Managerial Finance Review Questions
Course Introduction
Managerial Finance explores the fundamental principles and techniques used by managers to make informed financial decisions within organizations. The course covers topics such as financial analysis, budgeting, forecasting, capital structure, working capital management, and investment appraisal. Students will learn how to apply financial tools and concepts to real-world business scenarios, assess the financial health of an organization, and develop strategies to maximize shareholder value. Emphasis is placed on both the theoretical understanding and practical application of financial management to support effective decision-making in a dynamic business environment.
Recommended Textbook
Finance Applications and Theory 3rd Edition by
Marcia Millon Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) How do financial institutions impact business firms?
Answer: Financial institutions assist business firms with transactions involving financial assets in the financial markets.For the financial institutions to be successful at the execution of these services,they must possess unique assets and expertise.
Q2) Which of the following statements is correct?
A)Accountants are focused on what happened in the past.
B)Financial managers are focused on what happened in the past.
C)Both accountants and financial managers use total quality management systems to standardize data.
D)Financial managers double-check the accountant's statements.
Answer: A
Q3) In the financial crisis that started in 2006,a significant indicator of the U.S.economic decline was:
A)a significant drop in interest rates.
B)a sharp increase in unregulated Ponzi-type security sales.
C)rising defaults by subprime mortgage borrowers.
D)a large increase in loan default due to unemployment.
Answer: C
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Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time-generally one year?
A)Balance sheet
B)Income statement
C)Statement of retained earnings
D)Statement of cash flows
Answer: B
Q2) Balance Sheet Jack and Jill Corporation's year-end 2013 balance sheet lists current assets of $250,000,fixed assets of $800,000,current liabilities of $195,000,and long-term debt of $300,000.What is Jack and Jill's total stockholders' equity?
A)$495,000
B)$555,000
C)$1,050,000
D)There is not enough information to calculate total stockholder's equity.
Answer: B
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4
Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) DuPont Analysis Last year,K9 WebbWear,Inc.,reported an ROE of 30 percent.The firm's debt ratio was 45 percent,sales were $20 million,and the capital intensity was 1.50 times.Calculate the net income and profit margin for K9 WebbWear last year.This year,K9 WebbWear plans to increase its debt ratio to 60 percent.The change will not affect sales or total assets,however,it will reduce the firm's profit margin to 10 percent.By how much will the change in K9 WebbWear's debt ratio affect its ROE?
Answer: Last year: Capital intensity = 1.5 = Total assets/$20m => Total assets = 1.5 × $20m = $30m
=> Debt ratio = 0.45 = Total debt/$30m => Total debt = 0.45 × $30m = $13.5m
=> Total equity = $30m - $13.5m = $16.5m
=> ROE = 0.30 = Net income/$16.5m => Net income = 0.30 × $16.5m = $4.95m
=> Profit margin = $4.95m/$20m = 25 percent
This year: Profit margin = 10 percent = Net income/$20m => Net income = 0.1 × $20m = $2m
and Total debt = $30m × 0.60 = $18m
=> Total equity = $30m - $18m = $12m
=> ROE = $2m/$12m = 17 percent,an decrease of 13 percent
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Page 5
Chapter 4: Time Value of Money
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Sample Questions
Q1) When calculating the number of years needed to grow an investment to a specific amount of money:
A)the lower the interest rate, the shorter the time period needed to achieve the growth.
B)the higher the interest rate, the shorter the time period needed to achieve the growth.
C)the interest rate has nothing to do with the length of the time period needed to achieve the growth.
D)the Rule of 72 is the only way to calculate the time period needed to achieve the growth.
Q2) Time value of money concepts can be used by:
A)individuals doing personal financial planning.
B)CFOs and CEOs to make business decisions.
C)investors calculating a return on an investment.
D)All of these are users of time value of money concepts.
Q3) What would be more valuable,receiving $1,000 today or receiving $3,000 in 10 years when interest rates are 8 percent? Why?
