Course Introduction
Managerial Finance Practice Questions
Managerial Finance explores the principles and tools necessary for effective financial decision-making within organizations. The course covers topics such as financial statement analysis, budgeting, capital structure, risk assessment, working capital management, and valuation of investment opportunities. Emphasizing the role of finance in strategic planning, it teaches students how to use financial data to forecast, evaluate performance, allocate resources, and maximize shareholder value. Practical case studies and real-world scenarios are integrated to help students apply key concepts in managerial contexts.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) the main method of transferring ownership interest in a corporation is by means of a hostile takeover.
B) two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.
C) a corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.
D) limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E) although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.
Answer: C
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3
Chapter 2: Risk and Return-Part I
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Q1) Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky.
A)True
B)False Answer: True
Q2) A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
A)True
B)False Answer: True
Q3) Which of the following are the factors for the Fama-French model?
A) the excess market return, a debt factor, and a book-to-market factor.
B) the excess market return, a size factor, and a debt.
C) a debt factor, a size factor, and a book-to-market factor.
D) the excess market return, an industrial production factor, and a book-to-market factor.
E) the excess market return, a size factor, and a book-to-market factor.
Answer: E
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Page 4
Chapter 3: Risk and Return-Part II
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Q1) Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20. She is in the process of buying 100 shares of Safety Corp. at $10 a share and adding it to her portfolio. Safety has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Safety stock?
Rp bp
A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48
Answer: B
Q2) The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.
A)True
B)False
Answer: False
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Chapter 4: Bond Valuation
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Q1) Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?
A) if interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
B) the 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
C) the 10-year bond would sell at a premium, while the 15-year bond would sell at par.
D) if the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.
E) if interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.
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6
Chapter 5: Financial Options
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Q1) Which of the following statements is CORRECT?
A) call options give investors the right to sell a stock at a certain strike price before a specified date.
B) options typically sell for less than their exercise value.
C) leaps are very short-term options that were created relatively recently and now trade in the market.
D) an option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.
E) put options give investors the right to buy a stock at a certain strike price before a specified date.
Q2) The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?
A) $7.33
B) $7.71
C) $8.12
D) $8.55
E) $9.00
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Chapter 6: Accounting for Financial Management
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Q1) Hunter Manufacturing Inc.'s December 31, 2014 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding. During 2015, Hunter had $250,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/2015, assuming that Hunter neither issued nor retired any common stock during 2015
A) $20.90
B) $22.00
C) $23.10
D) $24.26
E) $25.47
Q2) The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
A)True
B)False
Q3) The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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Q1) Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.
A)True
B)False
Q2) 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) $52,230
B) $54,979
C) $57,873
D) $60,919
E) $64,125
Q3) Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.
A)True
B)False
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9
Chapter 8: Basic Stock Valuation
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Q1) A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = 5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
A) the company's dividend yield 5 years from now is expected to be 10%.
B) the constant growth model cannot be used because the growth rate is negative.
C) the company's expected capital gains yield is 5%.
D) the company's expected stock price at the beginning of next year is $9.50.
E) the company's current stock price is $20.
Q2) Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?
A) the stock's dividend yield is 8%.
B) the current dividend per share is $4.00.
C) the stock price is expected to be $54 a share one year from now.
D) the stock price is expected to be $57 a share one year from now.
E) the stock's dividend yield is 7%.
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Chapter 9: Corporate Valuation and Financial Planning
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Q1) A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.
A)True
B)False
Q2) A firm's AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
Q3) If Decker had a financing deficit, it could remedy the situation by
A) buying back common stock
B) paying a special dividend
C) paying down its long-term debt
D) borrowing on its line of credit
E) borrowing from retained earnings
Q4) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
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11
Chapter 10: Corporate Governance
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Q1) A company issues bonds saying that it will use the proceeds for a safe investment. Instead, it uses the proceeds for a risky investment. Which of the following statements is true about this situation.
A) this is an example of asset switching or bait and switch.
B) what the company does with the funds once it raises them isn't the business of the debtholders.
C) this will result in an increase in the value of the debt because the company is riskier.
