Managerial Finance
Midterm Exam
Course Introduction
Managerial Finance provides students with a thorough understanding of the principles and practices involved in financial decision-making within organizations. This course explores key topics such as financial statement analysis, capital budgeting, risk and return assessment, working capital management, and the cost of capital. Emphasizing practical application, students learn how to evaluate investment opportunities, manage corporate resources effectively, and use financial information to guide strategic planning. The course also integrates ethical considerations and the impact of the external financial environment on managerial choices, preparing students to make informed, responsible financial decisions in a dynamic business context.
Recommended Textbook
Financial Management Theory and Practice 3rd Canadian Edition by Eugene Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) You recently sold 100 shares of your new company,XYZ Corporation,to your brother at a family reunion.At the reunion your brother gave you a cheque for the shares and you gave your brother the share certificates.Which statement best describes this transaction?
A)This is an example of an exchange of physical assets.
B)This is an example of a primary market transaction.
C)This is an example of a direct transfer of capital.
D)This is an example of a money market transaction.
Answer: C
Q2) Which of the following is NOT a variable used in the calculation of free cash flow (FCF)?
A)sales (revenues)
B)operating expenses and taxes
C)expected (required) investments in operating capital
D)interest and other financing costs
Answer: D
Q3) Today,trustee services can be arranged only with trust companies.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) Which statement regarding the tax system is true?
A)Since companies can deduct dividends paid but not interest paid, such a tax system favours the use of equity financing over debt financing.
B)Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate.
C)The maximum federal personal tax rate in 2012 is 35%.
D)Ordinary corporate operating losses can be carried back to each of the preceding 10 years and forward for the next 3 years and used to offset taxable income in those years.
Answer: B
Q2) Other things held constant,which action would increase the amount of cash on a company's balance sheet?
A)The company purchases a new piece of equipment.
B)The company pays a dividend.
C)The company issues new common stock.
D)The company gives customers more time to pay their bills.
Answer: C
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Chapter 3: Analysis of Financial Statements
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Q1) An investor is considering starting a new business.The company would require $475,000 of assets,and it would be financed entirely with common stock.The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital,which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?
A)$54,979
B)$57,873
C)$60,919
D)$64,125
Answer: D
Q2) If a firm finances with only debt and common equity,and if its equity multiplier is 3.0,then its debt ratio must be 0.667.
A)True
B)False
Answer: True
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Suppose the Government of Canada offers to sell you a bond for $747.25.No payments will be made until the bond matures 5 years from now,at which time it will be redeemed for $1,000.What interest rate would you earn if you bought this bond at the offer price?
A)4.37%
B)4.86%
C)5.40%
D)6.00%
Q2) A Canada government bond promises to pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is correct?
A)The periodic interest rate is greater than 3%.
B)The periodic rate is less than 3%.
C)The present value would be greater if the lump sum were discounted back for more periods.
D)The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.
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Chapter 5: Financial Planning and Forecasting Financial Statements
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Q1) Which term best describes a relationship in which very large increases in sales require very little additional inventory?
A)Lumpiness
B)Curvilinear
C)declining ratio
D)constant ratio
Q2) Canada Manufacturing has net income of $18 on sales of $60,fixed assets of $95,and total assets of $190.The firm retains 50% of its earnings.If the firm is operating at 70% capacity,what are the full capacity sales?
A)$86
B)$84
C)$105
D)$172
Q3) Sales forecasts are usually based on which of the following?
A)historical trends
B)economic forecasts
C)past marketing strategy
D)both a and b
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Chapter 6: Bonds, Bond Valuation, and Interest Rates
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Q1) The risk in bond prices due to fluctuations in interest rates is called reinvestment risk. A)True B)False
Q2) Company A has a bond outstanding that pays a 7% coupon.The interest is paid semiannually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately,one year from today?
