Managerial Finance Exam Questions
Course Introduction
Managerial Finance explores the principles and practices financial managers use to make effective decisions within an organization. The course covers topics such as financial statement analysis, working capital management, time value of money, capital budgeting, cost of capital, and risk analysis. Emphasis is placed on applying financial concepts to real-world problems, equipping students with the analytical tools necessary for financial planning, investment decisions, and strategic financial management. By the end of the course, students will understand how financial decisions influence organizational value and sustainability.
Recommended Textbook Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following grants an individual the right to vote on behalf of a shareholder?
A) proxy
B) by-laws
C) indenture agreement
D) stock option
E) stock audit
Answer: A
Q2) The decision to issue additional shares of stock is an example of which one of the following?
A) working capital management
B) net working capital decision
C) capital budgeting
D) controller's duties
E) capital structure decision
Answer: E
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Page 3
Two: Financial Statements and Long-Term Financial Planning
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Q1) A positive cash flow to stockholders indicates which one of the following with certainty?
A) The dividends paid exceeded the net new equity raised.
B) The amount of the sale of common stock exceeded the amount of dividends paid.
C) No dividends were distributed but new shares of stock were sold.
D) Both the cash flow to assets and the cash flow to creditors must be negative.
E) Both the cash flow to assets and the cash flow to creditors must be positive.
Answer: A
Q2) Which term relates to the cash flow which results from a firm's ongoing,normal business activities?
A) operating cash flow
B) capital spending
C) net working capital
D) cash flow from assets
E) cash flow to creditors
Answer: A
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Chapter 3: Working With Financial Statements
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Q1) The Home Supply Co.has a current accounts receivable balance of $280,000.Credit sales for the year just ended were $1,830,000.How many days on average did it take for credit customers to pay off their accounts during this past year?
A) 54.29 days
B) 55.01 days
C) 55.50 days
D) 55.85 days
E) 61.00 days
Answer: D
Q2) The formula which breaks down the return on equity into three component parts is referred to as which one of the following?
A) equity equation
B) profitability determinant
C) SIC formula
D) Du Pont identity
E) equity performance formula
Answer: D
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Page 5
Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Q1) Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?
Q2) Which one of the following statements is correct?
A) Pro forma statements must assume that no new equity is issued.
B) Pro forma statements are projections,not guarantees.
C) Pro forma statements are limited to a balance sheet and income statement.
D) Pro forma financial statements must assume that no dividends will be paid.
E) Net working capital needs are excluded from pro forma computations.
Q3) The Parodies Corp.has a 22 percent return on equity and a 23 percent payout ratio.What is its sustainable growth rate?
A) 18.68 percent
B) 19.25 percent
C) 19.49 percent
D) 20.39 percent
E) 22.00 percent
Q4) Smith & Daughters is getting ready to compile pro forma statements for the next few years.How can the managers establish a reasonable range of growth rates that they should consider during this planning process?
Page 6
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Q1) Today,you earn a salary of $36,000.What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent?
A) $55,032.54
B) $57,414.06
C) $58,235.24
D) $59,122.08
E) $59,360.45
Q2) Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period?
A) 3.89 percent
B) 4.20 percent
C) 4.56 percent
D) 5.01 percent
E) 5.40 percent
Q3) You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today.Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Blackwell,Inc.has a $75,000 liability it must pay three years from today.The company is opening a savings account so that the entire amount will be available when this debt needs to be paid.The plan is to make an initial deposit today and then deposit an additional $15,000 each year for the next three years,starting one year from today.The account pays a 4.5 percent rate of return.How much does the firm need to deposit today?
A) $18,299.95
B) $20,072.91
C) $21,400.33
D) $24,487.78
E) $31,076.56
Q2) Western Bank offers you a $21,000,9-year term loan at 8 percent annual interest.What is the amount of your annual loan payment?
A) $3,228.50
B) $3,361.67
C) $3,666.67
D) $3,901.18
E) $4,311.07
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Bonner Metals wants to issue new 18-year bonds for some much-needed expansion projects.The company currently has 11 percent bonds on the market that sell for $1,459.51,make semiannual payments,and mature in 18 years.What should the coupon rate be on the new bonds if the firm wants to sell them at par?
A) 5.75 percent
B) 6.23 percent
C) 6.41 percent
D) 6.60 percent
E) 6.79 percent
Q2) An investment offers a 10.5 percent total return over the coming year.Sam Bernanke thinks the total real return on this investment will be only 6.2 percent.What does Sam believe the inflation rate will be for the next year?
A) 5.60 percent
B) 5.67 percent
C) 4.05 percent
D) 6.00 percent
E) 6.21 percent
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9
Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Q1) An ECN is best described as:
A) an electronic network which transmits orders directly to the floor of the NYSE.
