Managerial Finance Exam Questions
Course Introduction
Managerial Finance introduces students to the principles and practices that underpin financial decision-making within organizations. The course covers key topics such as financial analysis, budgeting, planning, working capital management, risk assessment, and capital structure. Emphasis is placed on the role of the financial manager in aligning financial strategies with organizational objectives, evaluating investment opportunities, and applying quantitative techniques to real-world problems. Through case studies, practical exercises, and discussions, students learn how to interpret financial statements, manage resources efficiently, and make informed decisions that enhance value for stakeholders.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT?
A) While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
B) A security whose value is derived from the price of some other "underlying" asset is called a liquid security.
C) Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
D) Money markets are markets for common stocks and long-term debt.
E) The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.
Answer: E
Q2) The facts that a proprietorship,as a business,pays no corporate income tax,and that it is easily and inexpensively formed,are two key advantages to that form of business.
A)True
B)False
Answer: True
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3
Chapter 2: Financial Statements, cash Flow, and Taxes
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Q1) On the balance sheet,total assets must always equal total liabilities and equity.
A)True
B)False
Answer: True
Q2) The annual report contains four basic financial statements: the income statement,balance sheet,statement of cash flows,and statement of stockholders' equity.
A)True
B)False
Answer: True
Q3) Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?
A) $77,000
B) $80,850
C) $84,893
D) $89,137
E) $93,594
Answer: A
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
B) If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
C) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
D) If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
E) If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.
Answer: C
Q2) The basic earning power ratio (BEP)reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business.The terms require you to amortize the loan with 10 equal end-of-year payments.How much interest would you be paying in Year 2?
A) $7,531
B) $7,927
C) $8,323
D) $8,740
E) $9,177
Q2) What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?
A) $1,537.69
B) $1,618.62
C) $1,699.55
D) $1,784.53
E) $1,873.76
Q3) If a bank compounds savings accounts quarterly,the nominal rate will exceed the effective annual rate.
A)True
B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) CMS Corporation's balance sheet as of today is as follows: \[\begin{array} { l r }
\text { Long-term debt (bonds, at par) } & \text { \$10,000,00 } \\
\text { Preferred stock } & 2,000,000 \\
\text { Common stock (\$10 par) } & 10,000,000 \\
\text { Retained earning } & 4,000,000 \\
\hline \text { Tatal debt and equity } & 26000000 \end{array}\]
The bonds have a 4.0% coupon rate,payable semiannually,and a par value of $1,000.They mature exactly 10 years from today.The yield to maturity is 12%,so the bonds now sell below par.What is the current market value of the firm's debt?
A) $5,276,731
B) $5,412,032
C) $5,547,332
D) $7,706,000
E) $7,898,650
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Page 7
Chapter 6: Risk and Return
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Q1) Stock A's stock has a beta of 1.30,and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium.)
A) 8.76%
B) 8.98%
C) 9.21%
D) 9.44%
E) 9.68%
Q2) We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.
A)True
B)False
Q3) A stock with a beta equal to -1.0 has zero systematic (or market)risk. A)True B)False
Q4) We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
A)True
B)False
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Chapter 7: Valuation of Stocks and Corporations
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Sample Questions
Q1) National Advertising just paid a dividend of D<sub>0</sub> = $0.75 per share,and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25,the required return on the market is 10.50%,and the risk-free rate is 4.50%.What is the company's current stock price?
A) $14.52
B) $14.89
C) $15.26
D) $15.64
E) $16.03
Q2) Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.
A)True
B)False
Q3) When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.
A)True
B)False
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60,what would your pre-tax net profit be?
A) -$5.10
B) $19.90
C) $20.90
D) $22.50
E) $27.60
Q2) BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?
A) The exercise price of the option is increased.
B) The life of the option is increased, i.e., the time until it expires is lengthened.
C) The Federal Reserve takes actions that increase the risk-free rate.
D) BLW's stock price becomes more risky (higher variance).
E) BLW's stock price suddenly increases.