D) all of the above.
E) none of the above.
Q2) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 11: Determining the Cost of Capital
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Q1) Westbrook's Painting Co. plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 30.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?
A) 0.57%
B) 0.63%
C) 0.70%
D) 0.77%
E) 0.85%
Q2) The cost of perpetual preferred stock is found as the preferred's annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, is not deductible by the issuing firm.
A)True
B)False
Q3) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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13
Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Westwood Painting Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected.
\(\begin{array} { l c c c c c }
&r=12.25 \% \\
\text { Year } & 0 & 1 & 2 & 3 & 4 \\
\text { Cash flows } & - 850 & 300 & 320 & 340 & 360 \end{array}\)
A) 13.42%
B) 14.91%
C) 16.56%
D) 18.22%
E) 20.04%
Q2) In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.
A)True
B)False
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Page 14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
A) increase the estimated npv of the project to reflect its greater risk.
B) reject the project, since its acceptance would increase the firm's risk.
C) ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
D) increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
E) increase the estimated irr of the project to reflect its greater risk.
Q2) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
A)True
B)False
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15
Chapter 14: Real Options
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Q1) Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q2) Refer to data for Steppingstone Incorporated (SI). Now assume that one year from now SI will know if the Z 45 has become the industry standard. Also assume that after receiving the cash flows at t = 1, SI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option?
A) $0
B) $2,075
C) $4,067
D) $8,945
E) $10,745
Q3) Real options affect the size, but not the risk, of a project's expected cash flows.
A)True
B)False
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16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following statements about dividend policies is correct?
A) one reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
B) one advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C) one key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
D) the clientele effect suggests that companies should follow a stable dividend policy.
E) modigliani and miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. they call this the "bird-in-the hand" effect.
Q2) Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.
A)True
B)False
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Page 17
Chapter 16: Capital Structure Decisions
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Q1) An all-equity firm with 200,000 shares outstanding, Antwerther Inc., has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs. Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?
A) $65.77
B) $69.23
C) $72.69
D) $76.33
E) $80.14
Q2) Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.
A)True
B)False
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Volunteer Enterprises has the following information for the current year. Calculate its free cash flow to equity. \(\begin{array}{lr}
\text { FCF } & 1,000 \\
\text { Interest expense } & 40 \\
\text { Principal payments } & 200 \\
\text { New debt } & 300 \\
\text { Tax rate } & 25 \% \end{array}\)
A) $1,070
B) $1,177
C) $1,295
D) $1,424
E) $1,567
Q2) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
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Q1) Which of the following statements is most CORRECT?
A) private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
B) private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
C) the sec requires that all private placements be handled by a registered investment banker.
D) private placements can generally bring in funds faster than is the case with public offerings.
E) in a private placement, securities are sold to private (individual) investors rather than to institutions.
Q2) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
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Page 20
Chapter 19: Lease Financing
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Q1) Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.
A)True
B)False
Q2) In the lease versus buy decision, leasing is often preferable
A) because, generally, no down payment is required, and there are no indirect interest costs.
B) because lease obligations do not affect the firm's risk as seen by investors.
C) because the lessee owns the property at the end of the least term.
D) because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
E) because it has no effect on the firm's ability to borrow to make other investments.
Q3) Many leases written today combine the features of operating and financial leases. Such leases are often called "combination leases."
A)True
B)False
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Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy. A)True
B)False
Q2) Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?
A) 6.66%
B) 6.99%
C) 7.34%
D) 7.71%
E) 8.09%
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Page 22
Chapter 21: Supply Chains and Working Capital Management
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Q1) Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment. Marketable securities held while awaiting reinvestment are not available for liquidity purposes.
A)True
B)False
Q2) A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.
A)True B)False
Q3) Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.
A)True B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) Which of the following statements is most correct?
A) it is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially "weak" firms. a major disadvantage of such a policy is that it is likely to increase uncollectible accounts.
B) a firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.
C) firms use seasonal dating primarily to decrease their dso.
D) seasonal dating with terms 2/15, net 30 days, with april 1 dating, means that if the original sale took place on february 1st, the customer can take the discount up until march 15th, but must pay the net invoice amount by april 1st.
