Managerial Finance Exam Practice Tests
Course Introduction
Managerial Finance is a course that explores the principles and practices involved in the financial management of organizations. It focuses on decision-making processes that managers use to analyze financial statements, plan for capital requirements, manage working capital, evaluate investment opportunities, and assess risk. The course covers topics such as time value of money, valuation of assets, cost of capital, capital budgeting, financial planning, and corporate financial policy, providing students with analytical tools and frameworks to make informed financial decisions that align with organizational objectives.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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2547 Verified Questions
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
A) must continue to provide audited financial statements to the public.
B) must continue to provide a detailed list of internal control deficiencies on an annual basis.
C) can provide less information to its shareholders than it did prior to "going dark".
D) can continue publicly trading its stock but only on the exchange on which it was previously listed.
E) ceases to exist.
Answer: C
Q2) How might agency problems arise in partnerships?
Answer: Agency conflicts typically arise when there is a separation between the ownership and the management of a business.In a general partnership,especially if the partnership is small,there is less of a chance of an agency conflict if all the partners are involved with the business on a regular basis.However,in a limited partnership,the opportunity exists for an agency problem to arise between the general and the limited partners.
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Chapter
Two: Financial Statements and Long-Term Financial Planning
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Sample Questions
Q1) Which one of the following represents the most liquid asset?
A) $100 account receivable that is discounted and collected for $96 today
B) $100 of inventory which is sold today on credit for $103
C) $100 of inventory which is discounted and sold for $97 cash today
D) $100 of inventory that is sold today for $100 cash
E) $100 accounts receivable that will be collected in full next week
Answer: D
Q2) The Lakeside Inn had operating cash flow of $48,450.Depreciation was $6,700 and interest paid was $2,480.A net total of $2,620 was paid on long-term debt.The firm spent $24,000 on fixed assets and decreased net working capital by $1,330.What is the amount of the cash flow to stockholders?
A) $5,100
B) $7,830
C) $18,020
D) $19,998
E) $20,680
Answer: E
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Which one of the following is a use of cash?
A) increase in notes payable
B) decrease in inventory
C) increase in long-term debt
D) decrease in accounts receivables
E) decrease in common stock
Answer: E
Q2) A firm has sales of $3,200,net income of $390,total assets of $4,500,and total equity of $2,750.Interest expense is $50.What is the common-size statement value of the interest expense?
A) 0.89 percent
B) 1.56 percent
C) 3.69 percent
D) 10.26 percent
E) 14.55 percent
Answer: B
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Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Sample Questions
Q1) Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current sales of $611,000.How much can the firm grow before any new fixed assets are needed?
A) 4.99 percent
B) 5.78 percent
C) 6.02 percent
D) 6.38 percent
E) 6.79 percent
Q2) Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.
Q3) The financial planning process:
I.involves internal negotiations among divisions.
II.quantifies senior manager's goals.
III.considers only internal factors.
IV.reconciles company activities across divisions.
A) III and IV only
B) II and III only
C) I,II,and IV only
D) II,III,and IV only
E) I,II,III,and IV
Page 6
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?
Q2) You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years.Assume you can earn 6 percent on your savings.Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.
Q3) You own a classic automobile that is currently valued at $150,000.If the value increases by 6.5 percent annually,how much will the automobile be worth ten years from now?
A) $244,035.00
B) $251,008.17
C) $270,013.38
D) $281,570.62
E) $291,480.18
Q4) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) Southern Tours is considering acquiring Holiday Vacations.Management believes Holiday Vacations can generate cash flows of $187,000,$220,000,and $245,000 over the next three years,respectively.After that time,they feel the business will be worthless.Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition.What is Southern Tours willing to pay today to acquire Holiday Vacations?
A) $503,098
B) $538,615
C) $545,920
D) $601,226
E) $638,407
Q2) An ordinary annuity is best defined by which one of the following?
