Managerial Finance
Pre-Test Questions
Course Introduction
Managerial Finance is a course that explores the principles and techniques used by managers to make strategic financial decisions within organizations. It covers core topics such as financial analysis, planning, and control, along with capital budgeting, risk assessment, and working capital management. The course emphasizes the use of financial information for decision-making, effective allocation of resources, and the maximization of firm value, equipping students with the analytical tools and frameworks needed to address real-world financial challenges in managerial roles.
Recommended Textbook
Principles of Managerial Finance 13th Edition by Lawrence J. Gitman
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The responsibility for managing day-to-day operations and carrying out corporate policies belongs to the
A) board of directors.
B) chief executive officer.
C) stockholders.
D) creditors.
Answer: B
Q2) The conflict between the goals of a firm's owners and the goals of its non-owner managers is
A) the agency problem.
B) incompatibility.
C) serious only when profits decline.
D) of little importance in most large U.S. firms.
Answer: A
Q3) Using certain standardized and generally accepted principles, the accountant prepares financial statements that recognize revenue at the point of sale and expenses when incurred.
A)True
B)False
Answer: True
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) In efficient market is one where
A) prices of stocks move up and down widely without apparent reason.
B) prices of stocks remain steady for long periods of time.
C) prices of stocks are unaffected by market news.
D) prices of stocks incorporate new information quickly and adjust appropriately to their true value.
Answer: D
Q2) Eurocurrency deposits arise when a corporation or individual makes a deposit in a bank in a currency other than the local currency of the country where the bank is located.
A)True
B)False
Answer: True
Q3) The shadow banking system describes a group of institutions that engage in lending activities, much like traditional banks, but these institutions do not accept deposits and are therefore not subject to the same regulations as traditional banks.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)
A) 32.5 days.
B) 11.8 days.
C) 25.3 days.
D) 35.9 days.
Answer: A
Q2) Which of the following ratios is difficult for creditors of a firm to analyze because the data are usually not available in published financial statements?
A) Financial leverage.
B) Average payment period.
C) Quick ratio.
D) Average age of inventory.
Answer: B
Q3) In the DuPont system, the return on total assets (asset) is equal to
A) (return on equity) × (financial leverage multiplier).
B) (return on equity) × (total asset turnover).
C) (net profit margin) × (fixed asset turnover).
D) (net profit margin) × (total asset turnover).
Answer: D
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) If a pro forma balance sheet dated at the end of May was prepared from the information presented, the accounts receivable would total ________. (See Table 4.3)
Q2) The Wirl-Wind Company of America is trying to plan for the next year. Using the current income statement and balance sheet given in Table 4.8, and the additional information provided, prepare the company's pro forma statements.
Sales are projected to increase by 15 percent.
Total of $75,000 in dividend will be paid.
A minimum cash balance of $650,000 is desired. A new asset for $50,000 will be purchased.
Depreciation expense for next year is $50,000.
Marketable securities will remain the same.
Accounts receivable, inventory, accounts payable, notes payable, and accruals will increase by 15 percent.
$30,000 new issue of bond will be sold.
No new stock will be issued.
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Nancy would like to accumulate $10,000 by the end of 3 years from now to buy a sports car from her friend, Jim. She has $2,500 now and would like to save equal annual end-of-year deposits to pay for the car. How much should she deposit at the end of each year in an account paying 8 percent interest to buy the car?
Q2) When computing the number of deposits needed to accumulate to a future sum, it will take longer the higher the interest rate, holding the future value and deposit size constant.
A)True
B)False
Q3) Nico is 30 years old and will retire at age 65. He will receive retirement benefits but the benefits are not going to be enough to make a comfortable retirement life for him. Nico has estimated that an additional $25,000 a year over his retirement benefits will allow him to have a satisfactory life. How much should Nico deposit today in an account paying 6 percent interest to meet his goal? Assume Nico will have 15 years of retirement.
