Managerial Finance
Final Exam Questions
Course Introduction
Managerial Finance explores the principles and techniques necessary for effective financial decision-making within organizations. This course covers key topics such as financial statement analysis, budgeting, working capital management, capital structure, and investment appraisal. Students will learn how managers use financial information to plan, evaluate, and control operations, as well as to make strategic choices that align with organizational goals. Emphasis is placed on applying financial concepts to real-world business scenarios, enabling students to critically assess financial reports, manage resources prudently, and contribute to the financial health and growth of their organizations.
Recommended Textbook
Foundations of Finance 7th Edition by Arthur J. Keown
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17 Chapters
2496 Verified Questions
2496 Flashcards
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Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) Capital budgeting is concerned with
A) whether a company's assets should be financed with debt or equity.
B) managing a firms cash budgeting procedures.
C) what long-term investments a firm should undertake.
D) planning sales of a corporation's equity capital.
Answer: C
Q2) The risk/return tradeoff implies that the return on a riskless asset must be zero.
A)True
B)False
Answer: False
Q3) Short-term United States Treasury Bills are widely used as proxies for risk-free assets,yet the returns on these T-bills are consistently greater than zero.Is this consistent with the concept of a risk-return tradeoff?
Answer: Yes.Investors also require a return for delaying consumption as well as a return for taking on risk.
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Page 3
Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) All of the following are benefits of organized stock exchanges except:
A) increased stock price volatility.
B) continuous markets.
C) fair security prices.
D) easier access to new capital for business expansion.
Answer: A
Q2) Investment firms,such as Goldman Sachs,assist the transfer of capital by
A) facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital).
B) selling indirect securities to savers and using the funds to buy common stock for corporations needing funds.
C) selling direct securities.
D) selling common stock for corporate clients in the secondary market.
Answer: A
Q3) The difference between the price the corporation gets and the public offering price is called the broker-dealer spread.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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110 Flashcards
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Sample Questions
Q1) Which of the following accounts belongs on the asset side of a balance sheet?
A) depreciation expense
B) accounts payable
C) inventory
D) accruals
Answer: C
Q2) The statement of cash flow explains the changes that took place in the firm's cash balance over the period of interest.
A)True
B)False
Answer: True
Q3) Global.Com has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000.What is Global's net working capital?
A) $390,000
B) $175,000
C) $700,000
D) $210,000
Answer: A
Page 5
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) Based on the information in Table 4-1,and assuming the company's stock price is $30 per share,the P/E ratio is
A) 3.09.
B) 4.83.
C) 9.85.
D) 10.99.
Q2) The current ratio of a firm would be increased by which of the following?
A) land held for investment is sold for cash
B) equipment is purchased, financed by a long-term debt issue
C) inventories are sold for cash
D) inventories are sold on a credit basis
Q3) If company A has a lower average collection period than company B,then company A will have a higher accounts receivable turnover.
A)True
B)False
Q4) Ratios are used to standardize financial information,thereby making it easier to interpret.
A)True
B)False
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65,when he retires.The amount Bill has in his IRA at age 65 can be characterized as the future value of an annuity.
A)True
B)False
Q2) Artificially low interest rates helped create the housing bubble because low interest rates (r value)create higher values (higher PVs).
A)True
B)False
Q3) You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?
A) $1,276
B) $1,359
C) $1,462
D) $1,338
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Page 7
Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) Which of the following statements is most correct concerning diversification and risk?
A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.
D) Proper diversification generally results in the elimination of risk.
Q2) Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.
A)True B)False
Q3) The characteristic line for any well-diversified portfolio is horizontal.
A)True B)False
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) A bond will sell at a discount (below par value)if
A) the market value of the bond is less than the present value of the discount rate of the bond.
B) current market interest rates are moving in the same direction as bond values.
C) investor's current required rate of return is above the coupon rate of the bond.
D) the economy is booming.
Q2) A company with a bond rating of BBB is more likely to have which of the following qualities compared to a company with a bond rating of B?
A) greater reliance on equity financing
B) high variability in past earnings
C) little use of subordinated debt
D) small firm size
Q3) The less risky the bond (or the higher the bond rating)the lower will be the yield to maturity on the bond.
A)True
B)False
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Preferred stock valuation usually treats the preferred stock as a
A) capital asset.
B) perpetuity.
C) common stock.
D) long-term bond.
Q2) In general,common stock and preferred stock are both valued by calculating the present value of all expected future cash flows,using the required return as the discount rate.
A)True
B)False
Q3) Consider the following four types of payments that could be made by a normal operating firm: interest,common dividends,income taxes,and preferred dividends.Compared to the other payments mentioned,where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?
A) First
B) Second
C) Third
D) Fourth
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Seafood Products Corp.is expected to pay a dividend of $2.60 next year.Dividends are expected to grow at a constant rate of 8% per year,and the stock price is currently $20.00.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 35%.Compute the cost of internal equity (retained earnings)and the cost of external equity (new common stock),respectively.
