Managerial Finance Exam Questions
Course Introduction
Managerial Finance explores the fundamental principles and analytical tools essential for effective financial decision-making within organizations. The course covers key topics such as financial statement analysis, budgeting, working capital management, capital budgeting, risk assessment, and the evaluation of investment opportunities. Emphasis is placed on the role of managers in planning and controlling financial resources to achieve strategic objectives. Through case studies, real-world examples, and practical exercises, students develop the skills needed to assess financial health, interpret financial data, and make informed managerial decisions that drive organizational value.
Recommended Textbook
Corporate Finance 1st European Edition by David Hillier
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) The articles of incorporation:
A)can be used to remove company management.
B)are amended annually by the company shareholders.
C)set forth the number of shares that can be issued.
D)set forth the rules by which the corporation regulates its existence.
E)can set forth the conditions under which the firm can avoid double taxation.
Answer: C
Q2) The person generally directly responsible for overseeing the tax management,cost accounting,financial accounting,and information system functions is the:
A)treasurer.
B)director.
C)controller.
D)chairman of the board.
E)chief executive officer.
Answer: C
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Page 3
Chapter 2: Corporate Governance
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Q1) A general partner:
A)has less legal liability than a limited partner.
B)has more management responsibility than a limited partner.
C)faces double taxation whereas a limited partner does not.
D)cannot lose more than the amount of his/her equity investment.
E)is the term applied only to corporations which invest in partnerships.
Answer: B
Q2) Which of the following are disadvantages of a partnership?
I.limited life of the firm
II.personal liability for firm debt
III.greater ability to raise capital than a sole proprietorship
IV.lack of ability to transfer partnership interest
A)I and II only.
B)III and IV only.
C)II and III only.
D)I,II,and IV only.
E)I,III,and IV only.
Answer: D
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Page 4
Chapter 3: Financial Statement Analysis and Long-Term Planning
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Q1) _____ refers to the cash flow that results from the firm's ongoing,normal business activities.
A)Cash flow from operating activities
B)Capital spending
C)Net working capital
D)Cash flow from assets
E)Cash flow to creditors
Answer: A
Q2) According to International Accounting Standards,revenue is recognized as income when:
A)a contract is signed to perform a service or deliver a good.
B)the transaction is complete and the goods or services are delivered.
C)payment is requested.
D)income taxes are paid.
E)All of the above.
Answer: B
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Chapter 4: Discounted Cash Flow Valuation
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Q1) You have £2,500 that you want to use to open a savings account.You have found five different accounts that are acceptable to you.All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible.Which account should you use based upon the annual percentage rates quoted by each bank?
Account A: 3.75%,compounded annually
Account B: 3.70%,compounded monthly
Account C: 3.70%,compounded semi-annually
Account D: 3.65%,compounded continuously
Account E: 3.66%,compounded quarterly
A)Account A
B)Account B
C)Account C
D)Account D
E)Account E
Q2) Using the example of a savings account,explain the difference between the stated rate and the annual percentage rate.
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6
Chapter 5: How to Value Bonds and Shares
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Q1) Weisbro and Sons ordinary equity sells for 21 a share and pays an annual dividend that increases by 5% annually.The market rate of return on this equity is 9%.What is the amount of the last dividend paid by Weisbro and Sons?
A) .77
B) .80
C) .84
D) .87
E) .88
Q2) Majestic Homes share traditionally provides an 8% rate of return.The company just paid a 2 a year dividend which is expected to increase by 5% per year.If you are planning on buying 1,000 shares next year,how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?
A) 48.60
B) 52.50
C) 55.13
D) 57.89
E) 70.00
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Chapter 6: Net Present Value and Other Investment Rules
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Q1) Consider an investment with an initial cost of £20,000 and is expected to last for 5 years.The expected cash flow in years 1 and 2 are £5,000,in years 3 and 4 are £5,500 and in year 5 is £1,000.The total cash inflow is expected to be £22,000 or an average of £4,400 per year.Compute the payback period in years.
A)3.18 years.
B)3.82 years.
C)4.00 years.
D)4.55 years.
E)None of the above.
Q2) The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:
A)the discount rate and scale problems.
B)timing and scale problems.
C)the discount rate and timing problems.
D)scale and reversing flow problems.
E)timing and reversing flow problems.
Q3) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
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Chapter 7: Making Capital Investment Decisions
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Q1) A company which uses the reducing balance system of depreciation:
A)will have equal depreciation costs each year of an asset's life.
B)will expense the cost of nonresidential real estate over a period of 7 years.
C)can depreciate the cost of land,if it so desires.