E) if credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase.
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24
Chapter 23: Other Topics in Working Capital Management
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Q1) During times of inflation, which of these inventory accounting methods is best for cash flow?
A) lifo, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
B) specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
C) weighted average, because it smoothes the reported cost of goods sold over time.
D) it doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
E) fifo, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.
Q2) Refer to Exhibit Palmer Pens. What is the firm's EOQ?
A) 26,833
B) 30,040
C) 43,987
D) 13,563
E) 21,456
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Chapter 24: Enterprise Risk Management
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Q1) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
Q2) Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09. What is the implied annual interest rate inherent in this futures contract?
A) 6.32%
B) 6.65%
C) 7.00%
D) 7.35%
E) 7.72%
Q3) Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.
A)True
B)False
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26
Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
Q2) Chapter 7 of the Bankruptcy Act is designed to do which of the following?
A) establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
B) ensure that the firm is viable after emerging from bankruptcy.
C) allow the firm to negotiate with each creditor individually.
D) provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
E) protect shareholders against creditors.
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Chapter 26: Mergers and Corporate Control
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Q1) Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s
A) a profitable firm acquires a firm with large accumulated tax losses that may be carried forward.
B) attempts to stabilize earnings by diversifying.
C) purchase of assets below their replacement costs.
D) reduction in competition resulting from mergers.
E) synergistic benefits arising from mergers.
Q2) Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.
A)True
B)False
Q3) Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.
A)True
B)False
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28
Chapter 27: Multinational Financial Management
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Q1) Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros?
A) 0.43
B) 0.86
C) 1.41 D) 1.64
E) 2.27
Q2) Which of the following statements is NOT CORRECT?
A) foreign bonds and eurobonds are two important types of international bonds.
B) foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
C) the term eurobond applies only to foreign bonds denominated in u.s. currency.
D) a foreign bond might pay a higher nominal interest rate than a u.s. bond.
E) any bond sold outside the country of the borrower is called an international bond.
Q3) Exchange rate quotations consist solely of direct quotations.
A)True B)False
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Chapter 28: Time Value of Money
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Q1) The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now. How much is the bond worth today?
A) $1,928.78
B) $2,030.30
C) $2,131.81
D) $2,238.40
E) $2,350.32
Q2) How much would $1, growing at 3.5% per year, be worth after 75 years?
A) $12.54
B) $13.20
C) $13.86
D) $14.55
E) $15.28
Q3) If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
A)True B)False
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Chapter 29: Basic Financial Tools: A review
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Q1) Which of the following statements is CORRECT?
A) if a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
B) the stock valuation model, p0 = d1/(rs g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
C) the price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
D) the constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
E) the constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
Q2) The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
A)True
B)False
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Chapter 30: Pension Plan Management
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Q1) From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
Q2) Ms. Lloyd, who is 25 and expects to retire at age 60, has just been hired by the Chambers Corporation. Ms. Lloyd's current salary is $30,000 per year, but her wages are expected to increase by 5 percent annually over the next 35 years. Chambers has a defined benefit pension plan in which workers receive 2 percent of their final year's wages for each year of employment. Assume a world of certainty. Further, assume that all payments occur at year-end. What is Ms. Lloyd's expected annual retirement benefit, rounded to the nearest thousands of dollars?
A) $35,000
B) $57,000
C) $89,000
D) $116,000
E) $132,000
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Chapter 31: Financial Management in Not for Profit
Businesses
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Q1) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q2) Which of the following statements about project risk analysis in not-for-profit firms is incorrect?
A) a project's corporate beta measures the contribution of the project to the overall corporate risk of the firm.
B) a project's corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.
C) a project's corporate beta is defined as ( p/ f)rpf, where p is the standard deviation of the project's returns, f is the standard deviation of the firm's returns, and rpf is the correlation among the two sets of returns.
D) in practice, it is usually difficult, if not impossible, to directly measure a project's corporate risk, so project risk analysis typically focuses on stand-alone risk.
E) the market risk of a project is not relevant to not-for-profit firms.
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