Q4) Dottie has decided to set up an account that will pay her granddaughter (Lexi) $5,000 a year indefinitely. How much should Dottie deposit in an account paying 8 percent annual interest?
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Violation of any standard or restrictive provision by the borrower gives the lender the right to do all of the following EXCEPT
A) alter the terms of the initial agreement, for example accelerate the maturity date.
B) demand immediate repayment.
C) increase the interest rate.
D) seize the loan collateral.
Q2) The yield to maturity on a bond with a current price equal to its par, or face, value will always be equal to the coupon interest rate.
A)True
B)False
Q3) Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the yield to maturity on the Tangshan Industries bond is
A) 10.79 percent.
B) 11.39 percent.
C) 12.19 percent.
D) 13.29 percent.
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.
A)True
B)False
Q2) Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.
A)True B)False
Q3) Investors purchase a stock when they believe that it is undervalued and sell when they feel that it is overvalued.
A)True
B)False
Q4) In common stock valuation, any action taken by the financial manager that increases risk will cause an increase in value.
A)True B)False
Q5) The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock. (See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be
A) 0.60.
B) 0.88.
C) 1.00.
D) 1.25.
Q2) Given the information in Table 8.2, what is the expected annual return of this portfolio?
A) 11.4%
B) 10.0%
C) 11.0%
D) 11.7%
Q3) Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms.
A)True
B)False
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10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) The ________ from the sale of a security are the funds actually received from the sale after ________, or the total costs of issuing and selling the security, which have been subtracted from the total proceeds.
A) gross proceeds; the after-tax costs
B) gross proceeds; the flotation costs
C) net proceeds; the flotation costs
D) net proceeds; the after-tax costs
Q2) Nico Trading Corporation is considering issuing preferred stock. The preferred stock would have a par value of $75 and a preferred dividend of 7.5 percent of par. In order to issue the stock, Nico trading would have to pay flotation costs of 6 percent of par value. Given this information, Nico Trading's cost of preferred stock would be 7.98 percent.
A)True
B)False
Q3) The cost of new common stock is normally greater than any other long-term financing cost.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If the NPV is greater than $0.00, a project should be accepted.
A)True
B)False
Q2) Unsophisticated capital budgeting techniques do not
A) examine the size of the initial outlay.
B) use net profits as a measure of return.
C) explicitly consider the time value of money.
D) take into account an unconventional cash flow pattern.
Q3) The ________ measures the amount of time it takes the firm to recover its initial investment.
A) average rate of return
B) internal rate of return
C) net present value
D) payback period
Q4) The cash flows of any project having a conventional pattern include all of the basic components EXCEPT
A) initial investment.
B) operating cash outflows.
C) operating cash inflows.
D) terminal cash flow.
Page 12
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is
A) $42,000.
B) $52,440.
C) $54,240.
D) $50,000.
Q2) For Proposal 1, the depreciation expense for year 1 is ________. (See Table 11.2)
A) $110,400
B) $115,200
C) $150,000
D) $300,000
Q3) Summarize the incremental after-tax cash flow (relevant cash flows) for years t = 0 through t = 5. (See Table 11.4)
Q4) Given the information in Table 11.4, compute the initial investment.
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Page 13
Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Important types of risk in an international capital budgeting context include all of the following EXCEPT
A) exchange rate risk.
B) political risk.
C) appropriation risk.
D) all of the above are correct.
Q2) The risk-adjusted net present value is the rate of return that a project must earn to maintain or improve the firm's share price.
A)True
B)False
Q3) Foreign direct investment is the transfer of capital, managerial, and technical assets to a foreign country.
A)True
B)False
Q4) The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can increase the market value of that project's cash flow.
A)True
B)False
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is because
A) EPS maximization does not consider risk.
B) share value maximization does not consider risk.
C) EPS maximization considers cash flows.
D) EPS maximization does consider risk.
Q2) Because of the extensive research conducted in recent years in the area of capital structure theory, it is now possible for financial managers to pinpoint with great accuracy a firm's optimal capital structure.
