Managerial Finance Practice Exam
Course Introduction
Managerial Finance is a course designed to introduce students to the principles and practices of financial management within organizations. The course covers fundamental topics such as financial analysis, planning, and control; capital budgeting; the management of working capital; cost of capital; and financing decisions. Emphasis is placed on the application of financial concepts to real-world managerial decision-making, including the interpretation of financial statements, the evaluation of investment opportunities, risk assessment, and strategies to maximize firm value. Through case studies and practical examples, students develop the analytical skills necessary to make informed financial decisions in a managerial context.
Recommended Textbook Principles of Managerial Finance Brief 7th Edition by Lawrence J. Gitman
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) An effective ethics program ________.
A) can weaken corporate value
B) has no effect on a corporation's value
C) can enhance a corporation's value
D) will result in high employee attrition rate
Answer: C
Q2) Cash flows and risk are the key determinants in share price.Increased risk,other things remaining the same,results in ________.
A) a lower share price
B) a higher share price
C) an unchanged share price
D) an undetermined share price
Answer: A
Q3) An increase in a firm's risk will always result in a higher share price since a stockholder must be compensated for the greater risk.
A)True
B)False
Answer: False
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3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 10 percent,or preferred stock at an annual cost of 7 percent.If the corporation has a 40 percent tax rate,the after-tax cost of each is ________.
A) debt: $100,000; preferred stock: $70,000
B) debt: $60,000; preferred stock: $42,000
C) debt: $60,000; preferred stock: $70,000
D) debt: $100,000; preferred stock: $42,000
Answer: C
Q2) Primary and secondary markets are markets for short-term and long-term securities,respectively.
A)True
B)False
Answer: False
Q3) An efficient market is one where ________.
A) prices of stocks move up and down widely without apparent reason
B) prices of stocks remain low for long periods of time
C) prices of stocks are unaffected by market news
D) the price of a security is an unbiased estimate of its true value
Answer: D
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) An analyst should be careful when conducting ratio analysis to ensure that
A) the overall performance of a firm is not judged on a single ratio
B) the role of inflation is ignored
C) ratios being compared should be calculated using financial statements dated at different points in time during the year
D) different accounting procedures are used
Answer: A
Q2) The ________ ratio may indicate poor collections procedures or a relaxed credit policy.
A) average payment period
B) inventory turnover
C) average collection period
D) quick
Answer: C
Q3) Total asset turnover commonly measures the liquidity of a firm's total assets.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) Cash flows directly related to production and sale of a firm's products and services are called ________.
A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities
Q2) Calculate net operating profit after taxes (NOPAT)if a firm has sales of $1,000,000,operating profit (EBIT)of $100,000,interest expense of $50,000,and a tax rate of 30%.
A) $35,000
B) $700,000
C) $70,000
D) $45,000
Q3) The pro forma accumulated retained earnings account on the balance sheet is projected to be ________.(See Table 4.4)
A) $62,500
B) $52,500
C) $57,000
D) $67,000
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.
A) effective
B) nominal
C) discounted
D) continuous
Q2) The present value of an ordinary annuity of $2,350 each year for eight years,assuming an opportunity cost of 11 percent,is ________.
A) $ 1,020
B) $27,869
C) $18,800
D) $12,093
Q3) In general,with an amortized loan,the payment amount grows over the life of the loan,the principal portion of each payment grows over the life of the loan,and the interest portion declines over the life of the loan.
A)True
B)False
Q4) Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.
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Chapter 6: Interest Rates and Bond Valuation
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Q1) What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent,paid semiannually,that has a YTM of 13 percent?
A) $604
B) $1,090
C) $1,060
D) $1,073
Q2) In a bond indenture,the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.
A)True
B)False
Q3) A call premium is the amount by which the call price exceeds the market price of the bond.
A)True
B)False
Q4) IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day)compared to IBM bonds.
A)True
B)False
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8
Chapter 7: Stock Valuation
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Sample Questions
Q1) Unlike creditors,equityholders are owners of the firm.
A)True
B)False
Q2) An action on the part of a firm that increases the level of expected cash flows without a corresponding increase in risk should reduce share value; an action that reduces the level of expected cash flows without a corresponding decline in risk should increase share value.
A)True
B)False
Q3) A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend.If the current market price of the preferred stock is $50,the yield on the preferred stock is ________.
A) 4.00%
B) 6.00%
C) 8.00%
D) 12.00%
Q4) In an inefficient market,stock prices adjust quickly to new public information.
A)True
B)False
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Chapter 8: Risk and Return
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Sample Questions
Q1) Combining uncorrelated assets can reduce risk-not as effectively as combining negatively correlated assets,but more effectively than combining positively correlated assets.
A)True
B)False
Q2) An investment advisor has recommended a $50,000 portfolio containing assets R,J,and K; $25,000 will be invested in asset R,with an expected annual return of 12 percent; $10,000 will be invested in asset J,with an expected annual return of 18 percent; and $15,000 will be invested in asset K,with an expected annual return of 8 percent.The expected annual return of this portfolio is ________.
