Managerial Finance Exam Solutions
Course Introduction
Managerial Finance explores the principles and practices that guide financial decision-making within organizations. This course covers fundamental topics such as financial analysis, planning and control, budgeting, capital structure, and working capital management. Emphasizing the application of quantitative techniques to real-world business scenarios, students learn how managers use financial data to maximize a firms value, assess risk, and make strategic investment and financing decisions. Through case studies and problem-solving exercises, the course develops skills necessary to interpret financial statements, evaluate financial performance, and understand the broader economic and ethical context of financial management.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) Existing securities are traded in the secondary market.
A)True
B)False Answer: True
Q2) Agency theory would imply that conflicts are more likely to occur between management and shareholders when
A) the company is owned and operated by the same person.
B) management acts in the best interests of maximizing shareholder wealth.
C) the chairman of the board is also the chief executive officer (CEO).
D) the board of directors exerts strong and involved oversight of management.
Answer: C
Q3) Risk management will be an important factor over the next decade.
A)True
B)False Answer: True
Q4) A corporation must have more than 75 stockholders to qualify for Subchapter S designation.
A)True
B)False Answer: False
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days.
A)True
B)False
Answer: False
Q2) Book value per share is the most important measure of value for a stockholder.
A)True
B)False
Answer: False
Q3) Assuming a tax rate of 40%, depreciation expenses of $500,000 will
A) reduce income by $200,000.
B) reduce taxes by $200,000.
C) reduce taxes by $500,000.
D) have no effect on income or taxes, since depreciation is not a cash expense.
Answer: B
Q4) Assume the company has issued 15,000 bonds with a coupon rate of 10% and a face value of $1,000 per bond, and the company has a marginal tax rate of 40%. Calculate the annual after-tax cost of the interest expense.
Answer: 11ea8e01_c8d2_c886_b636_dd595ce0c516_TB1701_00
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and equity are stated in historical dollars.
A)True
B)False
Answer: True
Q2) Heavy use of long-term debt can be of benefit to a firm.
A)True
B)False
Answer: True
Q3) Refer to the figure above. Compute Marni's after tax profit margin.
A) 7.5%
B) 3.75%
C) 50%
D) None of these.
Answer: B
Q4) If two companies have the same ROE, they will also have the same ROA.
A)True
B)False
Answer: False
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) The need for an increase or decrease in short-term borrowing can be predicted by A) ratio analysis.
B) trend analysis.
C) a cash budget.
D) an income statement.
Q2) A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that
A) all sales were from current production.
B) all sales were from beginning inventory.
C) sales were from beginning inventory until it was depleted, and then use sales from current production.
D) all sales were for cash.
Q3) In the percent-of-sales method, if (A/S) and (L/S) both increase:
A) RNF stays the same.
B) RNF goes down.
C) RNF goes up.
D) more information is needed.
Q4) A higher growth rate in sales will often require more external funds.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage.
A)True
B)False
Q2) Degree of operating leverage should be computed only over a profitable range of operations.
A)True B)False
Q3) A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 30% of sales, while fixed cost will be $540,000. The first year's sales estimates are $1,500,000. The cost to start up this restaurant will be $2,000,000. Two financing alternatives are being considered: a) 50% equity financing and 50% debt at 9%, or b) all equity financing. Common stock can be sold at $5 per share.
a) Compute the Operating Break-even point in dollars.
b) Compute DOL.
c) Compute DFL and DCL for both financing plans.
Q4) Linear break-even analysis assumes that costs are linear functions of volume.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Generally, more use is made of short-term financing because
A) short-term interest rates are generally lower than long-term interest rates.
B) most firms do not have Basic access to the capital markets.
C) short-term financing is usually more predictable than long-term financing.
D) a and b above.
Q2) Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets can borrow long-term at 8 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 6 percent interest in the first year. Then, Kuznets projects paying 9 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true?
A) Kuznets will definitely end up paying more under the long-term financing plan.
B) Kuznets will definitely end up paying less under the long-term financing plan.
C) Kuznets will probably pay more under the short-term financing plan.
D) Kuznets will probably pay less under the short-term financing plan.
Q3) Expected value techniques allow consideration of more than one possible outcome. A)True B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Money market funds
A) are modeled after money market deposit accounts.
B) are insured up to $100,000.
C) have a minimum balance of $2,500.
D) earn competitive market rates of return.
Q2) When considering offering a cash discount, a firm must weigh the benefits of freed up cash with the cost of the cash discount.
A)True
B)False
Q3) In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government agencies like the Federal Land Bank
A) are significantly riskier than Treasury securities.
