
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Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) Finance companies obtain a significant amount of their funds by
A) issuing their own equity securities
B) accepting both demand and time deposits
C) issuing their own debt securities
D) pooling funds
Answer: C
Q2) In an efficient capital market, all security investments will have:
A) a required rate of return that exceeds the cost of capital
B) a positive NPV
C) a required rate of return that is zero
D) a NPV of zero
Answer: D
Q3) Changes in the tax code that slow down depreciation, ____ the present value of investment cash flows and, therefore, make the investment ____ desirable.
A) decrease, more
B) decrease, less
C) increase, more
D) increase, less
Answer: B
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) If a firm wanted to report high profits, it would choose which method of inventory accounting in inflationary times?
A) FIFO
B) LIFO
C) FILO
D) GIGO
Answer: A
Q2) The analysis of the financial performance and condition of a firm with sizable international operations is generally more complicated than analyzing a firm whose operations are largely domestic for all of the following reasons except:
A) problems with the translation of foreign operating results
B) problems with definition of capital
C) fluctuating exchange rates
D) all of the above are correct reasons
Answer: B
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Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
A) $339,600
B) $283,200
C) No financing needed, surplus of $224,400
D) No financing needed, surplus of $524,400
Q2) All the following current liabilities normally vary directly with the sales except: A) accounts payable
B) notes payable
C) accrued wages
D) accrued taxes
Q3) Explain the cash flow generation process:
Q4) An operational plan is necessary to determine what the firm wants to be at some future point in time. What does an operational plan consist of?
Q5) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Approximately how long would it take to double my money if I invest it now at 18%?
A) 6 years
B) 4 years
C) 12 years
D) It cannot be determined
Q2) You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was your rate of return on your investment?
A) 12%
B) 11%
C) 10%
D) 9%
Q3) If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually, determine how much the CD will be worth at the end of 4 years.
A) $13,600
B) $45,730
C) $14,640
D) $15,958
Q4) Explain the concept of interest and compare it to rate of interest.
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Sample Questions
Q1) By the capitalization-of-cash flows method, the value of an asset is a function of
A) the book value of the asset
B) the risk of the asset's cash flows
C) the age of the asset
D) both the book value and the age of the asset
Q2) The call feature is an advantage to the issuing firm
A) if the bond has a floating rate
B) if interest rates decline
C) if the bond has a low par value
D) if interest rates increase
Q3) A zero coupon bond is a bond that
A) originally sold at a discount
B) will sell for a premium
C) is a premium value bond
D) has a high current yield
Q4) What is the collateral used in collateral trust bonds and who is its primary user?
Q5) List the advantages and disadvantages of long-term debt financing:
Q6) How does a firm value an asset?
Page 8
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) Assume that the dividend( $3.25) on Central Power Company's common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.
A) $3.25
B) $39
C) $12
D) $27.08
Q2) ____ result in what is known as treasury stock.
A) Stock dividends
B) Stock repurchases
C) Stock splits
D) Reverse stock splits
Q3) The zero growth dividend valuation model is used when a firm's future dividends are expected to remain constant,
A) so the value of the firm should also remain constant
B) so the required rate of return should also remain constant
C) and the firm can not be valued
D) forever
Q4) What are the advantages and disadvantages of common stock financing?
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) Twin City Knitting (TCK) pays a current dividend of $2.20 and dividends are expected to grow at a rate of 7 percent annually in the foreseeable future. The beta of TCK is 1.2. If the risk-free rate is 9.2 percent and the market risk premium is 6 percent, at what price would you expect TCK's common stock to sell?
A) $14.35
B) $33.63
C) $23.40
D) $25.04
Q2) A beta value of 0.5 for a security indicates
A) the security has average systematic risk
B) the security has above-average systematic risk
C) the security has no unsystematic risk
D) the security has below-average systematic risk
Q3) What kind of probability distribution shows all possible outcomes for a given event?
A) discrete
B) expected value
C) bar chart
D) continuous
Q4) Explain marketability risk and marketability premium.
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Raider Productions has to decide whether to build its warehouse in Dallas or Houston. This decision falls into the class of:
A) independent projects
B) mutually exclusive projects
C) contingent projects
D) marginal projects
Q2) The ____ the amount of depreciation charged in a period, the ____ will be the firm's taxable income.
A) greater, lower
B) lower, lower
C) lower, greater
D) greater, higher
Q3) Determining the net investment (NINV) of a project includes explicit consideration of all of the following except:
A) estimated net cash flow
B) project cost plus installation and shipping costs
C) increases in net working capital
D) taxes associated with the sale of an existing asset and/or the purchase of a new one
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11
Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) Capital expenditures levels tend ____ (in real terms) during periods of relatively high inflation than during low inflation times.