A) 0, 21.00%
B) 8.00%, 23.29%
C) 21.00%, 23.29%
D) 23.00%, 25.48%
Q2) The cost of a particular source of capital (debt,preferred stock,common stock)is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.
A)True B)False
Q3) The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
A)True
B)False
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11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.
A)True B)False
Q2) Project C requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project C and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments A) the payback period for Project C will be longer than 5.6 years. B) the payback period for Project C will be shorter than 5.6 years.
C) the IRR of Project C will increase. D) the NPV of Project C will decrease.
Q3) NPV is the most theoretically correct capital budgeting decision tool examined in the text.
A)True B)False
Q4) If a project's profitability index is less than one then the project should be rejected. A)True B)False
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Page 12
Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) Free cash flow calculations can be broken down into three parts: cash flows from operations,cash flows associated with working-capital requirements,and financing cash flows relating to interest and dividend payments.
A)True
B)False
Q2) Increasing depreciation expense results in a decrease of the incremental after-tax free cash flow.
A)True
B)False
Q3) Interest expenses are not included as incremental free cash flows because the cost of funds is recognized as cash flows are discounted back to present value.
A)True
B)False
Q4) In measuring cash flows we are interested only in the incremental or incremental after-tax cash flows that are attributed to the investment proposal being evaluated.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) The market value of a leveraged firm is equal to the market value of an unleveraged firm
A) plus the present value of tax shields minus the present value of financial distress costs plus the present value of agency costs.
B) plus the present value of tax shields plus the present value of financial distress costs plus the present value of agency costs.
C) minus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.
D) plus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.
Q2) The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure. A)True B)False
Q3) Capital structure is equal to financial structure minus current liabilities. A)True B)False
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Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) As a corporation's investment opportunities increase,the dividend payout ratio should decrease so that the corporation can avoid flotation costs.
A)True
B)False
Q2) An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.
A)True
B)False
Q3) A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.
A)True
B)False
Q4) According to the expectations theory,the actual dividend must equal the expected dividend,or lese the stock price will decrease after the dividend amount is announced. A)True
B)False
Q5) Describe the three divergent views of dividend policy's effect on share price.
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) When preparing pro forma financial statement,the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.
A)True
B)False
Q2) Which of the following statements is most correct concerning the relationship between a company's cash budget and its income statement?
A) If net income is positive for 3 or more months in a row, then cash flow must be positive.
B) If net income is positive, then cash flow must be positive.
C) If net income is positive, then cash flow could be positive or negative, but if net income is negative, cash flow must also be negative.
D) Cash flow could be positive whether net income is positive or negative.
Q3) In order to reduce discretionary financing needed,a profitable company could decrease its dividend payout ratio.
A)True
B)False
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) Commercial paper is an example of spontaneous financing because it is generated by the day-to-day operations of a company.
A)True
B)False
Q2) Your company buys supplies on credit terms of 2/10 net 45.Suppose the company makes a purchase of $20,000 today.Which of the following payment options makes the most sense as a general rule?
A) Pay the bill as soon as possible to keep the supplier happy.
B) Pay the bill on day 45 due to the time value of money.
C) Pay the bill on day 10 to get the discount.
D) Either pay the bill on day 10 to get the discount, or wait until day 45.
Q3) Short-term debt has a greater risk of illiquidity than long-term debt because it must be rolled over more frequently and its use creates more uncertainty concerning future interest rates.
A)True
B)False
Q4) Discuss the risk-return tradeoff experienced in working-capital management.
Q5) Define translation exposure,transaction exposure,and economic exposure.
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Chapter 16: Current Asset Management
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Sample Questions
Q1) If current interest rates are low,and therefore expected to increase in the future,a firm wanting to reduce its interest rate risk would hold debt with longer maturities.
A)True
B)False
Q2) If you were a treasurer for a Fortune 1,000 corporation who has responsibility for investing "excess cash balances," which of the following alternatives would you be least likely to select?
A) commercial paper
B) common stock
C) bankers' acceptances
D) U.S. Treasury bills
Q3) In the EOQ model the optimal ordering quantity is the quantity for which the sum of the costs of ordering and carrying inventory is minimized.
A)True
B)False
Q4) Lockbox arrangements may reduce mail float,processing float,and transit float.
A)True
B)False
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Chapter 17: International Business Finance
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Sample Questions
Q1) A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other currencies.
A)True
B)False
Q2) Forward contracts are usually quoted for periods greater than 1 year.
A)True
B)False
Q3) A U.S.-based multinational corporation (MNC)currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen.The company also owes its Japanese suppliers 12,000,000 yen.Which of the following statements is most correct?
A) The MNC is not exposed to exchange rate risk because it holds both assets and liabilities denominated in yen.
B) The MNC will be exposed to exchange rate losses if the yen declines in value relative to the dollar.
C) The MNC will be exposed to exchange rate losses if the yen increases in value relative to the dollar.
D) The MNC can avoid exchange rate risk by paying its Japanese liabilities with dollars.
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