Managerial Finance
Mock Exam
Course Introduction
Managerial Finance provides an in-depth exploration of financial decision-making within organizations, focusing on the application of financial principles to real-world managerial problems and strategies. The course covers foundational topics such as financial statement analysis, budgeting, capital structure, working capital management, and investment decisions. Students will develop analytical skills to evaluate risk, return, and value creation while utilizing quantitative tools for decision support. Emphasis is placed on the role of managers in optimizing financial performance, resource allocation, and fostering sustainable business growth.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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19 Chapters
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Page 2
Chapter 1: Foundations
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Sample Questions
Q1) Which of the following is considered a security?
A) IBM stock
B) IBM bond
C) US government bond
D) All of the above
Answer: D
Q2) The S-corporation was designed to address the concerns of shareholders of large, publicly traded companies that wanted to avoid the double taxation of their income.
A)True
B)False Answer: False
Q3) Which of the following is not a real asset?
A) Equipment
B) Land
C) Stock
D) None of the above
Answer: C
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Page 3
Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) The three most important financial statements are the balance sheet, income statement, and statement of retained earnings.
A)True
B)False
Answer: False
Q2) A progressive tax system taxes incremental income at progressively higher rates.
A)True
B)False
Answer: True
Q3) Differences between net income and cash flow come from:
A) accounts receivable.
B) depreciation.
C) short term securities.
D) a and b
Answer: D
Q4) Net book value is equal to market value less accumulated depreciation.
A)True
B)False
Answer: False
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) A firm's current ratio is 1.5, and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?
A) $5,000
B) $10,000
C) $15,000
D) None of the above
Answer: A
Q2) Both accounting and finance are concerned primarily with the creation of financial statements and their use as tools for evaluating the firm's future prospects.
A)True
B)False
Answer: False
Q3) If a firm has an ROA of 5% and desires an ROE of 10%, what debt-to-equity ratio will accomplish this?
A) 1.00
B) 0.50
C) 1.50
D) 2.00
Answer: A
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Page 5
Chapter 4: Financial Planning
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Sample Questions
Q1) Top-down planning tends to reflect more excessive and aggressive optimism than bottom-up planning.
A)True
B)False
Q2) Small business plans differ from large company plans in that:
A) small business plans normally do not discuss strategic planning at all.
B) small business plans usually don't include short-term forecasts.
C) small business plans don't generally discuss the decision to choose the business they are in over others.
D) Both a and b
E) All of the above
Q3) A firm has projected next year's sales at $678 million of which 60 percent will be for cash, and 40 percent will be on credit. Forecast the year-end accounts receivable balance if the firm expects an average collection period of 45 days (assume a 360-day year and calculate using year-end balance).
A) $9.0 million.
B) $13.6 million.
C) $22.6 million.
D) $33.9 million.
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Page 6
Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) One of the major goals of the Dodd-Frank Act is to break up certain existing financial companies that are too large.
A)True
B)False
Q2) The primary market is the market for original, first-time issues of securities.
A)True
B)False
Q3) Interest is defined as the:
A) return on all investments.
B) return on debt investments.
C) return on equity investments.
D) the one year return on investments in stocks or bonds.
Q4) The issuing corporation or government entity is usually involved in a primary market transaction.
A)True
B)False
Q5) The default risk on U.S. Government debt instruments increases with the maturity of the instrument.
A)True
B)False
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Chapter 6: Time Value of Money
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Sample Questions
Q1) Find the present value of a payment stream of $100 per year for the first fifteen years and $200 per year for the next five years, given a 12% discount rate.
A) $813
B) $1,402
C) $953
D) $887
E) $712
Q2) Assume that you have just won $5,000,000 in the lottery and will receive $250,000 per year for the next 20 years. How much is your prize worth today if the interest rate is 8%?
A) $1,072,731
B) $2,454,525
C) $2,185,219
D) $1,165,250
Q3) Opportunity cost is the:
A) benefit that would have been available from the next best use of money.
B) prime rate for large firms.
C) unemployment rate.
D) rate on standard savings accounts.
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Page 8
Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Which of the following is an example of an equity investment?
A) Government bond
B) Mortgage on real estate
C) Preferred stock
D) Corporate bond
Q2) A bond's current yield is calculated as:
A) the annual interest payment divided by the bond's current market yield.
B) the annual interest payment divided by the bond's face value.
C) the annual interest payment divided by the bond's current price.
D) the par value divided by the bond's current price.
Q3) Registered bonds require that the names of owners be registered with a transfer agent. Bearer bonds belong to the person who possesses them.