A) to be higher
B) to be lower
C) to be the same
D) to depend on business risk
Q2) When two or more normal ____ projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.
A) coincident
B) mutually exclusive
C) independent
D) none of the above
Q3) The profitability index would be ____ if the present value of the net cash flows (NCF) over the life of a project were ____.
A) negative; less than zero
B) negative; less than the net investment
C) zero; equal to the net investment
D) none of the above
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?
Q2) A major disadvantage of the risk-adjusted discount rate approach is that it A) can lead to selecting only above-average risk projects
B) provides the decision maker with a range of numbers C) can lead to selecting only below-average risk projects D) is difficult to estimate the appropriate risk premium for a project
Q3) When analyzing a sensitivity curve, the ____ the slope, the more sensitive the net present value is to a change in the computed variable.
A) more negative
B) steeper
C) more general
D) smaller
Q4) When evaluating a capital expenditure to be made in a foreign country, the parent firm must be concerned with the A) exchange rate risk
B) cash flows that can be expected to be received by the parent
C) greater uncertainty associated with tax rates in the host country
D) all the above
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) The Institutional Brokers' Estimate Service (IBES) summarizes analysts' ____.
A) short-term earnings forecasts
B) long-term earnings growth rates
C) bankruptcy forecasts
D) short-term earnings forecasts and long-term earnings growth rates
Q2) The cost of debt must account for all of the following inputs EXCEPT:
A) Bond ratings.
B) Issuance costs.
C) flotation costs.
D) The tax rate.
Q3) The required rate of return on any security consists of a
A) risk premium plus an expected inflation rate
B) risk free rate plus a risk premium
C) inflation rate plus a marketability premium
D) risk free rate plus an inflation premium
Q4) Which of the following is not a typical source of debt funds for a small firm?
A) investment banking firms
B) commercial finance companies
C) Small Business Administration
D) leasing companies
14
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) The objective of capital structure management is to find the capital mix that leads to A) maximization of earnings per share
B) shareholder wealth maximization
C) maximization of net income
D) maximization of the current period's dividends
Q2) Two prominent finance researchers (Modigliani and Miller) showed that
A) the firm's optimal capital structure consists of approximately equal proportions of debt and equity
B) the value of the firm is independent of its capital structure in perfect capital markets with no income taxes
C) the firm's cost of capital is minimized when its capital structure consists of approximately equal proportions of debt and equity
D) the firm's cost of capital is maximized when its capital structure consists of approximately equal proportions of debt and equity
Q3) How do signaling effects impact the firm's capital structure decision?
Q4) There are many benefits to a leveraged buy-out. However, the benefits from LBOs come with significant costs. Explain the down-side of LBOs.
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Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) Onyx expects to have an EBIT of $240,000 with a standard deviation of $110,000. The distribution of operating income is approximately normal. If Onyx has interest expenses of $50,000, what is the probability that it will have an operating income that is below $0?
A) 4.27%
B) 1.46%
C) 0.02%
D) 2.4%
Q2) Raw material and direct labor costs are examples of A) fixed costs
B) overhead costs
C) variable costs
D) capital costs
Q3) Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales. If management knows that Alpine's DOL is 1.5, what is its DFL?
A) 3.09
B) 2.06
C) 3.55
D) 1.67
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Chapter 15: Dividend Policy
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Sample Questions
Q1) Interim Systems has 1.5 million shares outstanding. This year Interim will have operating income (EBIT) of $18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million. What will the dividend per share be if Interim's dividend payout ratio is 40%? Assume a marginal tax rate of 40%.
A) $2.53
B) $3.39
C) $2.03
D) $6.32
Q2) Explain the "clientele effect".
Q3) Which of the following is not a direct result of a stock dividend?
A) the number of shares outstanding is increased
B) the market price of each outstanding share is increased
C) the amounts shown in the firm's capital accounts are redistributed
D) the per-share price of the stock goes up
Q4) The fundamental question in dividend policy is
A) the tax consideration
B) the amount of growth the firm considers optimal
C) not violating any restrictive covenants
D) determining what portion of earnings will be paid out
Q5) What is a DRIP and how does it work?
Page 17
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Chapter 16: Working Capital Policy and Short-term Financing
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Sample Questions
Q1) If a firm shows a profit on the quarterly income statement, then
A) there will be no need for additional financing
B) the firm may need additional financing
C) the firm will increase its cash balance
D) all the above may be correct
Q2) The operating cycle begins with the ____ and ends with the ____.
