Managerial Finance Question
Bank
Course Introduction
Managerial Finance explores the principles and practices necessary for effective financial decision-making within organizations. The course covers topics such as financial analysis, planning, and control; working capital management; capital budgeting; risk and return analysis; and the valuation of financial assets. Students will develop an understanding of how managers use financial information to make strategic decisions that maximize firm value, as well as the ethical and global dimensions of financial management. Through case studies and practical applications, participants will enhance their ability to analyze financial data, assess investment opportunities, and manage corporate resources efficiently.
Recommended Textbook
Practical Financial Management 7th Edition by William
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R. Lasher
Page 2
Chapter 1: Foundations
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Sample Questions
Q1) The term "buying a bond" is misleading because:
A) bonds are not available to the general public.
B) a bond can only be bought with assets other than money.
C) bonds represent a debt relationship so a bond buyer is actually lending money.
D) bonds are not owned, only held in trust for a buyer's beneficiaries.
Answer: C
Q2) Large corporations tend to be:
A) partnerships.
B) T-type corporations.
C) C-type corporations.
D) sole proprietorships.
Answer: C
Q3) Assets pledged to guarantee a loan are:
A) factored.
B) collateral.
C) hypothecated.
D) assumed.
Answer: B
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) The matching principle says:
A) assets costs should be recorded in the period in which they are purchased.
B) recognition of an asset's cost should match its service life.
C) the customer should be invoiced as soon as merchandise is produced.
D) only cash transactions should be recorded in the accounting records.
Answer: B
Q2) Selected accounts are listed below. How much is the firm's operating income?
\(\begin{array}{ll}
\text { Accrued payroll } & \$ 2,000 \\
\text { Sales } & 45,000 \\
\text { Cost of goods sold } & 26,000 \\
\text { Interest expense } & 1,000 \\
\text { Expenses (other than interest) } & 8,000
\end{array}\)
A) $8,000
B) $10,000
C) $9,000
D) $11,000
Answer: D
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) A decrease in accounts payable is categorized as a use of funds.
A)True
B)False
Answer: True
Q2) Which of the following actions will improve the current ratio?
A) Take a nine-month loan from the bank to pay off some of its suppliers
B) Accelerate the collection of accounts receivable
C) Sell off some old equipment
D) All of the above
Answer: C
Q3) If a firm's current ratio and quick ratio have been steadily decreasing, the underlying cause might be traced to the credit manager's relaxed attitude about enforcing prompt payment from customers.
A)True
B)False
Answer: False
Q4) Smart Motors' return on sales is 3 percent and its total asset turnover is 2.2. What is Smart's ROA?
Answer: ROA = ROS ´ Total asset turnover
ROA = 3% ´ 2.2 = 6.6%
5
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Chapter 4: Financial Planning
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Sample Questions
Q1) Not including the supporting detail in the financial plan will deem the financial plan useless.
A)True
B)False
Q2) The business planning spectrum shows:
A) the range or spectrum of activities that businesses engage in for which they must plan.
B) how differently large and small companies plan.
C) how the different kinds of plans vary from long- to short- range and from conceptual to detailed and numerical.
D) b and c
Q3) The managerial value of planning includes:
A) the planning process brings the management team together.
B) a resulting road map for running the business.
C) planning that provides credibility to employees.
D) Both a & b
E) All of the above
Q4) The business plan is a vehicle for communicating with potential investors.
A)True
B)False
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Insider trading is the exploitation for profit of information available to executives that is not available to the general public.
A)True
B)False
Q2) Which is not an example of a capital market security?
A) Common stock
B) A 30 day treasury bill
C) Corporate bonds
D) Preferred stock
E) None of the above
Q3) What is the real rate of interest on a $50,000 loan if $62,000 repays the loan after one year, given a rate of inflation of 12%?
A) 18%
B) 24%
C) 12%
D) 10%
E) 21%
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Page 7
Chapter 6: Time Value of Money
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Sample Questions
Q1) Which of the following cash flows is equivalent to receiving $125.00 today assuming a 9% annual discount rate?
A) Receiving $192.33 five years from today
B) Receiving $229.87 seven years from today
C) Receiving $163.12 three years from today
D) Receiving $312.67 ten years from today
Q2) If you owe $1,200.00, which is the most advantageous way to pay it back assuming a 12% APR discount rate?
A) $100.00 monthly payments over the next twelve months
B) $300.00 quarterly payments over the next four quarters
C) $600.00 paid every six months over the next year
D) $1,200.00 paid after one year
Q3) The future value of an annuity:
A) is the end sum of all payments and all interest if each payment is deposited when received.
B) is the beginning sum and future interest amortized over the life of the annuity.
C) allows for both the time interval and amounts to be different.
D) is the beginning sum and present value calculated into the future.
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Which of the following might be senior debt?
