Managerial Finance Question
Bank
Course Introduction
Managerial Finance is a course designed to introduce students to the fundamental principles and techniques necessary for effective financial management within organizations. The course explores key topics such as financial analysis, planning and forecasting, working capital management, capital budgeting, risk assessment, and cost of capital. Emphasis is placed on the practical application of financial decision-making and strategies, enabling students to evaluate investment opportunities, allocate resources efficiently, and maximize shareholder value. Through case studies and real-world scenarios, students gain the analytical skills necessary to address complex financial problems faced by managers in todays dynamic business environment.
Recommended Textbook Fundamentals of Corporate Finance 4th Edition Jonathan Berk
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Chapter 1: Corporate Finance and the Financial Manager
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Q1) Which of the following is NOT an advantage of a sole proprietorship?
A) single taxation
B) ease of setup
C) unlimited liability
D) no separation of ownership and control
Answer: C
Q2) In which of the following relationships is an agency conflict problem LEAST likely to arise?
A) the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars
B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks
C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied
D) the relationship between a driver and the passengers in a car regarding the safe driving of that car
Answer: D
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) The management of public companies is not legally required to disclose any off-balance sheet transactions.
A)True
B)False
Answer: False
Q2) What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
Answer: The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant.
Q3) How can we cross check the statement of cash flows?
Answer: The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets.
Q4) What are the four financial statements that all public companies must produce?
Answer: 1. balance sheet
2. income statement
3. statement of cash flows
4. statement of stockholders' equity
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Chapter 3: Time Value of Money: an Introduction
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Q1) Which of the following best describes the valuation principle?
A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks.
B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks.
D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
Answer: B
Q2) Explain why a dollar today is worth more than a dollar tomorrow.
Answer: A dollar today can be invested to earn interest, which will make it worth more than a dollar tomorrow.
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten years' time. What is the present value (PV) of this donation, given that the interest rate is 11%?
A) $3,840,628.87
B) $5,376,880.42
C) $6,913,131.97
D) $7,681,257.74
Q2) Dan buys a property for $210,000. He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?
A) $18,653.76
B) $22,384.51
C) $26,115.26
D) $29,846.02
Q3) The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.
A)True B)False
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Chapter 5: Interest Rates
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Q1) Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q2) You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.
A) $2439
B) $2661
C) $2218
D) $3105
Q3) What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV) of an annuity?
Q4) Everything else remaining same, under what situation will APR and EAR be equal?
Q5) How are interest and return of principal handled in an amortizing loan payment?
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Chapter 6: Bonds
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Q1) What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93?
A) 7.79%
B) 9.08%
C) 6.49%
D) 3.24%
Q2) Before it matures, the price of any bond is always less than its face value.
A)True
B)False
Q3) An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?
A) $2606.25
B) $5000.00
C) $5212.50
D) $5425.00
Q4) Prior to its maturity date, the price of a zero-coupon bond is its face value.
A)True B)False
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Chapter 7: Stock Valuation
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Q1) A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year?
A) $5.91
B) $11.82
C) $17.73
D) $23.64
Q2) What is a major assumption about growth rate in the dividend-discount model?
Q3) Which of the following is NOT a way that a firm can increase its dividend?
A) by increasing its retention rate
B) by decreasing its shares outstanding
C) by increasing its earnings (net income)
D) by increasing its dividend payout rate
Q4) A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?
A) 3.48%
B) 8.70%
C) 13.91%
D) 17.39%
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Chapter 8: Investment Decision Rules
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Q1) A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment?
A) $10,048
B) $11,053
C) $16,077
D) $14,250
Q2) Which of the following is a disadvantage of the Net Present Value rule?
A) can be misleading if inflows come before outflows
B) not necessarily consistent with maximizing shareholder wealth
C) ignores cash flows after the cutoff point
D) relies on accurate estimate of the discount rate
Q3) What is the decision criteria using internal rate of return (IRR) rule?