A) purchase of resources, selling of the product on credit
B) payment for purchases, liquidation of receivables
C) purchases of resources, receipt of cash
D) payment for purchases, receipt of cash
Q3) Why is working capital so important to a firm's continued profitability?
Q4) Which of the following working capital financing policies subjects the firm to the greatest risk?
A) financing fluctuating current assets with long-term debt
B) financing permanent current assets with long-term debt
C) financing permanent current assets with short-term debt
D) financing fluctuating current assets with short-term debt
Q5) What are the classifications for short-term lenders and how do they differ?
Page 18
Q6) Name some factors that affect the firm's investment decision to invest in current assets.
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Page 19
Chapter 17: The Management of Cash and Marketable Securities
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Q1) Lone Star Technologies has annual sales of $336 million. Management has determined that an average of 8 days elapses between the time customers mail their payments and when the funds are available to the firm. The cost of reducing the float 3 days will be $60,000. Should Lone Star work to reduce the float if the increase in cash can be invested to earn 7.5% per annum?
A) Yes--savings of $9,041
B) Yes--savings of $147,123
C) Yes--savings of $78,080
D) No--loss of $18,080
Q2) Explain how companies can slow disbursements in order to keep funds in the bank for longer periods of time.
Q3) The objective of cash collection and disbursement policies is to
A) minimize storage costs
B) speed up collections and slow down disbursements
C) maximize the return on near cash equivalents
D) avoid using float
Q4) Name the three primary components (or sources) of float:
Q5) Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements.
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Chapter 18: Management of Accounts Receivable and Inventories
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Q1) The likelihood that a customer will fail to repay credit extended ot it is referred to as:
A) default risk
B) maturity risk
C) bad-debt loss ratio
D) opportunity cost
Q2) Relaxing (i.e., lowering) the firm's credit standards is likely to result in
A) lower sales
B) smaller bad-debt losses
C) a shorter average collection period
D) possible higher pre-tax profits
Q3) The most widely known credit reporting organization is:
A) Moody's
B) Standard and Poor's
C) National Association of Credit Management
D) Dun and Bradstreet
Q4) How can a company use its credit period to affect sales and inventory?
Q5) Describe how an aging of accounts is a useful monitoring technique for accounts receivable.
Q6) What are seasonal datings as it applies to credit terms?
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Chapter 19: Lease and Intermediate-term Financing
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Q1) Lease-buy analysis assumes that the alternative to leasing as the source of financing is
A) buying for cash
B) borrowing to buy
C) buying with all equity funds
D) buying with before-tax dollars
Q2) The sale and leaseback is advantageous to the lessee because
A) the lessee cannot continue using the asset
B) the lessee receives cash from the sale of the asset
C) the lessee receives title to property at the termination of the lease
D) the lessee is never required to pay taxes and insurance
Q3) In the net advantage to leasing calculation, after-tax salvage value is discounted at the firm's
A) weighted (marginal) cost of capital
B) cost if internal equity capital
C) cost of external equity capital
D) after-tax marginal cost of borrowing
Q4) What are the advantages of leasing?
Q5) Explain a leveraged lease.
Q6) What is a term loan?
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Chapter 20: Financing With Derivatives
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Q1) A security whose payoffs (returns) depend on the value of another security is known as a(n) ____.
A) interest rate swap
B) master limited partnership
C) contingent claim
D) extendible note
Q2) In general, when a convertible security is exchanged for common stock, the overall effect is which of the following?
I. stock shares will decrease
II. earnings per share will decrease.
A) I only
B) II only
C) Both I and II
D) Nether I nor II
Q3) Prior to a warrant's expiration, its market price will be ____ the formula value
A) equal to
B) less than
C) greater than
D) negative as compared to
Q4) What is an interest rate swap? Describe how they are used.
Page 23
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Chapter 21: Risk Management
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Q1) To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?
A) Manufacture the product overseas.
B) Develop more raw material suppliers.
C) Test-market a product.
D) Change advertising.
Q2) All of the following are derivative securities EXCEPT:
A) Forwards
B) Margins
C) Futures
D) Options
Q3) What is a hedge?
Q4) List several reasons why a firm may choose to employ risk management techniques.
Q5) Acquisition of additional information can be accomplished by all of the following EXCEPT:
A) Employing individuals or firms with the needed expertise
B) Test-marketing
C) Paying to have new issues of bonds "rated"
D) Changing the location of the distributorship
Q6) What is marking-to-market and how is this process guaranteed?