D)will write off a specific percentage of the asset's residual value over the asset's life.
E)cannot expense any of the cost of a new asset during the first year of the asset's life.
Q2) This chapter introduced three new methods for calculating project operating cash flow (OCF).Under what circumstances is each method appropriate?
Q3) You just purchased some equipment that will be depreciated using 20% reducing balance.The equipment cost 67,600.What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time?
A) 34,611.20
B) 20,280.20
C) 27,040.00
D) 48,131.20
E) 48,672.00
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Page 9
Chapter 8: Risk Analysis, Real Options, and Capital Budgeting
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Q1) You are considering a new project.The project has projected depreciation of 720,fixed costs of 6,000,and total sales of 11,760.The variable cost per unit is 4.20.What is the accounting break-even level of production?
A)1,200 units
B)1,334 units
C)1,372 units
D)1,889 units
E)1,910 units
Q2) Sensitivity analysis evaluates the NPV with respect to:
A)changes in the underlying assumptions.
B)one variable changing while holding the others constant.
C)different economic conditions.
D)All of the above.
E)None of the above.
Q3) Which of the following are hidden options in capital budgeting?
A)option to expand
B)timing option
C)option to abandon
D)All of the above.
E)None of the above.
10
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Chapter 9: Risk and Return: Lessons From Market History
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Q1) The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
A)geometric average return.
B)inflation premium.
C)risk premium.
D)time premium.
E)arithmetic average return.
Q2) You purchased 200 shares at a price of £36.72 each.Over the last year,you have received total dividend income of £322.What is the dividend yield?
A)3.2%
B)4.4%
C)6.8%
D)9.2%
E)11.4%
Q3) What securities have offered the highest average annual returns over the last several decades?
Can we conclude that return and risk are related in real life?
Q4) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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Chapter 10: Return and Risk: The Capital Asset Pricing Model
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Q1) The percentage of a portfolio's total value invested in a particular asset is called that asset's:
A)portfolio return.
B)portfolio weight.
C)portfolio risk.
D)rate of return.
E)investment value.
Q2) Unsystematic risk:
A)can be effectively eliminated through portfolio diversification.
B)is compensated for by the risk premium.
C)is measured by beta.
D)cannot be avoided if you wish to participate in the financial markets.
E)is related to the overall economy.
Q3) Which one of the following would indicate a portfolio is being effectively diversified?
A)an increase in the portfolio beta
B)a decrease in the portfolio beta
C)an increase in the portfolio rate of return
D)an increase in the portfolio standard deviation
E)a decrease in the portfolio standard deviation
Page 12
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Chapter 11: Factor Models and the Arbitrage Pricing Theory
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Q1) A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.
A)negative; anticipated
B)positive; anticipated
C)negative; unanticipated
D)positive; unanticipated
E)None of the above.
Q2) The unexpected return on a security,U,is made up of:
A)market risk and systematic risk.
B)systematic risk and idiosyncratic risk.
C)idiosyncratic risk and unsystematic risk.
D)expected return and market risk.
E)expected return and idiosyncratic risk.
Q3) The acronym CAPM stands for:
A)Capital Asset Pricing Model.
B)Certain Arbitrage Pressure Model.
C)Current Arbitrage Prices Model.
D)Cumulative Asset Price Model.
E)None of the above.
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Page 13
Chapter 12: Risk, cost of Capital, and Capital Budgeting
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Q1) Eyes of the World plc has traditionally employed a firm wide discount rate for capital budgeting purposes.However,its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0,ßE = 2.0,and the beta for the overall firm is 1.3.The firm is considering the following capital expenditures:
Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?
Which projects would it accept if it estimates cost of capital separately for each division?
Use 6% as the risk-free rate and 12% as the expected return on the market.
Q2) The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:
A)reward to risk ratio for the firm.
B)expected capital gains yield for the equity.
C)expected capital gains yield for the firm.
D)portfolio beta for the firm.
E)weighted average cost of capital (WACC).
Q3) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Page 14
Chapter 13: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate.In fact,these predictions enable the investor to predict the health of the farm economy and therefore certain security prices.This finding is a violation of the:
A)moderate form of the efficient market hypothesis.
B)semistrong form of the efficient market hypothesis.
C)strong form of the efficient market hypothesis.
D)weak form of the efficient market hypothesis.
E)None of the above.
Q2) Insider trading does not offer any advantages if the financial markets are:
A)weak form efficient.
B)semiweak form efficient.
C)semistrong form efficient.
D)strong form efficient.
E)inefficient.
Q3) Do you think the lessons from capital market history will hold for each year in the future?
That is,as an example,if you buy small company shares will your investment always outperform Treasury bonds?