A)True
B)False
Q4) Holding all other variables constant, as market interest rates increase, bond prices decrease.
A)True
B)False
Q5) Explain call provisions on a bond. How does it help bond-issuers?
Q6) What are the different kinds of leases as per the FASB?
Page 9
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) The current price of Zebar is $32.00 and its last dividend was $.60. What is its return if dividends are expected to grow indefinitely at 8 percent?
A) 9.88%
B) 11.38%
C) 18.75%
D) None of the above
Q2) Scholars almost universally support technical analysis because it uses detailed statistical analysis to make predictions.
A)True
B)False
Q3) Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today?
A) $16.00
B) $22.22
C) $23.11
D) $50.00
E) $52.00
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10
Chapter 9: Risk and Return
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Sample Questions
Q1) According to the Capital Asset Pricing Model a stock's risk premium is:
A) a price premium on low risk stocks that investors are willing to pay for safety.
B) the risk premium on an average stock factored by a measure of the stock's market risk.
C) the risk premium on an average stock factored by a measure of the stock's total risk.
D) extra money paid for high risk stocks because they usually have high returns.
Q2) Which of the following statements is most correct?
A) Business-specific risk cannot be eliminated by diversification.
B) Investors are not compensated for bearing business specific risk.
C) Risk that cannot be diversified away is the risk peculiar to the stock under consideration.
D) You cannot ignore the business-specific risk even if you hold a very large portfolio.
E) All of the above statements are correct.
Q3) According to the SML, investors are rewarded for bearing market risk and not for bearing business-specific risk.
A)True
B)False
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Page 11
Chapter 10: Capital Budgeting
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Sample Questions
Q1) In case of two mutually exclusive projects, the project having the higher MIRR should be preferred.
A)True B)False
Q2) The mutually exclusive decision rule for the NPV technique is NPV<sub>B</sub> > NPV<sub>A</sub> ® choose project A over B
A)True B)False
Q3) What is the internal rate of return for a project that requires an initial outlay of $92,000 and generates a single cash inflow of $25,750 in 5 years?
A) 10%
B) 12%
C) 15.3%
D) 13.1%
Q4) Business projects virtually always involve:
A) capital budgets.
B) early cash inflows and later outflows.
C) early cash outflows and later inflows. D) quick payback periods.
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Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) Two years ago our company bought equipment for $1 million that has been depreciated straight line over a five-year life. The equipment has a current market value of $300,000. More efficient equipment can be purchased today for $3 million and is expected to last 5 years (economic life), at which time its anticipated salvage value would be $300,000. However, the new equipment would be depreciated straight line over only four years to a zero salvage value. Our company would realize a $1,000,000 per year operating cost savings by replacing the old equipment with the new equipment. Also, our Net Working Capital Requirement would decrease by $75,000 as soon as we bought the equipment, but would increase again when it is sold at the end of its economic life (5 years). Our marginal tax rate is 30%. Identify the relevant cash flows for this project. ($000)
Q2) A piece of machinery cost $50,000.00 when purchased and has been depreciated half of its value. Assuming the machinery can be sold for $30,000.00, how much accounting profit does the machinery generate?
A) -$20,000.00
B) $5,000.00
C) $30,000.00
D) $25,000.00
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Chapter 12: Risk Topics and Real Options in Capital Budgeting
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Sample Questions
Q1) Explain the certainty equivalent approach.
Q2) Suppose a firm builds a plant with more space than the firm currently needs. What type of real option best describes the firm's behavior?
A) An abandonment option
B) An expansion option
C) A land option contract
D) A contraction option
Q3) Why may an analysis that makes even a rough estimate of the probability distribution of project NPV or IRR be infinitely more valuable to management than a point estimate? Why are scenario and especially decision tree analysis particularly valuable with regard to this issue?
Q4) The NPV and IRR derived from estimated cash flows for a capital budgeting project are:
A) essentially expected values or means.
B) likely to differ from the actual results of the project.
C) random variables with their own probability distributions.
D) All of the above
Q5) What is Monte Carlo simulation? How is it used in the capital budgeting?
Page 14
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Chapter 13: Cost of Capital
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Sample Questions
Q1) A firm's correctly computed capital structure is 30% debt, 20% preferred stock, and 50% equity. If retained earnings of $1 million are expected, how much capital will have been raised when retained earnings are exhausted and new common equity must be issued?
A) $1,428,571
B) $1,000,000
C) $2,000,000
D) $3,333,333
Q2) All of the following represent adjustments to the cost of capital components except:
A) the tax effect on debt.
B) the tax effect on equity.