Q4) Explain how "interest rate" and "rate of return" are similar,yet different.
Q5) How does compounding help build wealth (or increase debt)over time?
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) Explain why the effective annual rate (EAR)is a more accurate measure of the interest rate paid than the annual percentage rate (APR)?
Q2) A perpetuity,a special form of annuity,pays cash flows:
A)and is not effected by interest rate changes.
B)that do not have time value of money implications.
C)continuously for one year.
D)periodically forever.
Q3) Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $200 per month contribution to grow to $14,700 in five years?
A)6.47 percent
B)7.76 percent
C)8.01 percent
D)14.70 percent
Q4) Describe how compounding affects the future value computation of an annuity.
Q5) Which of the following will increase the present value of an annuity?
A)The number of periods decreases.
B)The interest rate decreases.
C)The amortization schedule decreases.
D)The effective rate is calculated over fewer years.
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Which of the following determines the dollar amount of interest paid to bondholders?
A)Original issue discount
B)Call premium
C)Coupon rate
D)Market rate
Q2) Junk bonds are those bonds with a credit rating of:
A)BB and lower.
B)B and lower.
C)BBB and lower.
D)None of these.
Q3) A 7.5 percent coupon bond with 16 years left to maturity is offered for sale at $834.92.What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)
A)4.77 percent
B)7.5 percent
C)9.54 percent
D)10.34 percent
Q4) Provide the definitions of a discount bond and a premium bond.Give examples.
Q5) Describe reasons that the U.S.government and corporations would issue bonds.
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Chapter 8: Valuing Stockspart
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Sample Questions
Q1) Constant Growth Stock Valuation Target Corp.(TGT)paid a $0.21 dividend per share in 2000,which grew to $0.52 in 2007.This growth is expected to continue.What is the value of this stock at the beginning of 2007 when the required rate of return is 14.77 percent?
A)$3.52
B)$55.32
C)$62.97
D)$63.49
Q2) Value of a Preferred Stock If a preferred stock from Ecology and Environment,Inc.(EEI)pays $2.50 in annual dividends,and the required return on the preferred stock is 5.8 percent,what's the value of the stock?
A)$0.15
B)$0.43
C)$14.50
D)$43.10
Q3) Value stocks usually have:
A)low P/E ratios and high growth rates.
B)high P/E ratios and low growth rates.
C)low P/E ratios and low growth rates.
D)high P/E ratios and high growth rates.
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Page 9
Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Which of the following is correct regarding the coefficient of variation?
A)It measures the amount of standard deviation for each one percent of covariance.
B)It measures the amount of return achieved for each one percent of risk taken.
C)It measures the amount of risk taken for each one percent of return achieved.
D)None of these statements is correct.
Q2) Total Risk Rank the following three stocks by their level of total risk,highest to lowest.Rail Haul has an average return of 10 percent and standard deviation of 15 percent.The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent.
A)Rail Haul, Poker-R-Us, Idol Staff
B)Idol Staff, Poker-R-Us, Rail Haul
C)Poker-R-Us, Idol Staff, Rail Haul
D)Idol Staff, Rail Haul, Poker-R-Us
Q3) What does diversification do to the risk and return characteristics of a portfolio?
Q4) Why is the percentage return a more useful measure than the dollar return?
Q5) Define diversifiable risk and contrast it with market risk.
Q6) What is the source of firm-specific risk? What is the source of market risk?
Q7) Explain how to compute a portfolio's return.
Page 10
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Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.
Q2) U.S.Bancorp holds a press conference to announce a positive news event that was unexpected to the market.As soon as the announcement is made,the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4.Given this information which of the following statements is correct?
A)This is an example of a market overreaction.
B)This is an example of a market underreaction.
C)This is an example of a semi-strong efficient market.
D)None of these statements is correct.
Q3) Which of these is a theory that describes the types of information that are reflected in current stock prices?