A)$1,065.15
B)$1,000.00
C)$937.53
D)$936.70
Q3) A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)
A)True B)False
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8
Chapter 7: Risk, Return, and the Capital Asset Pricing Model
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Q1) Which of the following is correct?
A)Diversifiable risk, which is measured by the stock's beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
B)Diversifiable risk, which is measured by the standard deviation, can be lowered by adding more stocks to the portfolio in which the stock is held.
C)Systematic risk, which is measured by the stock's beta, cannot be diversified away by adding more stocks to the portfolio in which the stock is held.
D)Diversifiable risk, which is measured by the stock's expected return, can be lowered by adding more stocks to the portfolio in which the stock is held.
Q2) The coefficient of variation,calculated as the standard deviation of expected returns divided by the expected return,is a standardized measure of the risk per unit of expected return.
A)True
B)False
Q3) The CAPM can be viewed as an APT model with one factor.
A)True
B)False
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Chapter 8: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) The Wei Company's last dividend was $1.75.The dividend growth rate is expected to be constant at 1.50% for 2 years,after which dividends are expected to grow at a rate of 8.00% forever.Wei's required return (r<sub>s</sub>) is 12.00%.What is Wei's current share price?
A)$41.83
B)$43.08
C)$44.38
D)$45.71
Q2) You are considering buying a zero growth stock.If the firm pays a $2.00 annual dividend,and your required rate of return is 15%,what is the maximum price you would pay for this stock?
A)$13.33
B)$23.33
C)$133.33
D)$12.15
Q3) A significant difference between a stock's market value and its intrinsic value indicates that financial markets are basically inefficient.
A)True
B)False
Page 10
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Chapter 9: The Cost of Capital
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Q1) Among various sources of financing,which one will receive favourable tax treatments by issuers?
A)long-term debt
B)common stock
C)retained earnings
D)preferred stock
Q2) Kovach Lumber Company hired you to help estimate its cost of capital.You were provided with the following data: D<sub>1</sub> = $1.10; P<sub>0</sub> = $27.50; g = 6.00% (constant); and F = 5.00%.What is the cost of equity raised by selling new common stock?
A)9.41%
B)9.80%
C)10.21%
D)10.62%
Q3) Given that Firms X and Y are two separate entities,the cost of debt for X can be greater than the cost of equity for Y.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Which statement regarding the IRR method is correct?
A)One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B)One defect of the IRR method is that it does not take account of the time value of money.
C)One defect of the IRR method is that it does not take account of the cost of capital.
D)One defect of the IRR method is that it does not assume that the cash flows to be received from a project can be reinvested at a rate other than the IRR itself.
Q2) Because "present value" refers to the value of cash flows that occur at different points in time,a series of present values should not be summed to determine the value of a capital budgeting project.
A)True
B)False
Q3) Financing pressure or liquidity can explain the popular use of payback period in project appraisals for small firms.
A)True
B)False
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) In capital budgeting terminology,an externality is defined as something that is outside,or external to,a proposed new project.Therefore,externalities are not considered in project cash flow estimates.
A)True
B)False
Q2) Which of the following statements best describes CCA?
A)Using CCA rather than straight-line depreciation would normally have no effect on a project's total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
B)Corporations must use the same depreciation method (e.g., straight-line or CCA) for stockholder reporting and tax purposes.
C)Since CCA is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.
D)Under CCA rules, higher CCA deductions occur in the early years, and this reduces the early cash flows and thus lowers a project's projected NPV.
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Chapter 12: Capital Structure Decisions
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Sample Questions
Q1) Assuming the following variables,what is the value of the firm according to MM with corporate taxes?EBIT: $250,000 r<sub>d</sub>: 12% T<sub>c</sub>: 40%Debt: $500,000 r<sub>sU</sub>: 16%
A)$1,475,875
B)$1,137,500
C)$1,587,500
D)$1,646,250
Q2) The Congress Company has identified two methods for producing playing cards.One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards.The other method would use a less expensive machine (fixed cost = $5,000),but with greater variable costs ($1.50 per deck of cards).If the selling price per deck of cards is the same under each method,at what level of output will the two methods produce the same net operating income (EBIT)?