Q4) If WiseGuy Inc. uses IRR rule to choose projects, which of the projects (Project A or Project B) will rank highest?
A) Project A
B) Project B
C) Project A and Project B have the same ranking.
D) Cannot calculate a payback period without a discount rate.
Q5) What is the general shape of the net present value (NPV) profile?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) What is the most important function of sensitivity analysis?
Q2) A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine?
A) $80,000
B) $31,200
C) $28,080
D) $156,000
Q3) A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000. What is the EBIT break-even point for the number of games sold in this case?
A) $26,667
B) $26,316
C) $100,000
D) $33,684
Q4) What do you understand by break-even analysis?
Q5) How do we handle interest expense when making a capital budgeting decision?
Q6) What is the major difference between scenario analysis and sensitivity analysis?
Page 11
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Chapter 10: Stock Valuation: a Second Look
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Q1) In the method of comparables, the known values of a firm's cash flows are used to estimate the unknown cash flows of a similar firm.
A)True
B)False
Q2) Which of the following statements is FALSE?
A) We can estimate the value of a firm's shares by multiplying its current earnings per share by the average price-earnings ratio of comparable firms.
B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings.
C) Forward earnings are the expected earnings over the coming 12 months.
D) Trailing earnings are the earnings over the previous 12 months.
Q3) In an efficient market, investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.
A)True
B)False
Q4) What are the implications of the efficient markets hypothesis for corporate managers regarding accounting earnings?
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Chapter 11: Risk and Return in Capital Markets
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Q1) The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT?
A) -7%, 10%
B) 5%, 10%
C) -5%, 15%
D) -10%, 10%
Q2) Rational investors ________ fluctuations in the value of their investments. A) are averse to B) prefer C) are indifferent to D) are in favor of
Q3) You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________.
A) -99%
B) -75%
C) -150%
D) -100%
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) Is it possible for a stock to have high total risk but low systematic risk?
Q2) A portfolio comprises two stocks, A and B, with equal amounts of money invested in each. If stock A's stock price increases and that of stock B decreases, the weight of stock A in the portfolio will increase.
A)True
B)False
Q3) When we combine stocks in a portfolio, the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.
A)True
B)False
Q4) What role does the standard deviations of two assets play in computation of the expected return of the two asset portfolio?
Q5) Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.
A)True
B)False
Q6) How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?
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Chapter 13: The Cost of Capital
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Q1) Assume Time Warner shares have a market capitalization of $40 billion. The company is expected to pay a dividend of $0.25 per share and each share trades for $40. The growth rate in dividends is expected to be 7% per year. Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 9%. If the firm's tax rate is 40%, what is the WACC?
A) 5.85%
B) 6.54%
C) 6.88%
D) 7.57%
Q2) A firm has outstanding debt with a coupon rate of 5%, ten years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%?
A) 2.6%
B) 2.9%
C) 3.3%
D) 3.4%
Q3) What is the difference between the effective cost of debt and the cost of debt?
Q4) What type of adjustment to debt is in practice?
Q5) Which of the three costs-debt, preferred stock and common equity-is most difficult to estimate?
Page 15
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Chapter 14: Raising Equity Capital
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Q1) Which of the following is NOT a common name for a corporation that invests in private companies?
A) strategic investor
B) corporate partner
C) venture partner
D) strategic partner
Q2) What is a seasoned equity offering?
A) the sale of shares by the owners of a company
B) the raising of capital through retained earnings
C) the issuing of shares to the public in a proven private company
D) the issuing of shares by a company at a time after its IPO
Q3) How many types of seasoned equity offerings are there?
Q4) The firm commitment process is the most common practice for IPOs in the United States.
A)True
B)False
Q5) The announcement of an SEO usually raises a stock's price.
A)True
B)False
Q6) How do the transaction costs of IPO puzzle financial economists?
Page 16
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Chapter 15: Debt Financing
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Q1) A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to worst of this bond when it is released?