Page 15
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Chapter 14: Long-Term Financing: An Introduction
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Q1) A share certificate often has a stated value on it.This amount is the:
A)book value.
B)stated book value.
C)subordinated liquidation value.
D)par value.
E)None of the above.
Q2) Financial deficits are created when:
A)profits and retained earnings are greater than the capital-spending requirement.
B)profits and retained earnings are less than the capital-spending requirement.
C)profits and retained earnings are equal to the capital-spending requirement.
D)All of the above.
E)None of the above.
Q3) If a long-term debt instrument is perpetual,it is called a(n):
A)secured debt issue.
B)subordinated debt issue.
C)consol.
D)capital debt issue.
E)indenture.
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16
Chapter 15: Capital Structure: Basic Concepts
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Q1) Wild Flowers Express has a debt-equity ratio of .60.The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%.What is the cost of equity if the tax rate is 34%?
A)7.52%
B)8.78%
C)15.98%
D)16.83%
E)17.30%
Q2) The capital structure chosen by a firm doesn't really matter because of: A)taxes.
B)the interest tax shield.
C)the relationship between dividends and earnings per share.
D)the effects of leverage on the cost of equity.
E)homemade leverage.
Q3) In each of the theories of capital structure the cost of equity rises as the amount of debt increases.So why don't financial managers use as little debt as possible to keep the cost of equity down?
After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?
Q4) Explain homemade leverage and why it matters.
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Chapter 16: Capital Structure: Limits to the Use of Debt
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Q1) The All-Mine Corporation is deciding whether to invest in a new project.The project would have to be financed by equity,the cost is £2,000 and will return £2,500 or 25% in one year.The discount rate for both bonds and stock is 15% and the tax rate is zero.The predicted cash flows are £4,500 in a good economy,£3,000 in an average,economy and £1,000 in a poor economy.Each economic outcome is equally likely and the promised debt repayment is £3,000.Should the company take the project? What is the value of firm and its components before and after the project addition?
Q2) Given the following information,leverage will add how much value to the unlevered firm per pound of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 50%
Personal tax rate on income from equities: 10%
A)£-0.050
B)£-0.188
C)£0.188
D)£0.633
E)None of the above.
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Chapter 17: Valuation and Capital Budgeting for the Levered Firm
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Q1) The appropriate cost of debt to the firm is:
A)the weighted cost of debt after tax.
B)the levered equity rate.
C)the market borrowing rate after tax.
D)the coupon rate pre-tax.
E)None of the above.
Q2) A firm is valued at 6 million and has debt of 2 million outstanding.The firm has an equity beta of 1.8 and a debt beta of .42.The beta of the overall firm is:
A)1.00
B)1.11
C)1.20
D)1.34
E)It is impossible to determine with the information given.
Q3) Quick-Link has debt outstanding whose market value is 200 million,and equity outstanding with a market value of 800 million.Quick-Link is in the 34% tax bracket,and its debt is considered risk free.Merrill Lynch has provided an equity beta of 1.50.Given a risk free rate of 3% and an expected market return of 12%,calculate the discount for a scale enhancing project in the hypothetical case that Quick-Link is all equity financed.
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Chapter 18: Dividend and Other Payouts
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Q1) If you ignore taxes and transaction costs,a share repurchase will:
I.reduce the total assets of a firm.
II.increase the earnings per share.
III.reduce the PE ratio more than an equivalent stock dividend.
IV.reduce the total equity of a firm.
A)I and III only.
B)II and IV only.
C)I,II,and IV only.
D)I,III,and IV only.
E)I,II,III,and IV.
Q2) Bruno's has 7,000 shares outstanding with a par value of £1.00 per share and a market value of £12 per share.The statement of financial position shows £7,000 in the ordinary equity account,£58,000 in the additional paid in capital account,and £32,500 in the retained earnings account.The firm just announced a 50% (large)stock dividend.What is the market value per share after the dividend?
A)£6.00
B)£8.00
C)£9.00
D)£10.50
E)£12.00
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Chapter 19: Equity Financing
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Q1) Empirical evidence suggests that new equity issues are generally:
A)priced efficiently by the market.
B)overpriced by investor excitement concerning a new issue.
C)overpriced resulting from stock exchange regulation.
D)underpriced,in part,to counteract the winner's curse.
E)underpriced resulting from stock exchange regulation.
Q2) Explain the advantages of a shelf-registration to an issuer.How can timeliness of disclosure and a potential market overhang work against a shelf-registration?
Q3) For a particular stock the old share price is 20,the ex-rights price is 15,and the number of rights needed to buy a new share is 2.Assuming everything else constant,the subscription price is ______ .