B) the network used in the primary market for selling newly issued shares.
C) the international trading network of the NYSE.
D) a website that allows individual investors to trade directly with one another.
E) a computerized network used by independent brokers.
Q2) Free Motion Enterprises paid a $2.20 per share annual dividend last week.Dividends are expected to increase by 3.75 percent annually.What is one share of this stock worth to you today if your required rate of return is 15 percent?
A) $19.06
B) $19.30
C) $19.56
D) $20.29
E) $20.59
Q3) Using the dividend growth model,explain why a firm would be hesitant to reduce the growth rate of its dividends.
Q4) What are the primary differences and similarities between NASDAQ and the NYSE?
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10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) A project has average net income of $5,900 a year over its 6-year life.The initial cost of the project is $98,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project.The firm wants to earn a minimum average accounting return of 11.5 percent.The firm should _____ the project because the AAR is _____ percent.
A) accept;5.71
B) accept;9.90
C) accept;12.04
D) reject;5.71
E) reject;12.04
Q2) Which one of the following is an advantage of the average accounting return method of analysis?
A) easy availability of information needed for the computation
B) inclusion of time value of money considerations
C) the use of a cutoff rate as a benchmark
D) the use of pre-tax income in the computation
E) use of real,versus nominal,average income
Q3) The profitability index (PI)of a project is 1.0.What do you know about the project's net present value (NPV)and its internal rate of return (IRR)?
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Chapter 10: Making Capital Investment Decisions
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Q1) The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
A) underlying value principle
B) stand-alone principle
C) equivalent cost principle
D) salvage principle
E) fundamental principle
Q2) Your firm is contemplating the purchase of a new $1,628,000 computer-based order entry system.The system will be depreciated straight-line to zero over its 5-year life.It will be worth $156,300 at the end of that time.You will save $642,500 before taxes per year in order processing costs and you will be able to reduce working capital by $115,764 (this is a one-time reduction).The net working capital will return to its original level when the project ends.The tax rate is 35 percent.What is the internal rate of return for this project?
A) 11.78 percent
B) 13.49 percent
C) 18.21 percent
D) 22.15 percent
E) 23.58 percent
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Q1) You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value.To determine that sales level you should compute the:
A) contribution margin per unit and set that margin equal to the fixed costs per unit.
B) contribution margin per unit.
C) accounting break-even point.
D) cash break-even point.
E) financial break-even point.
Q2) Which of the following characteristics relate to the cash break-even point for a given project?
I.The project never pays back.
II.The IRR equals the required rate of return.
III.The NPV is negative and equal to the initial cash outlay.
IV.The operating cash flow is equal to the depreciation expense.
A) I and III only
B) II and IV only
C) I,II,and III only
D) II,III,and IV only
E) I,II,III,and IV
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Chapter 12: Some Lessons From Capital Market History
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Q1) How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?
Q2) Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent.Using Blume's formula,what is your best estimate of the future annual returns over the next 5 years?
A) 11.18 percent
B) 12.27 percent
C) 11.84 percent
D) 12.66 percent
E) 12.46 percent
Q3) Small-company stocks,as the term is used in the textbook,are best defined as the: A) 500 newest corporations in the U.S.
B) firms whose stock trades OTC.
C) smallest twenty percent of the firms listed on the NYSE.
D) smallest twenty-five percent of the firms listed on NASDAQ.
E) firms whose stock is listed on NASDAQ.
Q4) Define and explain the three forms of market efficiency.
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Six: Cost of Capital and Long-Term Financial Policy
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Q1) The expected return on a portfolio:
I.can never exceed the expected return of the best performing security in the portfolio. II.must be equal to or greater than the expected return of the worst performing security in the portfolio.
III.is independent of the unsystematic risks of the individual securities held in the portfolio.
IV.is independent of the allocation of the portfolio amongst individual securities.
A) I and III only
B) II and IV only
C) I and II only
D) I,II,and III only
E) I,II,III,and IV
Q2) Which one of the following is the best example of a diversifiable risk?
A) interest rates increase
B) energy costs increase
C) core inflation increases
D) a firm's sales decrease
E) taxes decrease
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Chapter 14: Cost of Capital
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Q1) Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project.The first evaluation was in error,he explains,because it ignored flotation costs.To correct for this,he asks you to evaluate the project using a higher cost of capital which incorporates these costs.Is your boss' approach correct? Why or why not?
Q2) Which one of the following is the primary determinant of a firm's cost of capital?
A) debt-equity ratio
B) applicable tax rate
C) cost of equity
D) cost of debt
E) use of the funds
Q3) The dividend growth model:
A) is only as reliable as the estimated rate of growth.
B) can only be used if historical dividend information is available.
