Managerial Finance Practice Questions
Course Introduction
Managerial Finance provides students with a comprehensive understanding of the financial principles and analytical tools used in business decision-making. The course explores key topics including financial statement analysis, budgeting, capital structure, working capital management, and the time value of money. Emphasizing both theory and practical application, students will learn how to assess financial performance, forecast funding needs, evaluate investment opportunities, and manage corporate resources efficiently to achieve organizational goals. The course is designed to equip future managers with the financial acumen needed to make informed decisions in today's dynamic business environment.
Recommended Textbook Essentials of Corporate Finance 8th Edition by
Stephen A. Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Maria is the sole proprietor of an antique store that she has operated at the same location for the past 16 years.The store rents the space in which it is located but does own all of the inventory and fixtures.The store has an outstanding loan with the local bank but no other debt obligations.There are no specific loan covenants or assets pledged as security for the loan.Due to a sudden and unexpected downturn in the economy,the store is unable to generate sufficient funds to pay the loan payments due to the bank.Which of the following options does the bank have to collect the money it is owed?
I.Sell the inventory and use the cash raised to apply to the debt
II.Sell the store fixtures and use the cash raised to apply to the debt
III.Take funds from Maria's personal account at the bank to pay the store's debt
IV.Sell any assets Maria personally owns and apply the proceeds to the store's debt
A)I only
B)III only
C)I and II only
D)I, II, and III only
E)I, II, III, and IV
Answer: E
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) The Toy Store has beginning retained earnings of $28,975.For the year,the company earned net income of $4,680 and paid dividends of $1,600.The company also issued $3,000 worth of new stock.What is the value of the retained earnings account at the end of the year?
A)$20,445
B)$22,695
C)$27,375
D)$32,055
E)$35,255
Answer: D
Q2) Baugh and Essary reports the following account balances: inventory of $17,600,equipment of $128,300,accounts payable of $24,700,cash of $11,900,and accounts receivable of $31,900.What is the amount of the current assets?
A)$46,700
B)$56,000
C)$61,400
D)$175,000
E)$199,700
Answer: C
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) A firm has sales of $311,000 and net income of $31,600.Currently,there are 28,000 shares outstanding at a market price of $36 per share.What is the price-sales ratio?
A)2.08
B)3.24
C)4.26 D)5.15
E)11.11
Answer: B
Q2) Which one of the following actions will increase the current ratio,all else constant?
Assume the current ratio is greater than 1.0.
A)Cash purchase of inventory
B)Cash payment of an account receivable
C)Cash payment of an account payable
D)Credit sale of inventory at cost
E)Cash sale of inventory at a loss
Answer: C
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) You are scheduled to receive $7,500 in three years.When you receive it,you will invest it for eight more years at 7.5 percent per year.How much will you have in eleven years?
A)$13,376.08
B)$14,428.09
C)$15,110.24
D)$16,113.33
E)$16,617.07
Q2) Jenny needs to borrow $16,000 for 3 years.The loan will be repaid in one lump sum at the end of the loan term.Which one of the following interest rates is best for Jenny?
A)8 percent simple interest
B)8 percent interest, compounded annually
C)8.5 percent simple interest
D)8.5 percent interest, compounded annually
E)9 percent interest, compounded annually
Q3) Explain the Rule of 72.
Q4) Explain the time value of money principle and also identify the underlying assumption of that principle.
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) First Trust offers personal loans at 7.7 percent compounded monthly.Second Bank offers similar loans at 7.75 percent compounded semiannually.Which one of the following statements is correct concerning these loans?
A)The First Trust loan has an effective rate of 7.98 percent.
B)The Second Bank loan has an effective rate of 8.03 percent.
C)The annual percentage rate for the Second Bank loans is 7.90 percent.
D)Borrowers should prefer the loans offered by Second Bank.
E)First Trust offers the best deal on loans.
Q2) The Men's Warehouse charges 1.6 percent interest per month.What rate of interest are its credit customers actually paying?
A)18.00 percent
B)18.92 percent
C)19.26 percent
D)19.31 percent
E)20.98 percent
Q3) Explain the similarities and differences among an ordinary annuity,an annuity due,and a perpetuity.
Q4) Identify four ways that you can use annuity computations in your everyday life.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) The call premium is the amount by which the:
A)market price exceeds the par value.
B)market price exceeds the call price.
C)face value exceeds the market price.
D)call price exceeds the par value.
E)call price exceeds the market price.
Q2) Which one of the following statements concerning sinking funds is correct?
A)Bond issuers must fund a sinking fund at the time the bonds are issued.
