Managerial Finance Exam Preparation Guide
Course Introduction
Managerial Finance is a course designed to equip students with the fundamental concepts and analytical tools necessary for effective financial decision making within organizations. The course covers key topics such as financial statement analysis, budgeting, capital structure, working capital management, risk assessment, and investment appraisal. Emphasis is placed on understanding the role of financial information in planning, controlling, and managing resources to achieve organizational objectives. By exploring both theoretical frameworks and real-world case studies, students will develop the skills needed to assess financial performance, design sound financial policies, and contribute to strategic decision-making in a managerial context.
Recommended Textbook
CFIN 3 3rd Edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Q1) Which of the following statements about the corporate form of business organization is incorrect?
A) The corporation is the easiest form of business organization to establish.
B) In the United States, corporations generate a significantly greater percentage of total annual sales than either partnerships or proprietorships.
C) Corporations generally are larger than either partnerships or proprietorships.
D) One of the most important features of the corporate form of business organization is that stockholders have limited liability.
E) None of the above.
Answer: A
Q2) Industrial groups are organizations comprised of companies in different industries with common ownership interests,which include firms necessary to sell and manufacture products.
A)True
B)False
Answer: True
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Chapter 2: Analysis of Financial Statements
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Q1) Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.
A)True
B)False
Answer: True
Q2) Which of the following statements is correct?
A) In the text, depreciation is regarded as a use of cash because it reduces fixed assets, which then must be replaced.
B) If a company uses some of its cash to pay off short-term debt, then its current ratio will always decline, given the way ratio is calculated, other things held constant.
C) During a recession, it is reasonable to think that most companies inventory turnover ratios will change while their fixed asset turnover ratio will remain fairly constant.
D) During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will probably decline.
E) Each of the above statements is false.
Answer: E
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Chapter 3: The Financial Environment: Markets,
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Q1) Which of the following is not an advantage of going public?
A) It allows a firm's founders to diversify their holdings.
B) It increases the liquidity of the stock.
C) It establishes a value for the firm.
D) It makes it easier to raise new equity capital in the future.
E) All of the above are advantages of going public.
Answer: E
Q2) Which of the following is considered an organized stock exchange?
A) New York Stock Exchange (NYSE)
B) National Association of Security Dealers Automated Quotation System (NASDAQ)
C) Over-the-Counter (OTC) market
D) All of the above are organized exchanges.
E) None of the above is an organized exchange.
Answer: A
Q3) Because foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue than their U.S.counterparts,such banks often engage in numerous aspects of multi-layer financial deals.
A)True
B)False
Answer: True
Page 5
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Chapter 4: The Time Value of Money
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Q1) You have the opportunity to buy a perpetuity which pays $1,000 annually.Your required rate of return on this investment is 15 percent.You should be essentially indifferent to buying or not buying the investment if it were offered at a price of
A) $5,000.00
B) $6,000.00
C) $6,666.67
D) $7,500.00
E) $8,728.50
Q2) Suppose an investor can earn a steady 5% annually with investment A,while investment B will yield a constant 12% annually.Within 11 years time,the compounded value of investment B will be more than twice the compounded value of investment A (ignore risk).
A)True
B)False
Q3) The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period).
A)True
B)False
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Chapter 5: The Cost of Money
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Q1) During or near peaks of business activity,yield curves that are flat or downward sloping (possibly with humps)often are prevalent.
A)True
B)False
Q2) If you have information that a recession is ending,and the economy is about to enter a boom,and your firm needs to borrow money,it should probably issue long-term rather than short-term debt.
A)True
B)False
Q3) If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,it would probably encourage companies to use more debt financing than they presently do,other things held constant.
A)True
B)False
Q4) The real rate of interest is composed of a risk-free rate of interest plus a premium that reflects the riskiness of the security.
A)True
B)False
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Chapter 6: Bonds Debt-Characteristics and Valuation
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Q1) Which of the following statements is correct?
A) A 10-year bond would have more interest rate price risk than a 5-year bond, but all 10-year bonds have the same interest rate price risk.
B) A 10-year bond would have more reinvestment rate risk than a 5-year bond, but all 10-year bonds have the same reinvestment rate risk.
C) If their maturities were the same, a 5 percent coupon bond would have more interest rate price risk than a 10 percent coupon bond.
D) If their maturities were the same, a 5 percent coupon bond would have less interest rate price risk than a 10 percent coupon bond.
E) Zero-coupon bonds have more interest rate price risk than any other type bond, even perpetuities.
Q2) Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.
A)True
B)False
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Chapter 7: Stocks Equity-Characteristics and Valuation
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Q1) Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period.
A)True
B)False
Q2) A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50,what is the simple annual rate of return?
A) 12%
B) 18%
C) 20%
D) 23%
E) 28%
Q3) 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
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Chapter 8: Risk and Rates of Return
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Q1) Stock X has ? = 4.0,which means that it is considered four times riskier than the average stock,or the stock market as a whole.According to the capital asset pricing model,Stock X should earn
A) a total return that is four times greater than the market return, that is, r<sub>X</sub> = 4 * r<sub>M</sub>.
B) a risk premium that is four times greater than the market risk premium-that is, RP<sub>X</sub> = 4 * RP<sub>M</sub>, which means that r<sub>X</sub> B k<sub>RF</sub> = 4 * (r<sub>M</sub> B k<sub>RF</sub>).
C) a return that is less than the market return (r<sub>M</sub>) because, all else equal, the high risk associated with Stock X will cause its value to decrease.