A) Debentures
B) Callable unsecured bonds
C) Subordinated debentures
D) Both a and b
E) All of the above
Q2) If current interest rates are higher than a bond's coupon rate, owners can:
A) hold the bond until maturity, at which point its market value will equal its face value.
B) sell the bond at a premium, because investors are sensitive to price changes in bonds caused by increased interest rates.
C) sell the bond at a discount, because investors recognize that the lower the bond's price the higher is its yield.
D) a and c
Q3) What does it mean for a bond to sell at a premium?
A) The yield to maturity is above the coupon rate.
B) The bond has an exceptionally good credit rating.
C) The bond rating is above investment grade.
D) The bond sells for more than par value.
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9
Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) It is important to acknowledge that growth or dividend pricing Models are essentially abstractions of reality and hence have serious practical limitations. The issues relating to accuracy include:
A) estimates of growth rates.
B) estimates of the market rate of interest.
C) the fact that the denominator in the Gordon model is the difference between two numbers that can be close together.
D) All of the above
Q2) Jan bought a stock at $70 per share and sold it for $84. While she owned it, she received a $5 per share dividend. What was her percentage return?
Q3) The price of a share of stock today is $50.00, and the projected selling price in one year is $55.00. The estimated dividend during the year is $1.00. The expected return on the stock is:
A) 12.00%.
B) 2.00%.
C) 10.91%.
D) 10.00%.
Q4) Are growth rate models such oversimplifications of reality that they're useless?
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Page 10
Chapter 9: Risk and Return
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Sample Questions
Q1) The SML shifts:
A) indicate an acceptance of beta.
B) parallel to itself in response to changes in the risk-free rate.
C) and rotates around its horizontal intercept.
D) accommodates a decrease in the risk free rate.
Q2) If the required return for a stock is 14% annually, what should the stock price be one year from today assuming the current price is $24.00 and a dividend of $0.24 is paid sometime over the year?
A) $27.36
B) $27.12
C) $21.05
D) $20.81
Q3) An intuitively pleasing and prudent investment strategy is to hold:
A) high beta stocks in a rising market and low beta stocks in a declining market.
B) high beta stocks in both rising and declining markets.
C) low beta stocks in both rising and declining markets.
D) high beta stocks in a declining market and low beta stocks in a rising market.
Q4) How can a stock have different risk characteristics in and out of a portfolio?
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Page 11
Chapter 10: Capital Budgeting
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Sample Questions
Q1) A firm's financial managers have been asked to evaluate the following investment proposals: 1. a new mainframe computer to replace an existing computer for administrative processing
2) a new assembly line to expand production capacity
3) new kitchen equipment for an existing cafeteria kitchen
4) new food vending machines to replace the existing cafeteria kitchen
Which of the above proposals are mutually exclusive?
A) 1 and 2
B) 3 and 4
C) 1, 2, and 3
D) 1, 2, 3, and 4
Q2) When can IRR and NPV give different results? Explain how this can happen.
Q3) The MIRR is an interest rate that:
A) equates the present value of outflows with the present value of the future value of all inflows of a project.
B) equates the present value of all cash inflows with the cost of capital of a project. C) is used to determine the rate of reinvestment of a project with multiple cash outflows. D) is used to determine the net present value of a project.
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Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) Which of the following is considered a relevant cash flow?
A) A market feasibility study already performed prior to the project
B) Interest expense associated with financing the project
C) Initial cost of hiring and training employees
D) Both b & c
E) All of the above
Q2) The following data is associated with a proposed replacement project: A machine that originally cost $25,000 and has been depreciated straight line has two years of its expected 5-year life remaining. Its current market value is $15,000. The corporate tax rate is 34%. The cash flow from disposing of the old machine is:
A) $10,000.
B) $15,000.
C) $13,300.
D) $8,250.
Q3) The interest rate associated with financing a capital budgeting project:
A) should be included in the estimate of the proposal's incremental cash flows.
B) should be ignored in the evaluation of the capital budgeting project.
C) is reflected in the cost of capital.
D) None of the above
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Page 13
Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) Which of the following is not a drawback of the simulation approach?
A) The probability distributions of the cash flows are subjective estimates.
B) It can be very difficult to access and use a simulation program.
C) Cash flows in successive periods tend not to be independent.
D) There are no clear guidelines on how to interpret the results.
Q2) Which of the following techniques gives an estimate of capital budgeting project risk in terms of the standard deviation of a project's NPV or IRR?
A) Computer simulation
B) Sensitivity/scenario analysis
C) Decision tree analysis
D) Both a and c
E) All of the above
Q3) A company is considering a project in which the risk associated with annual cash flows varies considerably from year to year. Which of the following methods will best allow management to include consideration of risk in the analysis?