A) 5
B) 13
C) 17
D) 18
E) 20
Q4) Discuss what a Dutch auction is and how it works.
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21
Chapter 20: Debt Financing
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Q1) Aspen Divestiture Corporation,a firm speculating in corporate reorganizations,has bonds outstanding that were originally issued at par,but are now selling,on September 19,2006,for 1,050 per 1,000 face value.The bonds have a stated interest rate of 8% and mature on January 1,2016.The bonds pay interest semi-annually on July 1 and January 1 each year.Suppose that an investor buys a 1,000 face value bond on September 1,2006.What euro amount will the investor pay to the seller on September 1? How much interest will the investor receive on January 1,2007?
Q2) The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is:
A)a nonrecourse covenant.
B)a recourse covenant.
C)a negative covenant.
D)a positive covenant.
E)more than one of the above.
Q3) An income bond is unique in at least one characteristic.Explain what is different about income bonds and why they exist.Why are they not more popular?
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Page 22
Chapter 21: Leasing and Off-Balance-Sheet Financing
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Q1) An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.
A)leveraged; direct
B)sales and leaseback; sales-type
C)capital; sales-type
D)direct; sales-type
E)None of the above
Q2) An operating lease's primary characteristics are:
A)fully amortized,lessee maintain equipment and there is not cancellation clause.
B)not fully amortized,lessor maintains equipment and there is a cancellation clause.
C)fully amortized,lessor maintain equipment and there is a cancellation clause.
D)not fully amortized,lessor maintains equipment and there is not cancellation clause.
E)fully amortized,lessee maintain equipment and lessee can acquire assets at end of lease for fair market value.
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Chapter 22: Options and Corporate Finance
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Q1) A _____ is a derivative security that gives the owner the right,but not the obligation,to buy an asset at a fixed price for a specified period of time.
A)futures contract
B)call option
C)put option
D)swap
E)forward contract
Q2) Explain the rationale behind the statement that equity is a call option on the firm's assets.When would a shareholder allow the call to expire?
Q3) The maximum value of a call option is equal to:
A)the strike price minus the initial cost of the option.
B)the exercise price plus the price of the underlying share.
C)the strike price.
D)the price of the underlying share.
E)the purchase price.
Q4) What are the upper and lower bounds for an American call option?
Explain what would happen in each case if the bound was violated.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Which of the following is not part of the Black Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value of the company's equity
E)Interest rate
Q2) What are the u,the up state multiplier,and d,the down state multiplier,if there are monthly intervals and the standard deviation is .38?
A)1.1159; .8961
B).0317; 31.5789
C).0317; .9683
D).2193; .7807
E)None of the above
Q3) Walter Maxim,the CEO of Digital Storage Devices has been granted options on 300,000 shares.The equity is currently trading at £27 a share and the options are at the money.The volatility of the equity has been about .15 on an annual basis over the last several years.The option mature in 5 years,become exercisable in 3 years,and the risk free rate is 4%.
What is the value of Mr.Maxim's options?
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) A convertible bond is selling for 800.It has 10 years to maturity,a 1,000 face value,and a 10% coupon.Similar nonconvertible bonds are priced to yield 14%.The conversion price is 50 per share.The equity currently sells for 31.375 per share.The conversion premium is:
A)37.25%.
B)43.33%.
C)59.36%.
D)66.67%.
E)None of the above.
Q2) A bond/warrant package is priced to sell at face value of 1,000.Each bond comes with 50 detachable warrants.A warrant gives the owner the right to buy 1 share of equity at 20 per share.The value of a warrant has been estimated at 2.The bonds mature in 20 years.Similar bonds without warrants yield 10%.What is the bond's annual coupon?
Q3) An "equity kicker" most often refers to a:
A)bond with conversion privileges.
B)preference share offering with conversion privileges.
C)warrant.
D)lettered ordinary equity.
E)None of the above.
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Page 26
Chapter 25: Financial Risk Management With Derivatives
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Q1) Interest rate and currency swaps allow one party to exchange a:
A)floating interest rate or currency value for a fixed value over the contract term.
B)fixed interest rate or currency value for a lower fixed value over the contract term.
C)floating interest rate or currency value for a lower floating value over the contract term.
D)fixed interest rate position for a currency position over the contract term.
E)None of the above.
Q2) A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration,then to immunize,the firm needs to:
A)decrease the duration of its assets.
B)increase the duration of its assets.
C)decrease the duration of its liabilities.
D)do nothing,i.e.,keep the duration of its liabilities equal to the duration of its assets.