C) considers the risk that future dividends may vary from their estimated values.
D) applies only when a firm is currently paying dividends.
E) uses beta to measure the systematic risk of a firm.
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Chapter 15: Raising Capital
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Q1) Before a seasoned stock offering,you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering,you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?
A) overallotment
B) percentage ownership dilution
C) Green Shoe
D) Red herring
E) abnormal event
Q2) You own 15 percent or 13,500 shares of Printers,Etc.These shares have a total market value of $435,000.By what percentage will the total value of your investment in this firm change if the company sells an additional 10,000 shares of stock at $30 a share and you do not buy any?
A) -1.37 percent
B) -1.21 percent
C) -0.69 percent
D) 1.03 percent
E) 1.29 percent
Q3) Explain why there is a tendency for IPOs to be underpriced.
Q4) Explain both a rights offering and the basic characteristics of a right.
Page 17
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Which of the following statements related to financial risk are correct?
I.Financial risk is the risk associated with the use of debt financing.
II.As financial risk increases so too does the cost of equity.
III.Financial risk is wholly dependent upon the financial policy of a firm.
IV.Financial risk is the risk that is inherent in a firm's operations.
A) I and III only
B) II and IV only
C) II and III only
D) I,II,and III only
E) I,II,III,and IV
Q2) Which one of the following is the legal proceeding under which an insolvent firm can be reorganized?
A) restructure process
B) bankruptcy
C) forced merger
D) legal takeover
E) rights offer
Q3) Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?
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Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Q1) Which one of the following involves a payment in shares by a stock issuer that increases the number of shares a shareholder owns but also decreases the value per share?
A) cash dividend
B) stock dividend
C) stock repurchase
D) stock split
E) reverse stock split
Q2) The Mining Co.has 20,000 shares of stock outstanding.The current market value of the firm is $328,000.The company has retained earnings of $27,000,capital in excess of par value of $160,000,and a common stock account value of $40,000.The company is planning a 2-for-5 reverse stock split.What will the par value per share be after the split?
A) $0.15
B) $0.20
C) $1.00
D) $2.50
E) $5.00
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Chapter 18: Short-Term Finance and Planning
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Q1) Breakwater Aquatics has a 45 day accounts receivable period.The estimated quarterly sales for this year,starting with the first quarter,are $6,800,$7,100,$8,200,and $6,400,respectively.What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days.
A) $3,400
B) $3,550
C) $6,950
D) $7,100
E) $7,650
Q2) List and describe the three basic types of secured inventory loans.Compare the advantages and disadvantages of these loans.
Q3) Which one of the following will decrease the operating cycle?
A) decreasing the inventory turnover rate
B) decreasing the accounts payable period
C) increasing the accounts receivable turnover rate
D) increasing the accounts payable period
E) increasing the accounts receivable period
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Chapter 19: Cash and Liquidity Management
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Q1) A zero-balance account:
A) is used to cover the compensating balance requirement of a line of credit agreement.
B) is only used to deposit funds received at local lockboxes.
C) is funded on an as-needed basis only.
D) is limited to handling payroll disbursements.
E) requires a compensating balance.
Q2) A firm has $16,718 in outstanding checks that have not cleared the bank.The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank.The current available balance is $11,407.What is the status of the net float?
A) net collection float of $8,138
B) net collection float of $2,043
C) net collection float of $13,450
D) net disbursement float of $3,268
E) net disbursement float of $5,311
Q3) Explain what a zero-balance account is,how it is used,and how it affects cash management.
Q4) Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.
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Page 21
Topics in Corporate Finance
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Q1) Music City,Inc.has an average collection period of 62 days.Its average daily investment in receivables is $50,000.What are the annual credit sales?
A) $268,407
B) $277,109
C) $294,355
D) $325,893
E) $767,123
Q2) The accounts receivable approach to credit policy supports the theory that:
A) a firm's risk of offering credit to a new customer is limited to the variable cost of the sold items.
B) the best credit policy is an all-cash policy.
C) the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer.
D) foregoing cash discounts is a method of obtaining inexpensive short-term financing.
E) the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same.
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Chapter 21: International Corporate Finance
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Q1) Today,you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S.dollars.Last year,100 U.S.dollars was worth 115 Canadian dollars or 1,291 Mexican pesos.Which one of the following statements is correct given this information?
A) $100 converted into Canadian dollars last year would now be worth $105.22.
B) $100 converted into Mexican pesos last year would now be worth $99.77.
C) $100 converted into Mexican pesos last year would now be worth $100.36.
D) $100 converted into Canadian dollars last year would now be worth $95.05.
E) $100 invested in Canadian dollars last year would now be worth $100.