A)True
B)False
Q3) The pecking order explanation of capital structure states that a hierarchy of financing exists for firms in which new external debt financing is employed first, followed by retained earnings and finally by external equity financing.
A)True
B)False
Q4) What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 13.1)
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Page 15
Chapter 14: Payout Policy
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Sample Questions
Q1) The great advantage of a ________ is that this policy avoids giving shareholders false hopes.
A) constant-payout-ratio policy
B) regular dividend policy
C) low-regular-and-extra dividend policy
D) none of the above
Q2) The repurchase of stock ________ the earnings per share and ________ the market price of stock.
A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases
Q3) Modigliani and Miller argue that when the firm has no acceptable investment opportunities, it should
A) close its doors.
B) distribute the unneeded funds to the owners.
C) lower its cost of capital.
D) retain the funds until an acceptable project arises.
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) The basic strategies that should be employed by the business firm in managing cash include all of the following EXCEPT
A) paying accounts payable as late as possible without damaging the firm's credit rating.
B) turning over inventory as quickly as possible, avoiding stockouts.
C) operating in a fashion that requires maximum cash.
D) collecting accounts receivable as quickly as possible without damaging customer rapport.
Q2) Zero-balance accounts are checking accounts in which a zero balance is maintained and the bank automatically covers all checks presented against the accounts.
A)True
B)False
Q3) In the EOQ model, ________ costs are the fixed clerical cost of writing a purchase order, processing the paper work, and verifying the invoice.
A) basic
B) order
C) carrying
D) processing
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000 for one year. The stated interest rate is ________ and the effective interest rate is
A) 12.00%; 12.00%
B) 13.64%; 12.00%
C) 12.00%; 13.64%
D) 12.00%; 10.71%
Q2) A line of credit is an agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.
A)True
B)False
Q3) Spontaneous liabilities such as accounts payable and accruals represent a use of financing that arise from the normal course of business. A)True
B)False
Q4) Discuss and contrast the three types of loans discussed in the text that use inventory as collateral: floating inventory liens, trust receipt inventory loans, and warehouse receipt loans.
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) A derivative security is neither debt nor equity but instead derives its value from an underlying asset.
A)True
B)False
Q2) Mia's Pet Store has warrants that allow the purchase of two shares of its outstanding common stock at $30 per share. The common stock price per share is $33 and the market value of the warrant is $8.
(a) Calculate the theoretical value of the warrant.
(b) Calculate the market premium for the warrant.
Q3) The call price of the security generally ________ the security's par value. A) is less than B) is equal to C) is greater than D) has no relation to
Q4) A warrant is attached to a $1,000 par, 10 percent, 15-year bond, paying annual interest and having 10 warrants attached for the purchase of the firm's stock. The bonds were initially sold for $1,020. When issued similar risk straight bonds were selling to yield a 12 percent rate of return. Calculate the implied price of the warrant.
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Page 19
Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) Financial mergers involve merging firms in order to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.
A)True
B)False
Q2) The motive for divestiture is likely to be all of the following EXCEPT
A) to generate cash for expansion of other product lines.
B) to get rid of poorly performing operations.
C) to head off bankruptcy.
D) to streamline the corporation.
Q3) In defending against hostile takeover attempts, a company will include provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over. This is called the ________ strategy.
A) shark repellent
B) white knight
C) greenmail
D) golden parachute
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) For foreign bonds, interest rates are usually not directly correlated with the domestic rates prevailing in the respective countries.
A)True
B)False
Q2) In the case of short-term financing, the forces of supply and demand are among the main factors determining exchange rates in Eurocurrency markets.
A)True
B)False
Q3) In 2003-2004, the United States signed a regional trade pact with the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua called the Central American Free Trade Agreement or CAFTA.
A)True
B)False
Q4) NAFTA is an international financial market that provides for borrowing and lending currencies outside their country of origin.
A)True
B)False
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