A) increasing payments paid for a definitive period of time
B) increasing payments paid forever
C) equal payments paid at regular intervals over a stated time period
D) equal payments paid at regular intervals of time on an ongoing basis
E) unequal payments that occur at set intervals for a limited period of time
Q3) Explain the difference between the effective annual rate (EAR)and the annual percentage rate (APR).Of the two,which one has the greater importance and why?
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) Currently,the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries.The 11.6 percent is referred to as which one of the following?
A) coupon rate
B) face rate
C) call rate
D) yield to maturity
E) interest rate
Q2) Which one of the following bonds is the least sensitive to interest rate risk?
A) 3-year;4 percent coupon
B) 3-year;6 percent coupon
C) 5-year;6 percent coupon
D) 7-year;6 percent coupon
E) 7-year;4 percent coupon
Q3) The collar of a floating-rate bond refers to the minimum and maximum:
A) call periods.
B) maturity dates.
C) market prices.
D) coupon rates.
E) yields to maturity.
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Page 9
Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Sample Questions
Q1) Westover Winds just paid a dividend of $2.10 per share.The company will increase its dividend by 8 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent dividend growth,after which the company will keep a constant growth rate forever.What is the price of this stock today given a required return of 11 percent?
A) $26.54
B) $28.99
C) $31.83
D) $32.06
E) $32.47
Q2) Jen's Fashions is growing quickly.Dividends are expected to grow at a 19 percent rate for the next 3 years,with the growth rate falling off to a constant 8 percent thereafter.The required return is 12 percent and the company just paid a $3.80 annual dividend.What is the current share price?
A) $128.96
B) $131.11
C) $135.95
D) $148.87
E) $152.20
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Which of the following are advantages of the payback method of project analysis?
I.works well for research and development projects
II.liquidity bias
III.ease of use
IV.arbitrary cutoff point
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) II,III,and IV only
Q2) A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?
A) net present value
B) internal return
C) payback value
D) profitability index
E) discounted payback
Q3) How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?
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Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000.Today,that lot has a market value of $340,000.At the time of the purchase,the company spent $15,000 to level the lot and another $20,000 to install storm drains.The company now wants to build a new facility on that site.The building cost is estimated at $1.51 million.What amount should be used as the initial cash flow for this project?
A) -$1,470,000
B) -$1,850,000
C) -$1,875,000
D) -$1,925,000
E) -$1,945,000
Q2) What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.
Q3) Which one of the following will increase a bid price?
A) a decrease in the fixed costs
B) a reduction in the net working capital requirement
C) a reduction in the firm's tax rate
D) an increase in the salvage value
E) an increase in the required rate of return
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Sample Questions
Q1) You are considering a project that you believe is quite risky.To reduce any potentially harmful results from accepting this project,you could:
A) lower the degree of operating leverage.
B) lower the contribution margin per unit.
C) increase the initial cash outlay.
D) increase the fixed costs per unit while lowering the contribution margin per unit.
E) lower the operating cash flow of the project.
Q2) Webster Iron Works started a new project last year.As it turns out,the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime.Given this,you know that the project:
A) will never pay back.
B) has a zero net present value.
C) is operating at a higher level than if it were operating at its cash break-even level.
D) is operating at a higher level than if it were operating at its financial break-even level. E) is lowering the total net income of the firm.
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Page 13
Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Which one of the following statements is a correct reflection of the U.S.markets for the period 1926-2010?
A) U.S.Treasury bill returns never exceeded a 9 percent return in any one year during the period.
B) U.S.Treasury bills provided a positive rate of return each and every year during the period.
C) Inflation equaled or exceeded the return on U.S.Treasury bills every year during the period.
D) Long-term government bonds outperformed U.S.Treasury bills every year during the period.
E) National deflation occurred at least once every decade during the period.
Q2) The excess return is computed as the:
A) return on a security minus the inflation rate.