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Firm J's earnings and stock price tend to move up and down with other firms in the S&P 500,while Firm F's earnings and stock price move counter cyclically with J and other S&P companies.Both J and F estimate their costs of equity using the CAPM,they have identical market values,their standard deviations of returns are identical,and they both finance only with common equity.Which of the following statements is CORRECT?
A) J and F should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
B) If J and F merge, then the merged firm MW should have a WACC that is a simple average of J's and F's WACCs.
C) Without additional information, it is impossible to predict what the merged firm's WACC would be if J and F merged.
D) Since J and F move counter cyclically to one another, if they merged, the merged firm's WACC would be less than the simple average of the two firms' WACCs.
E) J should have the lower WACC because it is like most other companies, and investors like that fact.
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Page 11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Robbins Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that if a project's expected NPV is negative,it should be rejected. \[\begin{array} { l c c c c c c } \text { WACC: } & 10.25 \% \\ \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\ \hline\text { Cash flows } & - \$ 1.000 & \$ 300 & \$ 300 &\$ 300 & \$ 300 &\$ 300 \end{array}\]
A) $105.89
B) $111.47
C) $117.33
D) $123.51
E) $130.01
Q2) Normal Projects S and L have the same NPV when the discount rate is zero.However,Project S's cash flows come in faster than those of L.Therefore,we know that at any discount rate greater than zero,L will have the higher NPV.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Since the focus of capital budgeting is on cash flows rather than on net income,changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
A)True
B)False
Q2) If debt is to be used to finance a project,then when cash flows for a project are estimated,interest payments should be included in the analysis.
A)True
B)False
Q3) It is extremely difficult to estimate the revenues and costs associated with large,complex projects that take several years to develop.This is why subjective judgment is often used for such projects along with discounted cash flow analysis.
A)True
B)False
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13
Chapter 12: Corporate Valuation and Financial Planning
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Q1) The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.
A)True
B)False
Q2) A rapid build-up of inventories normally requires additional financing,unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q3) One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.
A)True
B)False
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14
Chapter 13: Agency Conflicts and Corporate Governance
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Q1) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) 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
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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Q1) Which of the following statements is correct?
A) If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
B) The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
C) Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
D) A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.
E) The tax code encourages companies to pay dividends rather than retain earnings.
Q2) If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.
A)True
B)False
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Page 16
Chapter 15: Capital Structure Decisions
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Q1) The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage,other things held constant.
A)True
B)False
Q2) Two firms,although they operate in different industries,have the same expected earnings per share and the same standard deviation of expected EPS.Thus,the two firms must have the same business risk.
A)True
B)False
Q3) It is possible that two firms could have identical financial and operating leverage,yet have different degrees of risk as measured by the variability of EPS.
A)True
B)False
Q4) The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Questions
Q1) As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
A)True
B)False
Q2) Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.
A)True
B)False
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
Q4) If a firm busy on terms of 2/10 net 30,it should pay as early as possible during the discount period.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Q1) Suppose it takes 1.82 U.S.dollars today to purchase one British pound in the foreign exchange market,and currency forecasters predict that the U.S.dollar will depreciate by 12.0% against the pound over the next 30 days.How many dollars will a pound buy in 30 days? A) 1.12
Q2) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q3) The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.
A)True B)False
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Q1) The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price.Since this dilutes the value of the public stockholders,it "carves out" some of their value.
A)True
B)False
Q2) Suppose a company issued 30-year bonds 4 years ago,when the yield curve was inverted.Since then long-term rates (10 years or longer)have remained constant,but the yield curve has resumed its normal upward slope.Under such conditions,a bond refunding would almost certainly be profitable.
A)True
B)False
Q3) When a firm refunds a debt issue,the firm's stockholders gain and its bondholders lose.This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.
A)True
B)False
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Chapter 18: Extension 18 A: Rights Offerings
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Q1) Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. \(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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21
Chapter 19: Lease Financing
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Q1) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True
B)False
Q2) In a synthetic lease a special purpose entity (SPE)is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
Q3) Under a sale and leaseback arrangement,the seller of the leased property is the lessee and the buyer is the lessor.