B)Sinking funds must include at least one "balloon payment."
C)Sinking funds must be funded annually, starting on the issue date.
D)Sinking funds may be used to purchase bonds in the open market.
E)Sinking funds can be used only to call bonds.
Q3) You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000,an 8 percent coupon,and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?
A)$1,000.00
B)$1,146.67
C)$1,173.33
D)$1,176.67
E)$1,180.00
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) The Toy Chest pays an annual dividend of $4.80 per share and sells for $93.20 a share based on a market rate of return of 15 percent.What is the capital gains yield?
A)7.35 percent
B)7.78 percent
C)9.23 percent
D)9.85 percent
E)10.00 percent
Q2) A stock has paid dividends of $1.80,$1.85,$2.00,$2.20,and $2.25 over the past five years,respectively.What is the average capital gains yield?
A)2.80 percent
B)3.24 percent
C)4.45 percent
D)5.34 percent
E)5.79 percent
Q3) Explain how staggering offsets some of the benefits associated with cumulative voting.
Q4) How are preferred stock dividends treated for tax purposes by the issuer,an individual shareholder,and a corporate shareholder?
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Discounted cash flow valuation is the process of discounting an investment's:
A)assets.
B)future profits.
C)liabilities.
D)costs.
E)future cash flows.
Q2) Chasteen,Inc.is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project.The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years.What is the internal rate of return?
A)6.44 percent
B)6.94 percent
C)7.43 percent
D)7.55 percent
E)8.11 percent
Q3) Explain why the net present value is considered to be the best method of analyzing an investment.
Q4) In words,explain how the crossover rate is computed and why the net present value profile is useful.
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) Mike's Fish Market is implementing a project that will initially increase accounts payable by $4,600,increase inventory by $4,800,and decrease accounts receivable by $800.All net working capital will be recouped when the project terminates.What is the cash flow related to the net working capital for the last year of the project?
A)-$2,000
B)-$400
C)-$600
D)$200
E)$2,000
Q2) Fig Newton Industries is considering a project and has developed the following estimates: unit sales = 7,300,price per unit = $149,variable cost per unit = $91,fixed costs = $216,400.The depreciation is $94,700 a year and the tax rate is 40 percent.What effect would an increase of $1 in the selling price have on the operating cash flow?
A)$4,380
B)$4,823
C)$5,316
D)$5,448
E)$7,300
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Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) Which one of the following best describes an arithmetic average return?
A)Total return divided by N - 1, where N equals the number of individual returns
B)Average compound return earned per year over a multiyear period
C)Total compound return divided by the number of individual returns
D)Return earned in an average year over a multiyear period
E)Positive square root of the average compound return
Q2) Explain why investors receive exactly what they pay for in a totally efficient market.
Q3) A security produced returns of 13 percent,18 percent,9 percent,23 percent,and -17 percent over the past five years,respectively.Based on these five years,what is the probability that this stock will earn more than 24.76 percent in any one given year?
A)0.5 percent
B)1.0 percent
C)2.5 percent
D)5.0 percent
E)16.0 percent
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Chapter 11: Risk and Return
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Sample Questions
Q1) Stock J has a beta of 1.17 and an expected return of 14.4 percent,while Stock K has a beta of 0.68 and an expected return of 7.6 percent.You want a portfolio with the same risk as the market.What is the expected return of your portfolio?
A)10.67 percent
B)11.18 percent
C)11.62 percent
D)12.04 percent
E)13.13 percent
Q2) Which one of the following statements related to the security market line is correct?
A)An underpriced security will plot below the security market line.
B)A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
C)A portfolio with a beta of 0.93 will plot to the right of the overall market.
D)A security with a beta of 0.99 will plot above the security market line if it is correctly priced.
E)A risk-free security will plot at the origin.
Q3) What is the significance of the slope of the security market line? Should investors prefer a steeper slope or a flatter slope?
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Chapter 12: Cost of Capital
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Sample Questions
Q1) A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model.The market rate of return is 13.5 percent.What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?
A)12.4 percent because it is lower than 18.7 percent
B)18.7 percent because it is higher than 12.4 percent
C)The arithmetic average of 12.4 percent and 18.7 percent
D)The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent
E)13.5 percent
Q2) Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $18.6 million.The bonds mature in 6.5 years and pay semiannual interest payments of $35 each.What is the firm's pretax cost of debt?
A)4.21 percent
B)8.42 percent
C)7.58 percent
D)7.74 percent
E)7.80 percent
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Taunton's is an all-equity firm that has 150,000 shares of stock outstanding.Neal,the financial vice president,is considering borrowing $220,000 at 8.25 percent interest to repurchase 20,000 shares.Ignoring taxes,what is the value of the firm?