C) floatation costs when issuing preferred stock.
D) floatation costs when issuing common stock.
E) All of the above could represent adjustments to the cost of capital components.
Q3) When retained earnings are exhausted, the MCC breaks upward. What happens if the firm continues to raise capital after that? Does the MCC remain flat or move further upward? In either case, why?
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15
Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Why are business people fascinated by the central issue behind the study of leverage, that is whether leverage influences stock price and whether there's an optimal structure? (Hint: Think in terms of management's goals and of acquisitions.)
Q2) EPS, and not Net Income, is the measure of firm returns that stockholders normally use in determining whether financial leverage is favorable or unfavorable.
A)True
B)False
Q3) Which of the following if the correct mathematical expression of the degree of financial leverage (DFL)?
A) DFL = %ÄEBT \(\div\) %ÄEPS
B) DFL = %ÄEBIT \(\div\) %ÄEPS
C) DFL = %ÄEPS \(\div\) %ÄEBIT
D) DFL = %ÄEPS \(\div\) %ÄEBT
Q4) Business risk is associated with ____.
A) leverage
B) the interest on debt
C) the level of equity
D) the operating performance
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Page 16
Chapter 15: Dividends
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Sample Questions
Q1) Stock dividends are an effective management tool because they give shareholders the value equivalent of a cash dividend while conserving cash for capital budgeting projects.
A)True
B)False
Q2) The ex-dividend date is ____ before the record date.
A) 2 business days
B) 2 calendar days
C) 3 business days
D) 3 calendar days
E) 5 business days
Q3) Stock splits confer no direct economic benefit on shareholders. They do, however, keep share price within a "trading range" that makes the stock accessible to small investors, which is likely to exert a mild upward pressure on price.
A)True
B)False
Q4) A stock repurchase is an investment which is always profitable for a company.
A)True
B)False
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Chapter 16: The Management of Working Capital Multiple
Choice
Questions
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Sample Questions
Q1) Which of the following types of float can be virtually eliminated through the use of a lock box?
A) Mail float
B) Processing float
C) Transit float
D) Both a. and b. can be eliminated.
E) All of the above can be eliminated.
Q2) You plan to place an order with a new supplier. You have been offered terms of 2/10, net 50 from the date your supplies are shipped. The cost of borrowing from the bank is 15 percent on an annual basis. What is the best course of action in paying the supplier, assuming the firm will need to borrow if it takes the discount?
A) Pay as soon as supplies are received.
B) Pay on the 10th day.
C) Pay on the 50th day.
D) Pay on the 51st day.
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Chapter 17: The Management of Working Capital
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Sample Questions
Q1) Accruals tend to be directly related to a firm's level of operations.
A)True
B)False
Q2) Cash reserved to make payments to vendors is an example of precautionary demand.
A)True
B)False
Q3) Marketable securities are liquid investments that can be held instead of cash but do not earn any return.
A)True
B)False
Q4) Cash held for precautionary demand is to take advantage of unexpected opportunities.
A)True
B)False
Q5) As long as the borrower adheres to the conditions set forth in a revolving credit agreement, the bank is obligated to advance funds up to the agreed limit.
A)True
B)False
Q6) Explain the economic reasons for holding cash.
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) The late 1960's werethe era of the conglomerate merger.
A)True
B)False
Q2) The acquisition of a company in which the buyer borrows most of the purchase price using the firm's own assets as collateral is a:
A) consolidation.
B) leveraged buyout.
C) conglomerate merger.
D) tender offer.
Q3) Contrast the merger negotiations in a friendly merger and a hostile merger.
Q4) Although the long-term economic and political implications of the megamergers are as yet unclear, the massive accumulation of economic power currently taking place has no potential to change the open and competitive nature of the economy.
A)True
B)False
Q5) Mergers are accomplished only with the approval of the acquired firm's management.
A)True
B)False
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Chapter 19: International Finance
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Sample Questions
Q1) Which of the following statements is most correct?
A) All world currencies are convertible
B) In order for a currency to be convertible, the country's government must allow it to be traded on foreign exchange markets.
C) In order for a currency to be convertible, it must be exchangeable for U.S. dollars.
D) Both b. and c. are correct.
E) All of the above are correct.
Q2) Motorola has a contract to buy cellular telephones in Japan in 6 months. Payment will be in Japanese yen. What type of exchange rate risk does Motorola face?
A) Economic
B) Operating
C) Transaction
D) Translation
Q3) If a country's currency is expected to get weaker, this will ____.
A) encourage exports
B) encourage imports
C) not affect trade
D) discourage both imports and exports
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