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Chapter 22: International Financial Management
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Q1) The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____ prevailing in the two countries.
A) inflation rates
B) interest rates
C) trade deficit rates
D) GNP growth rates
Q2) A parent company's foreign investment risk exposure depends on the foreign subsidiary's net ____ position.
A) cash
B) equity
C) present value
D) working capital
Q3) A less restrictive form of purchasing power parity is:
A) Omnipotent purchasing power parity
B) Relative purchasing power parity
C) Absolute purchasing power parity
D) Exchange parity
Q4) Name the factors that affect exchange rates.
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Chapter 23: Corporate Restructuring
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Q1) Explain the motivation for a company to divest through a spin-off or equity carve-out.
Q2) Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg's current market price.
A) 0.375
B) 2.22
C) 0.45
D) 0.288
Q3) A combination of two or more companies that compete directly with each other is known as a
A) conglomerate merger
B) vertical merger
C) horizontal merger
D) takeover
Q4) The reasons why a company may choose external growth by merger over internal growth include
A) economies of scale
B) more rapid growth
C) tax considerations and rapid growth
D) economies of scale, tax considerations, and more rapid growth
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Chapter 24: Continuous Compounding and Discounting
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Q1) What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?
A) $21,240
B) $11,080
C) $16,421
D) none of the above
Q2) Paula invested $25 into a savings account when she was 6 years old. She is now 35. Her money grew at 2% compounded continuously. How much money does she have?
A) $106.58
B) $85.19
C) $270.82
D) $44.65
Q3) The nominal interest rate and the effective interest rate are equivalent when compounding occurs:
A) once a year at the end of the year.
B) every quarter.
C) semiannually.
D) monthly.
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Q1) The best way to measure projects with unequal lives is:
A) the Gordon Model
B) the payback period
C) the net present value method
D) equivalent annual annuity approach
Q2) When two or more mutually exclusive alternative investments have ____, neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time.
A) unequal lives
B) unequal net cash flows
C) unequal net investments
D) a and b
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
Q4) The importance of time discrepancies depends on several items when making capital budgeting decisions. State those items:
Q5) What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data?
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Chapter 26: Breakeven Analysis
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Q1) The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart. The finished product sells for $35 with a variable cost per unit of $21. The company has operating costs of $1,050,000. What is the firm's breakeven point in units?
A) 75,000
B) 50,000
C) 80,000
D) 65,000
Q2) The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes. The finished product sells for $60 with a variable cost per unit of $27. The company has fixed operating costs of $1,250,000. What is its breakeven point?
A) 22,187
B) 37,879
C) 56,124
D) 48,961
Q3) How can a firm have more than one breakeven output point?
Q4) What are the possible uses for breakeven analysis?
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Chapter 27: Bond Refunding Analysis
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Q1) Clinch River Power is considering refunding a $150 million 12% coupon bond with a 10% coupon bond, 20 year bond. The current bond also matures in 20 years and is now callable at 110% of par. The unamortized flotation cost on the old issue is $540,000 and the flotation cost of the new issue is 0.925%. Clinch River estimates that there would be a 4 week period where both bonds would be outstanding. The company has a weighted cost of capital of 11% and a 40% marginal tax rate. Should Clinch River sell the refunding issue?
A) Yes, NPV is approximately $9.838 million
B) Yes, NPV is approximately $9.930 million
C) Yes, NPV is approximately $9.655 million
D) Yes, NPV is approximately $10.808 million
Q2) Waste Deep Disposal Services are considering refunding a $525,000,000 bond issue.
The old bonds have a 7.25% coupon rate. The new bonds will have a 6% coupon rate. Both issues will be outstanding for about four weeks. What is the overlapping interest if the company is in the 38% tax bracket (rounded)?
A) $1,517,465
B) $1,815,288
C) $1,357,642
D) $1,225,427
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Chapter 28: Taxes
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/3398
Sample Questions
Q1) For a corporation with ordinary taxable income of $425,000, what is the additional tax liability if $30,000 in dividends is received from shares it holds in another corporation?
A) $7,140
B) $10,200
C) $11,700
D) $3,060
Q2) What is the tax liability in 2010 for a corporation with taxable income of $425,000?
A) $144,500
B) $132,750
C) $150,250
D) $122,700
Q3) Corporate capital gains income is currently taxed at ____ ordinary income.
A) 80 percent of the marginal tax rate on
B) the same marginal rate as
C) 50 percent of the marginal tax rate on
D) none of the above
Q4) How are dividends received by a corporation treated for tax purposes?
Q5) Explain the difference between average tax rate and marginal tax rate.
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