A)$1,260,000
B)$1,400,000
C)$1,485,000
D)$1,520,000
E)$1,650,000
Q2) A firm is considering two different capital structures.The first option is an all-equity firm with 32,000 shares of stock.The second option is 20,000 shares of stock plus some debt.Ignoring taxes,the break-even level of earnings before interest and taxes between these two options is $48,000.How much money is the firm considering borrowing if the interest rate is 8 percent?
A)$175,000
B)$225,000
C)$250,000
D)$275,000
E)$300,000
Q3) Explain why the capital structure of a firm is irrelevant to equity investors.
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Page 15
Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) Which one of the following is a noncash payment made by a firm to its shareholders and is a payment that lessens the value of each outstanding share?
A)Reverse stock split
B)Cash distribution
C)Stock dividend
D)Regular dividend
E)Liquidating dividend
Q2) Which one of the following reduces the number of shares outstanding but does not change a firm's total equity?
A)Stock split
B)Distribution
C)Reverse split
D)Liquidation
E)Redemption
Q3) What are the differences between a regular cash dividend,a liquidating dividend,a special dividend,and an extra cash dividend?
Q4) What is the difference between a tender offer and a targeted repurchase?
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16
Chapter 15: Raising Capital
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Sample Questions
Q1) Chinese Importers wants to raise $58 million to expand its operations into South America.The company will sell new shares of common stock using a general cash offering.The underwriters charge a 7.8 percent spread,the administrative costs are $411,000,and the offer price is $35 per share.How many shares of stock must be sold if the firm is to raise the funds it desires?
A)1,648,315 shares
B)1,810,071 shares
C)1,911,502 shares
D)1,989,415 shares
E)2,051,515 shares
Q2) What is the advertisement,commonly found in financial newspapers,that announces a public offering of securities and provides the name of the underwriters called?
A)Prospectus
B)Red herring
C)Tombstone
D)Green Shoe
E)Underwriter's ad
Q3) Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.
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Page 17
Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) Which one of the following is a use of cash?
A)Selling inventory at cost
B)Paying a supplier for inventory you purchased last month
C)Borrowing money from a local bank
D)Collecting payment from a customer
E)Selling a fixed asset such as a piece of machinery
Q2) The cash cycle is equal to which one of the following?
A)Inventory period minus the accounts payable period
B)Operating cycle plus the accounts payable period
C)Operating cycle minus the accounts receivable period
D)Accounts receivable period minus the accounts payable period plus the inventory period
E)Inventory period minus the accounts receivable period minus the accounts payable period
Q3) How can a firm benefit from preparing a short-term financial plan?
Q4) Can a firm have a negative cash cycle?
If yes,explain how that can occur and discuss whether or not that would be good for a firm.If no,explain why that cannot occur and why preventing it from occurring is good for a firm.
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Chapter 17: Working Capital Management
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Sample Questions
Q1) Rocket City Space Camp has annual credit sales of $16 million.The average collection period is 35 days.What is the average investment in accounts receivable as shown on the balance sheet?
A)$646,000
B)$824,000
C)$1,408,888
D)$1,534,247
E)$1,693,134
Q2) In a typical month,River City Tours received 60 checks totaling $144,000.These are delayed 3 days on average.What is the average daily float? Assume 30 days in a month.
A)$12,500
B)$13,333
C)$14,400
D)$16,217
E)$16,667
Q3) Draw a basic flowchart that depicts the components of collection time.Be sure to label all key points and explain the various components.In addition,offer one suggestion for decreasing the time required for each component.
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) Suppose a U.S.firm builds a factory in China,staffs it with Chinese workers,uses materials supplied by Chinese companies,and finances the entire operation with a loan from a Chinese bank located in the same town as the factory.This firm is most likely trying to greatly reduce,or eliminate,which one of the following?
A)Interest rate disparities
B)Short-run exposure to exchange rate risk
C)Long-run exposure to exchange rate risk
D)Political risk associated with the foreign operations
E)Translation exposure to exchange rate risk
Q2) Which one of the following most likely represents the greatest political risk for a U.S.-based firm?
A)A product assembly plant located in a foreign country
B)A foreign sales office
C)Accounting office that handles all payroll functions and is located in a foreign country
D)Natural ore mine in a foreign country
E)Subassembly plant in a foreign country that uses U.S.-made components
Q3) Explain how the forward exchange market can help reduce short-run exposure to exchange rate risk.
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