A)5,000 decks
B)10,000 decks
C)15,000 decks
D)20,000 decks
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Page 14
Chapter 13: Distributions to Shareholders: Dividends and Repurchases
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Q1) Which of the following statements best describes stock splits?
A)When firms are deciding on the size of stock splits-say, whether to declare a 2-for-1 split or a 3-for-1 split-it is best to declare the smaller one, in this case, the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
B)Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today, stock dividends are used far more often than stock splits.
C)When a company declares a stock split, the price of the stock typically declines-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the equity.
D)If a firm's stock price is quite high relative to most stocks-say, $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say, $2 per share-then it can declare a "reverse split" of, say, 1-for-25 so as to bring the price up to somewhere around $50 per share.
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Chapter 14: Initial Public Offerings Investment Banking and Financial Restructuring
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Sample Questions
Q1) In an IPO issue,the issuing company has incurred $10 million for the floatation costs and legal fees.The issue involves 50 million shares.As a firm commitment written deal,the underwriter agrees to buy the shares at $18 each and resells to the public at $20 per share.What will be the percentage of direct costs required in this deal?
A)11.50%
B)10.00%
C)9.10%
D)8.40%
Q2) With a firm commitment underwriting,an investment bank agrees to sell 2 million shares to the public at $10 per share with a spread of $1.How much does the issuing company receive if only 1.5 million shares are sold?
A)$20.0 million
B)$18.0 million
C)$15.0 million
D)$13.5 million
Q3) Best efforts deals are commonly used by well-known,established issuers.
A)True
B)False
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Chapter 15: Lease Financing
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Q1) Under which circumstances will a lessor likely charge higher lease rates?
A)if the lessor's tax rate increases
B)if the cost of borrowing increases
C)if the residual value of the asset increases
D)if the purchase price of the asset decreases
Q2) Consider the following information: original investment = $5,000,PV of CCA tax shield = $3,500,PV of after-tax lease payments = $1,900.What is the NAL?
A)$550
B)$650
C)-$400
D)$350
Q3) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under CRA guidelines.
A)True
B)False
Q4) CCA recapture or terminal losses will not be an issue for lessors even when the lease expires.
A)True
B)False
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Chapter 16: Capital Market Financing: Hybrid and Other Securities
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Sample Questions
Q1) Refer to Scenario: Saunders.Based on your answers to the three preceding questions,what is the minimum price (or "floor" price) at which the Saunders bonds should sell?
A)$734.89
B)$773.57
C)$814.29
D)$857.14
Q2) Liquid assets such as bankers' acceptance (BA) can never be used for securitization. A)True
B)False
Q3) A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.
A)True
B)False
Q4) The "misused" asset securitizations,credit derivatives,and CDOs took the blame for creating the credit crisis of 2007.
A)True
B)False
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Chapter 17: Working Capital Management and Short-Term Financing
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Q1) The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from greater variability of interest costs on short-term debt.Even if its long-term prospects are good,the firm's lender may not renew a short-term loan if the firm is even temporarily unable to repay it.
A)True
B)False
Q2) Which statement best describes cash budgets?
A)Depreciation expense is not explicitly included, but depreciation effects are reflected in the estimated tax payments.
B)Cash budgets do not include financial expenses such as interest and dividend payments.
C)Cash budgets do not include cash inflows from long-term sources such as bond issues.
D)Changes that affect the DSO do not affect the cash budget.
Q3) Stretching accounts payable is a widely accepted and costless financing technique.
A)True
B)False
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Page 19
Chapter 18: Current Asset Management
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Q1) The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.
A)True B)False
Q2) Providing much higher yields than operating assets,marketable securities are often held in sizable amounts.