B) are much less liquid than Treasury securities.
C) yield slightly more than Treasury securities.
D) usually require the payment of higher commissions when purchased than Treasury securities.
Q4) For modern corporations, the more cash they have, the better off they are.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) It is difficult to acquire a loan in US dollars outside the United States.
A)True
B)False
Q2) Larger firms tend to be net users of trade credit.
A)True
B)False
Q3) The effective rate on a loan with a 7% stated rate and 15% compensating balance is
A) 11%
B) 7.2%
C) 8.2%
D) none of these
Q4) Commercial paper represents secured short-term borrowing by large companies.
A)True
B)False
Q5) Commercial paper is very popular with many firms because
A) it can usually be issued below the prime rate.
B) it satisfies the firm's need for long-term funds.
C) there are no required lines of credits at the bank.
D) it is very Basic to roll over (refinance) in times of economic turmoil.
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The interest factor for a future value (FV<sub>IF</sub>) is equal to (1 + i)<sup>n</sup>.
A)True
B)False
Q2) Kimberly Ford invested $10,000 10 years ago at 16 percent, compounded quarterly. How much has she accumulated?
Q3) Mr. Smith has just invested $10,000 for his son (age 7). The money will be used for his son's education 15 years from now. He calculates that he will need $100,000 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?
A) between 9% and 10%
B) between 16% and 17%
C) between 10% and 11%
D) between 15% and 16%
Q4) In determining the future value of a single amount, one measures
A) the future value of periodic payments at a given interest rate.
B) the present value of an amount discounted at a given interest rate.
C) the future value of an amount allowed to grow at a given interest rate.
D) the present value of periodic payments at a given interest rate.
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Preferred stock has all but which of the following characteristics?
A) No stated maturity.
B) A fixed dividend payment that carries a higher precedence than common stock dividends.
C) The same binding contractual obligation as debt.
D) Preferred lacks the ownership privilege of common stock.
Q2) If the inflation premium for a bond goes up, the price of the bond
A) is unaffected.
B) goes down.
C) goes up.
D) need more information.
Q3) A 15-year zero-coupon bond was issued with a $1000 par value to yield 8%. What is the approximate market value of the bond?
A) $597
B) $315
C) $275
D) $482
Q4) The inflation premium is based on past and current inflation levels.
A)True
B)False
Page 12
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Chapter 11: Cost of Capital
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Q1) The use of common stock equity in the weighted average cost of capital is always (K<sub>e</sub>) and not (K<sub>n</sub>), the cost of new common stock.
A)True
B)False
Q2) According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes.
A)True
B)False
Q3) All firms within particular industries have similar optimum capital structures.
A)True
B)False
Q4) The slope of the security market line (SML) will often increase when the economy is in a boom period.
A)True
B)False
Q5) K<sub>e</sub>represents an expected return to stockholders as well as a cost to the firm.
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) Investors discount the later years of a long-term project at a lower rate because they are generally less precise.
A)True
B)False
Q2) A firm may adopt capital rationing because
A) it is hesitant to use external sources of financing.
B) it wishes to maximize profits.
C) it is fearful of too much growth.
D) a and c.
Q3) Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?
A) $70,900
B) $82,000
C) $42,000
D) None of these
Q4) The payback method is not really a theoretically correct approach.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The investor's portfolio should always be on the efficient frontier.
A)True
B)False
Q2) A project has the following projected outcomes in dollars: $250, $350, and $500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the expected value of these outcomes?
A) $362.5
B) $89.4
C) $94.5
D) $178.3
Q3) Risk is not only measured in terms of losses, but also in terms of variability.
A)True
B)False
Q4) Which investment has the least amount of risk?
A) Standard deviation = $450, expected return = $4,500
B) Standard deviation = $600, expected return = $400
C) Standard deviation = $500, expected return = $800
D) Standard deviation = $400, expected return = $5,000
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Chapter 14: Capital Markets
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Sample Questions
Q1) The NYSE purchased Archipelago (an ECN) in 2005 in order to expand its floor-trading capabilities.
A)True
B)False
Q2) Securities issued by states and municipalities are referred to as statutory bonds and municipal bonds, respectively.
A)True
B)False
Q3) Brokers actually own the securities they buy and sell on the floor of the exchange.
A)True
B)False
Q4) The Securities Exchange Act of 1934 is primarily concerned with A) a central market system.
B) regulation of organized exchanges.
C) protecting customers of bankrupt securities firms.
D) original issues of securities.