B) return on a risky security minus the risk-free rate.
C) risk premium on a risky security minus the risk-free rate.
D) the risk-free rate plus the inflation rate.
E) risk-free rate minus the inflation rate.
Q3) How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?
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Page 14
Six: Cost of Capital and Long-Term Financial Policy
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Sample Questions
Q1) Which one of the following should earn the most risk premium based on CAPM?
A) diversified portfolio with returns similar to the overall market
B) stock with a beta of 1.38
C) stock with a beta of 0.74
D) U.S.Treasury bill
E) portfolio with a beta of 1.01
Q2) Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:
A) average arithmetic return.
B) expected return.
C) market rate of return.
D) internal rate of return.
E) cost of capital.
Q3) Which one of the following is an example of systematic risk?
A) investors panic causing security prices around the globe to fall precipitously
B) a flood washes away a firm's warehouse
C) a city imposes an additional one percent sales tax on all products
D) a toymaker has to recall its top-selling toy
E) corn prices increase due to increased demand for alternative fuels
Page 15
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Chapter 14: Cost of Capital
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Sample Questions
Q1) Miller Sisters has an overall beta of 0.79 and a cost of equity of 11.2 percent for the firm overall.The firm is 100 percent financed with common stock.Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's operations.What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent?
A) 13.12 percent
B) 13.96 percent
C) 14.63 percent
D) 15.77 percent
E) 16.01 percent
Q2) The Shoe Outlet has paid annual dividends of $0.65,$0.70,$0.72,and $0.75 per share over the last four years,respectively.The stock is currently selling for $26 a share.What is this firm's cost of equity?
A) 7.56 percent
B) 7.93 percent
C) 10.38 percent
D) 10.53 percent
E) 11.79 percent
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) A.K.Stevenson wants to raise $7.5 million through a rights offering.The subscription price is set at $24.Currently,the company has 2.1 million shares outstanding with a current market price of $25 a share.Each shareholder will receive one right for each share of stock they currently own.How many rights will be needed to purchase one new share of stock in this offering?
A) 6.40 rights
B) 6.67 rights
C) 6.72 rights
D) 6.87 rights
E) 7.00 rights
Q2) D.L.Jones & Co.recently went public.The firm received $20.80 a share on the entire offer of 25,000 shares.Keeser & Co.served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share.What type of underwriting was this?
A) best efforts
B) shelf
C) over subscribed
D) private placement
E) firm commitment
Q3) Explain both a rights offering and the basic characteristics of a right.
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share.The company has earnings before interest and taxes of $102,000.Naylor's has decided to issue $750,000 of debt at 7.5 percent.The debt will be used to repurchase shares of the outstanding stock.Currently,you own 500 shares of Naylor's stock.How many shares of Naylor's stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest.Ignore taxes.
A) 322 shares
B) 350 shares
C) 362 shares
D) 425 shares
E) 502 shares
Q2) Pete is the CFO of Dexter International.He would like to increase the debt-equity ratio of the firm but is concerned that the firm's shareholders may not be willing to accept additional financial leverage.Pete has come to you for advice.What is your recommendation?
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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Page 18
Chapter 17: Dividends and Payout Policypart Seven:
Short-Term Financial Planning and Management
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Sample Questions
Q1) Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per share and a market value of $19 per share.The balance sheet shows $3,500 in the common stock account,$24,000 in the capital in excess of par account,and $31,400 in the retained earnings account.The firm just announced a 100 percent stock dividend.What is the value of the capital in excess of par account after the dividend?
A) $0
B) $20,500
C) $24,000
D) $55,500
E) $87,000
Q2) Which one of the following statements related to cash dividends is correct?
A) Extra cash dividends cannot be repeated in the future.
B) A dividend is never a liability until it has been declared.
C) If a firm has paid regular quarterly dividends for at least five consecutive years it is legally obligated to continue doing so.
D) Regular cash dividends reduce paid-in capital.