A) 1.40%
B) -2.73%
C) 3.00%
D) 4.71%
Q2) What is a bond's seniority?
A) the bondholder's priority in claiming assets in the event of default
B) clauses restricting a company from issuing new debt
C) the yield to maturity of a bond as compared to bonds of comparable rating
D) the issue price of the bond as compared to its face value
Q3) Which of the following is an advantage of a public bond issue over private placement?
A) It can be tailored to a particular situation.
B) It is less costly to issue.
C) It does not need to be registered with the SEC.
D) It is freely tradable on the bond market.
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Chapter 16: Capital Structure
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Q1) After the repurchase, how many shares will Luther have outstanding?
A) 0.75 billion
B) 1.0 billion
C) 1.1 billion
D) 1.2 billion
Q2) When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.
A) to increase debt values
B) to decrease costs of distress
C) that benefit shareholders at the expense of debt holders
D) to reduce fixed costs
Q3) With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm.
A)True
B)False
Q4) Financial managers prefer to choose the same debt level no matter which industry they operate in.
A)True
B)False
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Chapter 17: Payout Policy
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Q1) Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount of the special dividend is closest to ________.
A) $5.00
B) $4.00
C) $6.00
D) $10.00
Q2) A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.
A) open market share repurchase
B) Dutch auction share repurchase
C) tender offer
D) targeted repurchase
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) LG Inc. has done a long-term forecast of its balance sheet. The projected total assets for the next year are $300 million. The current liabilities are projected to be $170 million and other long term liabilities are $70 million. How net new financing is needed in the following year?
A) $58 million
B) $60 million
C) $65 million
D) $70 million
Q2) The amount of dividends a company pays will affect the ________ it has to finance future growth.
A) debt
B) retained earnings
C) current liabilities
D) current ratio
Q3) Long term financial planning helps a financial manager in budgeting but has little to do with understanding how the business operates.
A)True
B)False
Q4) Why is EBITDA multiple used for valuation rather than sales or earnings?
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Chapter 19: Working Capital Management
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Q1) What is cash discount?
Q2) ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT's average inventory need to be so that it would meet the industry average?
A) $4.45 million
B) $3.65 million
C) $3.33 million
D) $2.67 million
Q3) Which of the following is NOT a benefit of holding inventory?
A) minimizes the risk that the firm will not be able to obtain an input it needs for production
B) seasonality of demand, meaning that customer purchases often do not match the most efficient production cycle, leading to a buildup of inventory in off-peak periods
C) minimizes order cost from placing multiple orders throughout the year
D) minimizes risks involved in spoilage and obsolescence
Q4) What is a firm's operating cycle?
Q5) What is a firm's cash cycle?
Q6) What is collection float?
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Chapter 20: Short-Term Financial Planning
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Q1) According to the matching principle, short-term needs for funds should be financed by short-term sources of funds; long-term need for funds should be financed by long-term sources of funds.
A)True
B)False
Q2) Commercial paper is usually a more expensive source of funds than a short-term bank loan.
A)True
B)False
Q3) The interest on commercial paper is typically paid by selling it at an initial discount.
A)True
B)False
Q4) What do we understand by seasonality?
Q5) Which of the following best describes an aggressive financing policy?
A) financing part or all of the permanent working capital with short-term debt
B) financing part or all of the permanent working capital with long-term debt
C) financing part or all of the temporary working capital with short-term debt
D) financing part or all of the temporary working capital with long-term debt
Q6) What are compensating balance and what effect does it have on the loan?
Page 22
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Chapter 21: Option Applications and Corporate Finance
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Q1) Suppose you purchase a call option for $5 and a strike price of $20. On the expiration day, the price of the stock is $30. What is the return on the call option if you hold your position until maturity?
A) 25%
B) 50%
C) 75%
D) 100%
Q2) The value of an otherwise identical call option is ________ if the stock price is ________.
A) higher, higher
B) lower, higher
C) higher, lower
D) none of the above
Q3) Which of the following is not used in the Black-Scholes option pricing formula?