Q5) NASD regulates stock brokers and brokerage firms. A)True B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Q1) A market maker transacts in stocks as a broker.
A)True
B)False
Q2) It would not be unusual for an investment banking syndicate to include as many as 30 investment banking houses in large offerings.
A)True
B)False
Q3) The investment banker may advise clients on a continuing basis about
A) the types of securities being sold.
B) the number of shares for distribution.
C) the timing of the sale.
D) all of these.
Q4) All of the following are disadvantages of going public except
A) the firm may now become active in mergers and acquisitions.
B) the company must make all information available to the public through filings to the SEC and the state.
C) an erosion in value may take place after the initial offering.
D) there is a high cost associated with going public.
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Chapter 16: Long-Term Debt and Lease Financing
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Q1) If a company has promised to pay interest on debt, it must pay the interest even if it shows no profit for the year, or else it may go bankrupt.
A)True
B)False
Q2) Bond ratings are significantly based on all of the following except:
A) times interest earned ratio
B) debt-equity ratio
C) current ratio
D) return on assets
Q3) Which of the following statements regarding the June 2009 bankruptcy of General Motors is false?
A) The government provided more than $50 billion in bailout.
B) The common stockholders received nothing.
C) The U.S. government owns 85% of the common stock of GM.
D) The preferred stockholders received nothing.
Q4) Refunding a bond occurs when the company sells more bonds of the same series with maturity and coupon equal to the bonds sold earlier.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Stock purchased through a rights offering may carry lower margin requirements.
A)True
B)False
Q2) Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of common stock. The cumulative preferred stock has a stated dividend of $1.75 per share. Under normal conditions, Kreisler pays out preferred dividends and 30% of remaining earnings to common stockholders, however, because of a severe recession, Fritz retained all earnings last year. This year, Fritz earned net income of $5 million. Calculate the dividend per share to be received by the common stockholders this year.
Q3) Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income.
A)True
B)False
Q4) Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) The Tax Relief Act of 2003
A) taxes dividend and long-term capital gains at the same rate.
B) taxes short-term and long-term capital gains at the same rate.
C) eliminated the tax rate on dividends to avoid double taxation.
D) made high dividend paying stock less attractive to high income investors.
Q2) All of the following uses of annual earnings would contribute toward an increase in shareholder value except:
A) repurchase shares
B) invest in projects with high profit potential
C) payoff debt
D) all of these increase shareholder value
Q3) When a firm which previously paid regular dividends ceases to do so, the stock is ex-dividend until the firm resumes regular dividend payments.
A)True
B)False
Q4) Because the capital gains tax is so high, there are no real tax advantages to a stock repurchase option.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Q1) On average, convertible bonds have call premiums of less than 10% at time of issue.
A)True
B)False
Q2) The interest rate on convertibles is generally ____________ the interest rate on similar nonconvertible instruments.
A) greater than
B) less than
C) the same as
D) at least twice
Q3) A warrant which does not expire until several years in the future which provides its owner the opportunity to buy a stock. If the stock price rises, the warrant will probably sell for
A) less than its intrinsic value.
B) exactly its intrinsic value.
C) more than its intrinsic value.
D) less than or equal to its intrinsic value.
Q4) The conversion premium is equal to the market price minus the conversion value.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Q1) Too much diversification has led many companies to sell off companies previously acquired during the merger boom.
A)True
B)False
Q2) Dilution in earnings per share occurs when a company with
A) a high P/E ratio buys a company with a low P/E ratio.
B) a low P/E ratio buys a company with a high P/E ratio.
C) a high growth rate in earnings per share buys a company with a low growth rate in earnings per share.
D) a low growth rate in earnings per share buys a company with a high growth rate in earnings per share.
Q3) A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.
A)True
B)False
Q4) Antitrust policy can preclude the acquisition of a competitor.
A)True
B)False
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Chapter 21: International Financial Management
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Q1) Which of the following statements about forward exchange rates is false?
A) They reduce uncertainty about future value of currencies.
B) They reflect expectations about the future value of currencies.
C) They are usually slightly lower than the spot rate.
D) All of these are true.
Q2) Which of the following hedging strategies is not used to minimize transaction exposure?
A) Eurobond market.
B) Forward exchange market.
C) Money market.
D) Currency futures market.
Q3) The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) form the basis for the
A) purchasing power theory of exchange rates.
B) interest rate parity theory of exchange rates.
C) balance of payments theory of exchange rates.
D) government intervention theory of exchange rates.
Q4) Assume the following spot and forward rates for the New Zealand dollar ($/NZD).
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