E) The dividend yield expresses the annual dividend as a percentage of net income.
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Tall Guys Clothing has a 45 day collection period.Sales for the next calendar year are estimated at $2,100,$1,600,$2,500 and $2,300,respectively,by quarter,starting with the first quarter of the year.Given this information,which one of the following statements is correct? Assume a year has 360 days.
A) The firm will collect $800 in Quarter 2.
B) The accounts receivable balance at the beginning of Quarter 4 will be $1,150.
C) The firm will collect $2,000 in Quarter 3.
D) The firm will have an accounts receivable balance of $2,300 at the end of the year.
E) The firm will collect a total of $2,400 in Quarter 4.
Q2) The operating cycle describes how a product:
A) is priced.
B) is sold.
C) moves through the current asset accounts.
D) moves through the production process.
E) generates a profit.
Q3) Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future.How does this affect a firm's selection of a financing policy for its current assets?
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Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) A firm has $16,718 in outstanding checks that have not cleared the bank.The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank.The current available balance is $11,407.What is the status of the net float?
A) net collection float of $8,138
B) net collection float of $2,043
C) net collection float of $13,450
D) net disbursement float of $3,268
E) net disbursement float of $5,311
Q2) The Miller-Orr model assumes that:
A) the cash balance is depleted at regular intervals.
B) all cash flows are known with certainty.
C) the average change in the daily cash flows is positive.
D) management will set both the lower and the upper desired levels of cash.
E) the cash balance fluctuates in a random manner.
Q3) Float management systems may provide only minimal benefits to a firm.Given that most firms have other projects with higher positive net present values,why should a firm's managers spend time implementing a float management system?
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21
Chapter 20: Credit and Inventory Managementpart Eight:
Topics in Corporate Finance
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Q1) A firm's total investment in receivables depends primarily on the firm's:
A) total sales and cash discount period.
B) cash to credit sales ratio.
C) bad debt ratio.
D) average collection period and amount of credit sales.
E) amount of credit sales and cash discount percentage.
Q2) Music City,Inc.has an average collection period of 62 days.Its average daily investment in receivables is $50,000.What are the annual credit sales?
A) $268,407
B) $277,109
C) $294,355
D) $325,893
E) $767,123
Q3) Which one of the following inventory items is probably the most liquid?
A) a custom made set of kitchen cabinets
B) metal cabinets for dishwashers
C) wheat stored in a grain silo
D) a customized drilling press
E) a partially built modular home
Page 22
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Chapter 21: International Corporate Finance
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Q1) Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?
A) unbiased forward rates
B) uncovered interest rate parity
C) international Fisher effect
D) purchasing power parity
E) interest rate parity
Q2) You are analyzing a project with an initial cost of £48,000.The project is expected to return £11,000 the first year,£36,000 the second year and £38,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal return relevant to the project is 12 percent in the U.S.The nominal risk-free rate in the U.S.is 4 percent while it is 5 percent in the U.K.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?
A) $23,611
B) $25,938
C) $26,930
D) $29,639
E) $30,796
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) When weighing a decision,Kate places greater emphasis on opinions that match her own than she does on opinions offered by others that disagree with her personal point of view.Kate illustrates which one of the following?
A) frame dependence
B) overconfidence
C) gambler's fallacy
D) confirmation bias
E) overoptimism
Q2) Amy is the chief financial officer of a retail toy store.Recently,she decided that the firm should expand its operations and open two additional stores.Within a very brief period,it was obvious that Amy had made a very bad decision in opening those stores,given that the economy is in the middle of a severe recession.In reflecting back on her decision,Amy realizes that she made a bad decision due to a reasoning error.Which one of the following areas of study best applies to this situation?
A) corporate ethics
B) financial statement analysis
C) managerial finance
D) debt management
E) behavioral finance
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Chapter 23: Enterprise Risk Management
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Q1) Futures contracts:
A) are identical to forward contracts except for the size of the contract.