A) Pure play method
B) Accounting beta method
C) Certainty approach method
D) Overlay approach
Page 14
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Chapter 13: Cost of Capital
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Sample Questions
Q1) While book values relate to the costs of capital that a company currently employs, market values relate to the current state of capital markets. Therefore, market values represent the average cost of newly acquired capital if it were raised today.
A)True
B)False
Q2) If a firm issuing additional common equity can estimate the return investors require on its stock (k<sub>e</sub>) at 12% and knows that flotation costs are about 18%, its component cost of equity capital for the new funds will be:
A) 30.0%
B) 14.2%
C) 13.6%
D) 14.6%
Q3) Capital structures based on book and market values are generally different because:
A) market values of securities change all the time.
B) market values reflect the cost of capital already spent.
C) market values of securities are reflected on company books.
D) market values reflect the prices at which the securities are sold.
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) A firm that employs a relatively large proportion of debt in its capital structure will have a relatively ____ degree of financial leverage.
A) low
B) high
C) insignificant
D) constant
Q2) In a favorable economic climate, at low to moderate levels of debt, investors value the positive effects of leverage and almost ignore increases in risk.
A)True
B)False
Q3) Explain the breakeven analysis.
Q4) Breakeven analysis can provide an insight into the nature and effect of financial leverage.
A)True
B)False
Q5) The slope of a EBIT-EPS line declines as its financial leverage increases.
A)True
B)False
Q6) What are the two different types of risk in the context of leverage?
Page 16
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Chapter 15: Dividends
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Sample Questions
Q1) An increase in a firm's payout ratio increases current dividends received by a stockholder at the expense of lower future dividends.
A)True
B)False
Q2) Unlike a stock dividend or a stock split, share repurchase should increase stockholder wealth.
A)True
B)False
Q3) The dividend irrelevance hypothesis argues that the negative impact on P<sub>0</sub> of reducing or eliminating early dividends is offset by the positive effect of larger dividends later on and an increased selling price.
A)True
B)False
Q4) A fundamental issue of dividend policy is whether stockholders prefer dividend income or capital gains.
A)True
B)False
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Chapter 16: The Management of Working Capital Multiple
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Sample Questions
Q1) Braebner Corp. orders 500,000 microchips per year at an average cost of $130. The carrying cost of each chip is $25, and each order costs $150. Compute Braebner's EOQ.
A) 23,846
B) 2,449
C) 17,333
D) 3,005
Q2) If a firm issues $5 million of commercial paper with a maturity of three months at an annual interest rate of 8%, the proceeds of the issue are:
A) $4,900,000.
B) $4,629,630.
C) $4,901,961.
D) $4,600,000.
Q3) The purpose of collateral in a secured loan agreement is to:
A) reduce the lender's risk.
B) reduce the expense of administering the loan.
C) make borrowers indifferent to the default risk of the loan.
D) increase the rate borrowers are willing to pay for funds.
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Page 18
Chapter 17: The Management of Working Capital
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Q1) As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of bad debts decline.
A)True B)False
Q2) Loans are said to be self-liquidating if the project the funds support automatically generates the cash to repay the loan.
A)True B)False
Q3) Because of the short-term nature of working capital assets and liabilities, it is always necessary to support working capital with short-term borrowing. To do otherwise would violate the matching principle, which is of paramount importance in financial management.
A)True B)False
Q4) Carrying excess cash is convenient but expensive because cash earns little or no return.
A)True B)False
Q5) Explain marketable securities. How are they useful to companies?
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) When unhappy, shareholders solicit other shareholders to join them in removing certain board members, the action is called a:
A) a staggering of the election of directors.
B) seeking a white knight.
C) a proxy fight.
D) the board's adoption of a poison pill.
Q2) Although the long-term economic and political implications of the megamergers are as yet unclear, the massive accumulation of economic power currently taking place has no potential to change the open and competitive nature of the economy.
A)True
B)False
Q3) A combination of companies in which neither competes with the other, no buyer-seller relationship exists between them, and the firms' businesses are unrelated is a:
A) conglomerate merger.
B) vertical merger.
C) horizontal merger.
D) takeover.
Q4) Contrast the merger negotiations in a friendly merger and a hostile merger.
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Chapter 19: International Finance
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Sample Questions
Q1) Under a floating rate system, exchange rates are set by international treaty and administered by the International Monetary Fund.
A)True
B)False
Q2) Over the last six decades, commerce has become increasingly international. The changes have occurred through:
A) simply doing more business with other countries in terms of both imports and exports.
B) an expansion of direct investments in facilities and equipment in other countries.
C) other governments actively promoting US products.
D) a and b
Q3) A recent direct quote for the Japanese yen was $.009622. How many Japanese yen can be purchased with 10 American dollars?
A) 9.622
B) 1,039.28
C) 0.09622
D) 10.39
Q4) Describe the difference between fixed and floating exchange rate systems.
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