A) stock price
B) dividend yield
C) strike price
D) risk-free rate
Q4) When is an option at-the-money?
Q5) What are American options?
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Chapter 22: Mergers and Acquisitions
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Q1) An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a
A) golden parachute
B) white knight
C) poison pill
D) classified board
Q2) Which of the following statements is FALSE?
A) There are two primary mechanisms by which ownership and control of a public corporation can change: Either another corporation or group of individuals can acquire the target firm, or the target firm can merge with another firm.
B) Merger activity is greater during economic contractions than during expansions.
C) Mergers and acquisitions are part of what is often referred to as "the market for corporate control."
D) The takeover market is also characterized by merger waves-peaks of heavy activity followed by quiet troughs of few transactions.
Q3) What is a white knight?
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Chapter 23: International Corporate Finance
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Q1) Which of the following statements is FALSE?
A) Differential access to national capital markets is common enough that it provides the best explanation for the existence of currency swaps, which are like the interest rate swap contracts, but with the holder receiving coupons in one currency and paying coupons denominated in a different currency.
B) Currency swaps generally also have final face value payments, also in different currencies.
C) Using a currency swap, a firm can borrow in the market where it has the best access to capital, and then "swap" the coupon and principal payments to whichever currency it would prefer to make payments in.
D) With differential access to national markets, to maximize shareholder value, the firm should raise capital in the foreign market; the method of valuing the foreign project as if it were a domestic project would then provide the correct net present value (NPV).
Q2) With internationally integrated capital markets the value of an investment depends on the currency used in the analysis.
A)True
B)False
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Chapter 24: Leasing
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Q1) Which of the following statements is FALSE?
A) In a leveraged lease the lessor borrows from a bank or other lender to obtain the initial capital for the purchase, using the lease payments to pay interest and principal on the loan.
B) In some circumstances, the lessor is not an independent company but rather a separate business partnership, called a special-purpose entity (SPE), which is created by the lessor for the sole purpose of obtaining the lease.
C) In a direct lease, the lessor is not the manufacturer, but is often an independent company that specializes in purchasing assets and leasing them to customers.
D) SPEs are commonly used in synthetic leases, which are designed to obtain specific accounting and tax treatment.
Q2) In the chapter, the lease versus buy decision was called an unfair comparison. Why? What is the correct comparison?
Q3) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
Q4) If St. Martin purchases the CT scanner, what is the amount of the lease-equivalent loan?
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Chapter 25: Insurance and Risk Management
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Q1) Which of the following statements is FALSE?
A) Horizontal integration entails the merger of a firm and its supplier or a firm and its customer.
B) Like insurance, hedging involves contracts or transactions that provide the firm with cash flows that offset its losses from price changes.
C) For many firms, changes in the market prices of the raw materials they use and the goods they produce may be the most important source of risk to their profitability.
D) Because an increase in the price of the commodity raises the firm's costs and the supplier's revenues, these firms can offset their risks by merging.
Q2) An operator of an oil well has a 0.5% chance of experiencing a catastrophic failure over the next year. This failure will cost the operator $500 million. If the risk-free rate is 2%, the expected return on the market is 8%, and the beta of the risk is -1.2, what is the actuarially fair insurance premium?
A) $2,500,000
B) $2,637,131
C) $2,550,000
D) $2,753,304
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Chapter 26: Corporate Governance
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Q1) Which of the following statements is FALSE?
A) An active takeover market is part of the system through which the threat of dismissal is maintained.
B) When internal governance systems such as ownership, compensation, board oversight, and shareholder activism fail, the one remaining way to remove poorly performing managers is by mounting a hostile takeover.
C) Likely because hostile takeovers and internal governance systems are substitute mechanisms, researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity.
D) The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover.
Q2) Directors who are employees, former employees, or family members of employees are called ________.
A) managing directors
B) independent directors
C) inside directors
D) gray directors
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