B) provides an option to purchase an asset at a specified price on the settlement date.
C) are marked to the market on a daily basis.
D) cannot be resold.
E) are limited to contracts on financial assets.
Q2) Explain why a swap is effectively a series of forward contracts.
Q3) A forward contract:
A) requires that payment be made in full when the contract is originated.
B) provides the buyer with an option to buy an asset on the settlement date at the forward price.
C) is a binding agreement on both the buyer and the seller and nets out as a zero sum game.
D) is marked to the market daily at the seller's request.
E) allows for immediate delivery at an agreed upon price which is to be paid on the settlement date.
Q4) What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?
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Page 25
Chapter 24: Options and Corporate Finance
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Q1) We are examining a new project.We expect to sell 8,000 units per year at $80 net cash flow apiece for the next 15 years.In other words,the annual operating cash flow is projected to be $80 × 8,000 = $640,000.The relevant discount rate is 16 percent,and the initial investment required is $2,740,000.The project can be dismantled after the first year and sold for $2,130,000.Suppose you think it is likely that expected sales will be revised upward to 9,600 units if the first year is a success and revised downward to 3,000 units if the first year is not a success.Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold.Naturally,expansion would be desirable only if the project is a success.This implies that if the project is a success,projected sales after expansion will be 19,200.Assume that success and failure are equally likely.Note that abandonment is still an option if the project is a failure.What is the value of the option to expand?
A) $1,774,328
B) $1,809,941
C) $1,828,406
D) $1,848,920
E) $1,872,312
Q2) Explain how the floor and the ceiling prices for a convertible bond are determined.
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Chapter 25: Option Valuation
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Q1) Which one of the five factors included in the Black-Scholes model cannot be directly observed?
A) risk-free rate
B) strike price
C) standard deviation
D) stock price
E) life of the option
Q2) Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today.The annual percentage rate applicable to her investment is 6.8 percent.Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?
A) annual
B) daily
C) quarterly
D) monthly
E) continuous
Q3) Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.
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Page 27
Chapter 26: Mergers and Acquisitions
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Sample Questions
Q1) Sleep Tight is acquiring Restful Inns for $52,500 in cash.Sleep Tight has 3,000 shares of stock outstanding at a market price of $38 a share.Restful Inns has 2,100 shares of stock outstanding at a market price of $24 a share.Neither firm has any debt.The incremental value of the acquisition is $1,700.What is the price per share of Sleep Tight after the acquisition?
A) $36.92
B) $37.30
C) $37.87
D) $39.19
E) $39.29
Q2) The value of a target firm to the acquiring firm is equal to:
A) the value of the target firm as a separate entity plus the incremental value derived from the acquisition.
B) the purchase cost of the target firm.
C) the value of the merged firm minus the value of the target firm as a separate entity. D) the purchase cost plus the incremental value derived from the acquisition.
E) the incremental value derived from the acquisition.
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Chapter 27: Leasing
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Sample Questions
Q1) Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine.The machine will be depreciated using MACRS over a 4-year period,after which the machine will be worthless.MACRS allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The machine could be leased for $105,000 a year for 4 years.The firm can borrow money at 9.5 percent and has a 35 percent tax rate.The firm does not expect to pay any taxes for the next 5 years.What is the net advantage to leasing?
A) -$4,587
B) -$7,471
C) -$18,640
D) -$21,651
E) -$30,277
Q2) Which one of the following statements is correct concerning taxes and leasing?
A) Tax-deferral is a legitimate reason for leasing.
B) The lessee should be the party with the higher tax bracket.
C) Generally speaking,lessors tend to benefit from leases while lessees do not.
D) If a firm has significant net operating losses,it should be the lessor in a lease.
E) You should only lease an asset if the lease will be fully amortized.
Q3) Explain the differences between purchasing an asset and leasing an asset.
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