E)None of the above.
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Chapter 26: Short-Term Finance and Planning
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Q1) A _____ issued by a bank is a promise by that bank to make a loan if certain conditions are met.
A)compensating balance
B)cleanup loan
C)letter of credit
D)line credit
E)revolver
Q2) Trade receivables and inventory are some of the most liquid assets a firm owns and their market values are typically fairly close to book value.Even so,in the eyes of many lenders,these assets make for inadequate collateral on loans,particularly if the business looking to borrow the money is in a liquidity crisis.Why do you think this is the case?
Q3) The length of time between the sale of inventory and the collection of cash from receivables is called the:
A)operating cycle.
B)inventory period.
C)trade receivables period.
D)trade payables period.
E)cash cycle.
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Chapter 27: Cash Management
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Q1) Auction-Rate Preferred Stock has less risk factors than Adjustable-Rate Preferred Stock (ARPS)because:
A)the reset period is 49 days instead of 90.
B)the market sets the dividend level reducing principle volatility.
C)better liquidity allows corporate investors to control their investments individually.
D)All of the above.
E)None of the above.
Q2) The net float of a firm is made up of disbursement float and collection float.Discuss the three components of collection float and how they would work against the firm.
Q3) If a firm has achieved its target cash balance the net present value is:
A)positive because the cash balance is positive.
B)zero because increasing the cash balance increases the interest cost.
C)negative because the cash balance has a financing cost.
D)positive because decreasing the cash decreases the cost of illiquidity.
E)None of the above.
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Chapter 28: Credit Management
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Sample Questions
Q1) Businesses in deciding to extend credit to new customers try to reduce defaults by:
A)determining the probability of non-payment.
B)gathering independent credit checks.
C)determining if it is profitable to extend credit.
D)All of the above.
E)None of the above.
Q2) Lengthening the credit period _____ the price paid by the customer.Generally,this acts to _____ sales.
A)increases; increase B)increases; decrease C)decreases; decrease D)decreases; increase E)increases; have no effect on
Q3) Aggie Corporation has been asked by its customers to grant them a 2% discount if they pay their bill within 15 days.The purchase size of the average order is £75,000.Normally,the customer pays within 30 days with no discount.Aggie 's cost of debt capital is 12%.Should the request be granted?
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Chapter 29: Mergers and Acquisitions
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Q1) Alto and Solo are all-equity firms.Alto has 2,400 shares outstanding at a market price of £24 a share.Solo has 4,000 shares outstanding at a price of £17 a share.Solo is acquiring Alto for £63,000 in cash.The incremental value of the acquisition is £5,500.What is the net present value of acquiring Alto to Solo?
A)£100
B)£400
C)£1,200
D)£2,400
E)£5,500
Q2) The payments made by a firm to repurchase shares of its outstanding equity from an individual investor in an attempt to eliminate a potential unfriendly takeover attempt are referred to as:
A)a golden parachute.
B)standstill payments.
C)greenmail.
D)a poison pill.
E)a white knight.
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Chapter 30: Financial Distress
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Questions
Q1) The management of Magic Mobile Homes has proposed to reorganize the firm.The proposal is based on a going-concern value of 2 million.The proposed financial structure is 750,000 in new mortgage debt, 250,000 in subordinated debt and 1,000,000 in new equity.All creditors,both secured and unsecured,are owed 2.5 million euros.Secured creditors have a mortgage lien for 1,500,000 on the factory.The corporate tax rate is 34%.How much should the unsecured creditors receive?
A) 500,000
B) 667,000
C) 750,000
D) 1,000,000
E)None of the above.
Q2) Prepackaged bankruptcies are:
A)described as a combination of a private workout and a liquidation.
B)the easiest way to transfer wealth to the shareholders.
C)described as a combination of a completed private workout and the formal bankruptcy filing.
D)All of the above.
E)None of the above.
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Chapter 31: International Corporate Finance
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Q1) The foreign currency approach to capital budgeting analysis:
I.is computationally easier to use than the home currency approach. II.produces the same results as the home currency approach.
III.utilizes the uncovered interest parity relationship.
IV.computes the net present value of a project in both the foreign and in the domestic currency.
A)I and III only.
B)II and IV only.
C)I,II,and IV only.
D)II,III,and IV only.
E)I,II,III,and IV.
Q2) How well do you think relative purchasing power parity and uncovered interest parity behave?
That is,do you think it's possible to forecast the expected future spot exchange rate accurately?
What complications might you run into?
Q3) Describe the foreign currency and home currency approaches to capital budgeting.Which is better?
Which approach would you recommend a U.S.firm use?
Justify your answer.
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