D) the risk-free rate of return (r<sub>RF</sub>).
E) None of the above is correct.
Q2) The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0)is zero.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Q1) When considering two mutually exclusive projects,the financial manager should always select that project whose internal rate of return is the highest provided the projects have the same initial cost.
A)True
B)False
Q2) The Seattle Corporation has been presented with an investment opportunity which will yield end of year cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year10.This investment will cost the firm $150,000 today,and the firm's required rate of return is 10 percent.What is the NPV for this investment?
A) $135,984
B) $18,023
C) $219,045
D) $51,138
E) $92,146
Q3) The post-audit two main purposes are to improve forecasts and to improve operations.
A)True
B)False
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Chapter 10: Project Cash Flows and Risk
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Q1) After a long drought,the manager of Long Branch Farm is considering the installation of an irrigation system which will cost $100,000.It is estimated that the irrigation system will increase revenues by $20,500 annually,although operating expenses other than depreciation will also increase by $5,000.The system will be depreciated using MACRS over its depreciable life (5 years)to a zero salvage value.If the tax rate on ordinary income is 40 percent,what is the project's IRR?
A) 12.6%
B) -1.3%
C) 13.0%
D) 10.2%
E) -4.8%
Q2) In cash flow estimation,the presence of externalities has no direct cash flow effects.
A)True
B)False
Q3) The stand-alone risk is the risk an asset would have if it were a firm's only asset and it is measured by the variability of the asset's expected returns.
A)True
B)False
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Chapter 11: The Cost of Capital
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Q1) If a firm can shift its capital structure so as to change its weighted average cost of capital (WACC),which of the following results would be preferred?
A) The firm should try to decrease the WACC because such an action will increase the value of the firm.
B) The firm should try to increase the WACC because such an action will increase the value of the firm.
C) The firm should try to decrease the WACC because such an action will decrease the value of the firm.
D) The firm should try to increase the WACC because such an action will decrease the value of the firm.
E) The firm should not try to change the WACC because changing the WACC will not change the value of the firm.
Q2) Refer to Rollins Corporation.What is Rollins' component cost of debt?
A) 10.0%
B) 9.1%
C) 8.6%
D) 8.0%
E) 7.2%
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Chapter 12: Capital Structure
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Q1) Which of the following is not one of the four primary factors that influence capital structure decisions?
A) The firm's business risk.
B) The firm's tax position.
C) The firm's financial flexibility.
D) The firm's inventory valuation method.
E) The firm's managerial attitude.
Q2) One of the implications of signaling theory for capital structure decisions is that firms should normally seek to maintain a reserve borrowing capacity.
A)True
B)False
Q3) The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility. A)True
B)False
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) If the information content,or signaling,hypothesis is correct,then changes in dividend policy can be important with respect to firm value and capital costs.
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) Firms with a large number of acceptable capital budgeting projects generally have a high dividend payout ratio.
A)True
B)False
Page 15
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Chapter 14: Working Capital Policy
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Q1) A high current ratio insures that a firm will have the cash required to meet its needs.
A)True
B)False
Q2) The sale of common stock for cash will increase the current assets for a firm.
A)True
B)False
Q3) The average cash conversion cycle of European firms is __________ as long as the average cash conversion cycle of American firms.
A) equally
B) one-half
C) twice
D) one-fourth
E) four times
Q4) The cash conversion cycle is the sum of the inventory conversion period,the receivables collection period,and the payables deferral period.
A)True
B)False
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Chapter 15: Managing Short-Term Assets
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Q1) Other things equal and held constant,a firm with an effective accounts receivable monitoring system,when compared with a firm without such a monitoring system,will likely have lower additional funds needed.
A)True
B)False
Q2) A report showing how long accounts receivable have been outstanding is called what?
A) Time line.
B) Preauthorized debit system.
C) Aging schedule.
D) Cash discount.
E) Credit period.
Q3) Inventory management focuses on three basic questions: (1)how many units to hold in stock,(2)how many units of each item to order,and (3)at what point to reorder.
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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Q1) A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.
A)True
B)False
Q2) If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.
A)True
B)False
Q3) A promissory note is a document specifying the terms and conditions of a loan,including the amount,interest rate,and repayment schedule.
A)True
B)False
Q4) On a 1-year loan for $10,000,a firm would be better off borrowing at a rate of 9.5 percent discounted interest than 9 percent simple interest.
A)True
B)False
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Chapter 17: Financial Planning and Control
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Q1) The decision of how to raise additional funds needed to support sales growth is based on several factors including
A) firm's ability to handle additional debt.
B) conditions in the equity markets.
C) firm's current capital structure.
D) existing debt covenants.
E) All of the above.
Q2) Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability,but it is not useful in studying the effects of a general expansion in the firm's operations.
A)True
B)False
Q3) Which of the following accounts will not rise spontaneously with an increase in sales?
A) Accounts payable
B) Accrued wages
C) Accrued taxes
D) Accounts receivable
E) Notes payable
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Chapter 18: project Cash Flows and Risk
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Q1) The primary advantage of accelerated depreciation over straight line depreciation is that the total,undiscounted,depreciation tax savings over the life of the project are greater when an accelerated depreciation method is used.
A)True
B)False
Q2) The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower,and cash flows higher,for the duration of a project's life,other things held constant.
A)True
B)False
Q3) A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses MACRS accelerated depreciation than if it uses the optional straight-line alternative,other things being equal.
A)True
B)False
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