A)True
B)False
Q4) Leasing is typically a financing decision and not a capital budgeting decision.Thus,the availability of lease financing cannot affect the size of the capital budget.
A)True
B)False
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Q1) Which of the following statements concerning warrants is correct?
A) Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
B) Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
C) A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
D) A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
E) Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.
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Chapter 21: Dynamic Capital Structures
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Q1) In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
Q2) MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.
A)True
B)False
Q3) In the MM extension with growth,the appropriate discount rate for the tax shield is the unlevered cost of equity.
A)True
B)False
Q4) The MM model is the same as the Miller model,but with zero corporate taxes.
A)True
B)False
Q5) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True
B)False
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Chapter 22: Mergers and Corporate Control
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Q1) Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.
A)True
B)False
Q2) Although goodwill created in a merger may not be amortized for shareholder reporting purposes,it may be amortized for Federal tax purposes.
A)True
B)False
Q3) A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.
A)True
B)False
Q4) A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.
A)True
B)False
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25
Chapter 23: Enterprise Risk Management
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Q1) A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?
A) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
B) Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
C) A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
D) A company can swap fixed interest payments for floating interest payments.
E) A swap involves the exchange of cash payment obligations.
Q2) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A) Risk management can help a firm maintain its optimal capital budget.
B) Risk management can reduce the expected costs of financial distress.
C) Risk management can help firms minimize taxes.
D) Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
E) Risk management can increase debt capacity.
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) Bankruptcy plays no role in settling labor disputes and product liability suits.Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
Q2) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q3) In the event of bankruptcy under the federal bankruptcy laws,debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders.Moreover,in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium.)
A) Stock B must be a more desirable addition to a portfolio than Stock A.
B) Stock A must be a more desirable addition to a portfolio than Stock B.
C) The expected return on Stock A should be greater than that on Stock B.
D) The expected return on Stock B should be greater than that on Stock A.
E) When held in isolation, Stock A has greater risk than Stock B.
Q2) In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are interested in ex ante (future)data.
A)True B)False
Q3) If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative,the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue in the future.
A)True B)False
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Chapter 26: Real Options
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Q1) Which one of the following is an example of a "flexibility" option?
A) A company has an option to close down an operation if it turns out to be unprofitable.
B) A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change.
C) A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.
D) A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.
E) A company has an option to invest in a project today or to wait a year.
Q2) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
Q3) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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Q1) Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped.However,planting,irrigating,and harvesting must be done on a nearly continual schedule.The firm uses 90-day bank notes to finance its operations.The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually.What is the effective annual interest rate of these discount loans?
A) 11.00%
B) 15.94%
C) 11.46%
D) 13.75%
E) 12.72%
Q2) The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q3) The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.
A)True
B)False
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Source URL: https://quizplus.com/quiz/24950
Sample Questions
Q1) The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates.
A)True
B)False
Q2) Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover,management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)
A) $1,000 loss
B) $1,000 benefit
C) $500 loss
D) $500 benefit
E) $0 (The change would not affect profits.)
Q3) If a company increases its safety stock,then its average inventory will go up.
A)True
B)False
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Chapter 29: Pension Plan Management
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Sample Questions
Q1) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows.)
A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491
Q2) Under a defined contribution plan,employees agree to contribute some percentage of their salaries,up to 20 percent,to the firm's pension fund.
A)True
B)False
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Chapter 30: Financial Management in Not For Profit
Businesses
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Sample Questions
Q1) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A) Fund capital is obtained by retaining earnings-if all earnings are paid out as dividends, no fund capital is created.
B) Preferred stock is never used by not-for-profit firms.
C) Not-for-profit firms are not allowed to raise capital by borrowing.
D) Not-for-profit firms usually have high dividend payouts.
E) Since not-for-profit firms are tax exempt, there is no tax advantage to debt capital.
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q3) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
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