Q2) Assume the euro is selling in the spot market for $1.33.Simultaneously,in the 3-month forward market the euro is selling for $1.35.Which one of the following statements correctly describes this situation?
A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the euro.
D) The euro is selling at a premium relative to the dollar.
E) The euro is expected to depreciate in value.
Q3) Describe the foreign currency and home currency approaches to capital budgeting for a foreign project.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Which one of the following best illustrates an error which you,as a manager,might make due to overconfidence?
A) overestimating the best outcome expected from a project while underestimating the possibility of a less favorable outcome
B) assuming that a new project will be profitable since similar projects in the past were successful
C) assuming that your expectations of the future outcome from a project are more accurate than the expectations of others within your organization
D) listening to the advice of subordinates with whom you agree while ignoring the advice of subordinates with whom you tend to disagree
E) downplaying the cost of future failure of an existing project since the project has already paid for itself
Q2) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
Q3) Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.
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Page 24
Chapter 23: Enterprise Risk Management
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Q1) You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month.The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415 0 cents per bushel for delivery next month.If you want to hedge your cost,you should _____ contracts at a cost of _____ per contract.
A) buy 12;$2,075
B) buy 16;$20,750
C) buy 16;$2,075,000
D) sell 12;$2,075
E) sell 16;$2,075,000
Q2) Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?
A) setting a permanent price at which a commodity will be traded
B) setting the price at the minimum spot price during a given period of time
C) setting the price equal to the spot price on the delivery date
D) using the average market price over a given period of time
E) setting the contract price equal to some percentage,less than 100 percent,of the market price on any given day
Q3) Explain why a swap is effectively a series of forward contracts.
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25
Chapter 24: Options and Corporate Finance
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Q1) Josh opted to exercise his January option at the end of December and paid $3,250 at that time to acquire 100 shares of stock.Which one of the following did Josh own?
A) American call
B) American put
C) European call
D) European put
E) European convertible bond
Q2) Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _____ option on the assets of the firm with a strike price of _____.
A) put;$180,000.
B) put;$265,000.
C) warrant;$265,000.
D) call;$180,000.
E) call;$265,000.
Q3) Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?
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Chapter 25: Option Valuation
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Q1) Which one of the following statements related to options is correct?
A) American stock options can be exercised but not resold.
B) A European call is either equal to or less valuable than a comparable American call.
C) European puts can be resold but can never be exercised.
D) European options can be exercised on any dividend payment date.
E) American options are valued using the Black-Scholes option pricing model.
Q2) Explain how an increase in T-bill rates will affect the value of an American call and an American put.
Q3) You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.
A) $6,000.00
B) $6,048.50
C) $6,179.25
D) $6,202.22
E) $6,415.69
Q4) Explain why financial mergers tend to benefit bondholders more than shareholders.
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Chapter 26: Mergers and Acquisitions
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Q1) Nelson's Interiors has $1.52 million in net working capital.The firm has fixed assets with a book value of $23.23 million and a market value of $26.16 million.The firm has no long-term debt.The Home Centre is buying Nelson's Interiors for $29.5 million in cash.The acquisition will be recorded using the purchase accounting method.What is the amount of goodwill that The Home Centre will record on its balance sheet as a result of this acquisition?
A) $1.82 million
B) $3.34 million
C) $3.88 million
D) $4.14 million
E) $6.27 million
Q2) Firms can frequently create synergy by merging and sharing complementary resources with another firm.Give two examples of situations where this would most likely occur.
Q3) When evaluating an acquisition you should:
A) concentrate on book values and ignore market values.
B) focus on the total cash flows of the merged firm.
C) apply the rate of return that is relevant to the incremental cash flows.
D) ignore any one-time acquisition fees or transaction costs.
E) ignore any potential changes in management.
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Chapter 27: Leasing
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72 Flashcards
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Sample Questions
Q1) If a firm enters a sale and leaseback agreement,then:
I.the lessee will benefit from an immediate cash inflow.
II.both the lessor and the lessee may benefit if the lessor can benefit more from the tax benefits of ownership than can the lessee.
III.the lease automatically becomes a nonrecourse lease.
IV.the lessee forfeits the right to repurchase the asset at a later date.
A) I and III only
B) II and IV only
C) I and II only
D) II and III only
E) III and IV only
Q2) Which one of the following statements is correct concerning taxes and leasing?
A) Tax-deferral is a legitimate reason for leasing.
B) The lessee should be the party with the higher tax bracket.
C) Generally speaking,lessors tend to benefit from leases while lessees do not.
D) If a firm has significant net operating losses,it should be the lessor in a lease.
E) You should only lease an asset if the lease will be fully amortized.
Q3) Explain the differences between purchasing an asset and leasing an asset.
Q4) What are some "good" reasons for opting to lease rather than purchase an asset?
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