Managerial Finance Exam
Questions
Course Introduction
Managerial Finance is a course designed to provide students with an in-depth understanding of financial principles and their practical applications in managerial decision-making. The course covers essential topics such as financial analysis, planning and forecasting, valuation of assets, capital budgeting, cost of capital, and risk management. Students will learn how to interpret financial statements, assess the financial health of organizations, and make strategic decisions to maximize shareholder value. Through the use of case studies and real-world scenarios, this course aims to equip students with the skills necessary to effectively manage financial resources within a business environment.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B) Corporate shareholders are exposed to unlimited liability.
C) Corporations generally face fewer regulations than sole proprietorships.
D) Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
E) Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.
Answer: A
Q2) If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.
A)True
B)False
Answer: False
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?
A) 9.32%
B) 9.82%
C) 10.33%
D) 10.88%
E) 11.42%
Answer: D
Q2) Which of the following would indicate an improvement in a company's financial position, holding other things constant?
A) The current and quick ratios both increase.
B) The inventory and total assets turnover ratios both decline.
C) The debt ratio increases.
D) The profit margin declines.
E) The EBITDA coverage ratio declines.
Answer: A
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Page 4
Chapter 4: Time Value of Money
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Sample Questions
Q1) Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?
A) 73.67%
B) 77.55%
C) 81.63%
D) 85.93%
E) 90.45%
Q2) The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.
A)True
B)False
Q3) The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.
A)True
B)False
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) Gilligan Co.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?
A) 3.92%
B) 4.12%
C) 4.34%
D) 4.57%
E) 4.81%
Q2) A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.
A)True
B)False
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6
Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.
B) A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
C) A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
D) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
E) A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.
Q2) A stock with a beta equal to 1.0 has zero systematic (or market) risk.
A)True
B)False
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) A stock is expected to pay a year-end dividend of $2.00, i.e., D<sub>1</sub> = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = 5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
A) The company's dividend yield 5 years from now is expected to be 10%.
B) The constant growth model cannot be used because the growth rate is negative.
C) The company's expected capital gains yield is 5%.
D) The company's expected stock price at the beginning of next year is $9.50.
E) The company's current stock price is $20.
Q2) The preemptive right is important to shareholders because it
A) will result in higher dividends per share.
B) is included in every corporate charter.
C) protects the current shareholders against a dilution of their ownership interests.
D) protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
E) allows managers to buy additional shares below the current market price.
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Page 8
Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
B) Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
C) Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E) If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Quinlan Enterprises stock trades for $52.50 per share. It is expected to pay a $2.50 dividend at year end (D<sub>1</sub> = $2.50), and the dividend is expected to grow at a constant rate of 5.50% a year. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from reinvested earnings?
A) 7.07%
B) 7.36%
C) 7.67%
D) 7.98%
E) 8.29%
Q2) You were recently hired by Garrett Design, Inc. to estimate its cost of common equity. You obtained the following data: D<sub>1</sub> = $1.75; P<sub>0</sub> = $42.50; g<sub>L</sub> = 7.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock?
A) 10.77%
B) 11.33%
C) 11.90%
D) 12.50%
E) 13.12%
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Page 10
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive NPV.
A)True
B)False
Q2) Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
A)True
B)False
Q3) For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.
A)True
B)False
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Page 11
Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws.
B) If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward.
C) If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized.
D) Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself.
E) If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.
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12
Chapter 12: Financial Planning and Forecasting Financial Statements
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Sample Questions
Q1) The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
A) $312.5
B) $328.1
C) $344.5
D) $361.8
E) $379.8
Q2) Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.
A)True
B)False
Q3) If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding.
A)True
B)False
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Page 13
Chapter 13: Corporate Valuation, Value-Based
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Sample Questions
Q1) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q2) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q4) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) In the real world, dividends
A) are usually more stable than earnings.
B) fluctuate more widely than earnings.
C) tend to be a lower percentage of earnings for mature firms.
D) are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
E) are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.
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) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Page 15
Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
A)True
B)False
Q2) An all-equity firm with 200,000 shares outstanding, Antwerther Inc., has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs.
Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?
A) $65.77
B) $69.23
C) $72.69
D) $76.33
E) $80.14
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Page 16
Chapter 16: Working Capital Management
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Sample Questions
Q1) Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.
A)True
B)False
Q2) Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?
A) Take steps to reduce the DSO.
B) Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
C) Sell common stock to retire long-term bonds.
D) Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
E) Increase average inventory without increasing sales.
Q3) If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.
A)True
B)False
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Page 17
Chapter 17: Multinational Financial Management
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Q1) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
Q2) Which of the following is NOT a reason why companies move into international operations?
A) To develop new markets for the firm's products.
B) To better serve their primary customers.
C) Because important raw materials are located abroad.
D) To increase their inventory levels.
E) To take advantage of lower production costs in regions where labor costs are relatively low.
Q3) Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
A)True
B)False
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