A)True B)False
Q3) The principal goal of most inventory management systems is to balance the costs of ordering,shipping,and receiving goods against the cost of carrying those goods,while simultaneously meeting the firm's policy with respect to avoiding running short of stock and thus disrupting production schedules or losing sales.
A)True B)False
Q4) The credit period is the amount of time it takes to do a credit search on a potential customer.
A)True B)False
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Chapter 19: Financial Options and Applications in Corporate Finance
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Q1) Which of the following best describe the exercise value of a call option?
A)The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.
B)The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is greater than zero if the stock's price is below the strike price.
C)The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is negative if the stock's price is below the strike price.
D)The exercise value of a call option is the positive difference between the current price of the stock and the option price. The exercise value is zero if the stock's price is below the strike price.
Q2) Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.
A)True
B)False
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Page 21
Chapter 20: Enterprise Risk Management
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Q1) Suppose the quoted price for a June 2008 10-year CGB futures contract has changed from 118.72 to 118.77.What is the corresponding change in value in this futures contract?
A)$70
B)$60
C)$50
D)$30
Q2) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q3) Which of the following best describes counterparty risk?
A)the risk that one party defaults on its counterparty risk
B)the risk that one party defaults on its bond coupon payments
C)the risk that one party defaults on its derivatives contract obligations
D)there is no such thing as counterparty risk in derivatives markets
Q4) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
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Chapter 21: International Financial Management
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Q1) The cash flows relevant for a foreign investment should,from the parent company's perspective,include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
A)True
B)False
Q2) The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.
A)True
B)False
Q3) Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.
A)True
B)False
Q4) The Eurocurrency market is essentially a long-term market; most loans and deposits in this market have maturities longer than 1 year.
A)True
B)False
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Page 23
Chapter 22: Corporate Valuation and Governance
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Q1) Based on the corporate valuation model,the value of a company's operations is $1,200 million.The company's balance sheet shows $80 million in accounts receivable,$60 million in inventory,and $100 million in short-term investments that are unrelated to operations.The balance sheet also shows $90 million in accounts payable,$120 million in notes payable,$300 million in long-term debt,$50 million in preferred stock,$180 million in retained earnings,and $800 million in total common equity.If the company has 30 million shares of stock outstanding,what is the best estimate of the stock's price per share?
A)$24.90
B)$27.67
C)$30.43
D)$33.48
Q2) Suppose Toronto Corp.'s free cash flow in the previous year was $250,000,and FCF is expected to grow at a constant rate of 5%.If the company's weighted average cost of capital is 15%,what is the value of its operations?
A)$2,625,000
B)$2,500,000
C)$2,900,000
D)$2,000,000
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Chapter 23: Mergers,Acquisitions,and Restructuring
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Q1) A taxable merger offer is one where the acquiring company offers to purchase the target company with cash.However,the same deal is not taxable if the merger is paid by exchanging stocks.Such nontaxable bids should be more popular by far.
A)True
B)False
Q2) Which of the following factors does NOT influence the consideration of a merger and an acquisition of stocks?
A)Shareholders are dealt with directly to bypass the target management and board of directors.
B)In a tender offer, usually some minority shareholders do not tender (offer) their shares. This can result in preventing the target firm from being completely absorbed
C)Target management may be unfriendly and resist an offer, which usually results in a higher stock price.
D)The target company's supplier has developed a new high-quality product.
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Chapter 24: Decision Trees,real Options and Other Capital Budgeting Techniques
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Q1) Which circumstance will NOT increase the value of a real option?
A)lengthening the time in which a real option must be exercised
B)an increase in the volatility of the underlying source of risk
C)an increase in the risk-free rate
D)an increase in the cost of obtaining the real option
Q2) A project has an expected NPV of -$250,based on the traditional DCF analysis.However,the real option valuation shows that the expected NPV is $750.What is the value of the option?
A)$250
B)$500
C)$750
D)$1,000
Q3) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q4) Real options are options to buy real assets,such as stocks,rather than interest-bearing assets,such as bonds.
A)True
B)False
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