A) 12.67%
B) 12.00%
C) 10.00%
D) 11.78%
Q3) The security market line is not stable over time and shifts over time in response to changing inflationary expectations.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The capital asset pricing model is used to calculate the effect of increase in prices of capital assets due to inflation.
A)True
B)False
Q2) Which of the following is a source of long-term funds?
A) commercial paper
B) retained earnings
C) factoring
D) money market instruments
Q3) A firm has issued preferred stock at its $125 per share par value.The stock will pay a $15 annual dividend.The cost of issuing and selling the stock was $4 per share.The cost of the preferred stock is ________.
A) 7.2 percent
B) 12 percent
C) 12.4 percent
D) 15 percent
Q4) Since preferred stock is a form of ownership,it has no maturity date.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If a project's IRR is greater than the cost of capital,the project should be rejected.
A)True
B)False
Q2) A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to a firm's cost of capital is called profitability index.
A)True
B)False
Q3) What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1,$1,900,000 in year 2,$1,700,000 in year 3,and ($1,300,000)in year 4?
A) -$1,494,336
B) $158,011
C) -$158,011
D) $3,505,664
Q4) Use the IRR approach to select the best group of projects,if the required rate of return is 23.5%.(See Table 10.5)
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) For Proposal 1,the initial outlay equals ________.(See Table 11.2)
A) $1,380,000
B) $1,440,000
C) $1,500,000
D) $1,620,000
Q2) The annual incremental after-tax cash flow from operations for year 1 is ________.(See Table 11.3)
A) $13,950
B) $16,600
C) $25,600
D) $30,000
Q3) In case of an existing asset which is depreciable and is used in business and is sold for a price equal to its initial purchase price,the difference between the sales price and its book value is considered as recaptured depreciation and will be taxed as ordinary income.
A)True
B)False
Q4) In capital budgeting,risk is the degree of variability of cash flows.
A)True
B)False
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) An increase in cost (fixed cost or variable cost)tends to increase the operating breakeven point,whereas an increase in the sales price per unit will decrease the operating breakeven point.
A)True
B)False
Q2) In the EBIT-EPS approach to capital structure,risk is represented by ________.
A) the slope of the capital market line
B) shifts in the cost of debt capital
C) the slope of the capital structure line
D) shifts in the times-interest-earned ratio
Q3) An increase in fixed operating and financial cost results in an increase in risk,since the firm will have to achieve a higher level of sales just to break even.
A)True
B)False
Q4) Operating leverage may be defined as the potential use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes (EBIT).
A)True
B)False
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Chapter 13: Payout Policy
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Sample Questions
Q1) In most states,legal capital is measured either by the par value of common stock; other states,however,define legal capital to include not only the par value of the stock,but also any paid-in capital in excess of par.
A)True
B)False
Q2) Which type of dividend payment policy has the advantage that if a firm's earnings drop,dividends will still be maintained at a relatively constant level?
A) constant-payout-ratio policy
B) regular dividend policy
C) low-regular-and-extra dividend policy
D) target dividend policy
Q3) The dividend payment date is set by a firm's board of directors and represents the actual date on which the firm mails the dividend payment to the holders of record.
A)True
B)False
Q4) The stock repurchase can be viewed as a cash dividend.
A)True
B)False
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) One major risk a firm assumes in an aggressive financing strategy is ________.
A) the possibility that collections will be slower than expected
B) the possibility that long-term funds may not be available when needed
C) the possibility that short-term funds may not be available when needed
D) the possibility that it will run out of cash
Q2) A firm that is unable to pay its bills as they come due is said to be insolvent.
A)True
B)False
Q3) Float is important in the cash conversion cycle of a firm because ________.
A) its presence reduces a firm's average collection period
B) its presence reduces a firm's average payment period
C) its presence lengthens both a firm's average collection period and its average payment period
D) its presence reduces the investment that a firm must make in its cash conversion cycle
Q4) Controlled disbursing involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float,respectively.
A)True
B)False
Page 16
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) The cost of giving up a cash discount under the terms of sale 1/10 net 60 (assume a 360-day year)is ________.
A) 7.3 percent
B) 6.1 percent
C) 14.7 percent
D) 12.2 percent
Q2) The percentage advanced by a lender constitutes the principal of a secured loan and varies according to the type and liquidity of the collateral.
A)True
B)False
Q3) The stated cost of a pledge of accounts receivable is normally ________ above the prime rate.
A) 6 to 8 percent
B) 2 to 5 percent
C) 4 to 9 percent
D) 6 to 10 percent
Q4) Bessey Aviation has just sold an issue of 30-day commercial paper with a face value of $5,000,000.The firm has just received $4,958,000.What is the effective annual interest rate on the commercial paper?
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