A)Asset pricing
B)Behavioral finance
C)Efficient market hypothesis
D)Public information
Q4) What is required to use the constant-growth model to compute required return?
Q5) Explain the risk premiums of stock.
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) The ___________ approach to computing a divisional weighted average cost of capital (WACC)uses the average beta of projects in each division to calculate the WACC.
A)subjective
B)objective
C)firmwide
D)implicit
Q2) A firm has 1,000,000 shares of common stock outstanding,each with a market price of $10.00 per share.It has 15,000 bonds outstanding,each selling for $900 (with a face value of $1,000).The bonds mature in 15 years,have a coupon rate of 10 percent,and pay coupons semi-annually.The firm's equity has a beta of 1.5,and the expected market return is 20 percent.The tax rate is 35 percent and the WACC is 16 percent.What is the risk-free rate?
A)4.8 percent
B)11.4 percent
C)27.6 percent
D)30.0 percent
Q3) Why do we use market-based weights instead of book-value weights when computing the WACC?
Q4) Define subjective and objective approaches to divisional cost of capital.
Page 12
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) Suppose you sell a fixed asset for $99,000 when its book value is $129,000.If your company's marginal tax rate is 39 percent,what will be the effect on cash flows of this sale (i.e.,what will be the after-tax cash flow of this sale)?
A)$80,700
B)$110,700
C)$77,300
D)$84,800
Q2) Equipment was purchased for $45,000 plus $2,000 in freight charges.Installation costs were $1,500 and sales tax totaled $1,000.Hiring a special consultant to provide advice during the selection of the equipment cost $3,000.What is this asset's depreciable basis?
A)$51,500
B)$49,500
C)$48,500
D)$52,500
Q3) When calculating operating cash flow for a project,why would one treat EBIT as a negative for tax purposes when there is an operating loss?
Q4) In a cost-cutting proposal,what might cause you to sometimes have a negative EBIT?
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) A project's IRR:
A)is the average rate of return necessary to pay back the project's capital providers.
B)will change with the cost of capital.
C)is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuity.
D)All of these answers are correct.
Q2) Compare and contrast the IRR and the MIRR statistic.
Q3) Rank the capital budgeting tools from best to worst.
Q4) Which of the following is a capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return,IRR,decision rule?
A)Discounted payback
B)Net present value
C)Modified internal rate of return
D)Profitability index
Q5) Why is a project's cost not an appropriate benchmark for its NPV?
Q6) How does profitability index differ from the other statistics discussed in this chapter?
Page 14
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Chapter 14: Working Capital and Policies
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Sample Questions
Q1) All of the following are the different types of float the firm may experience in its collections EXCEPT:
A)mail float.
B)availability float.
C)check kiting float.
D)processing float.
Q2) Carrying costs are associated with having current assets and fall into two general categories.List those two categories.
Q3) B&B Cos.has sales of $732,000 and cost of goods sold of $323,000.The firm had a beginning inventory of $48,000 and an ending inventory of $39,000.What is the length of the days' sales in inventory?
A)37.79 days
B)31.84 days
C)44.07 days
D)49.02 days
Q4) In Japan,many consumers pay their bills by electronic deduction from their checking accounts instead of using paper checks.What effect do you think this has on the collection float of Japanese firms versus that of American firms?
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Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) First order effects are defined as which of the following?
A)The subsequent, less observable effects of the change
B)The subsequent, more observable effects of the change
C)Higher order effects of the change
D)The immediately observable effects of changing one item on another
Q2) Which of the following will decrease the additional funds needed from external sources?
A)The firm's profit margin decreases
B)The firm's retention ratio is decreased
C)The firm becomes less capital intensive
D)The firm reduces its usage of trade credit
Q3) All of the following will tend to increase spontaneously with sales EXCEPT:
A)accrued wages.
B)notes payable.
C)accounts payable.
D)All of these will tend to increase spontaneously with sales.
Q4) Which liabilities would tend to spontaneously increase with sales? Why?
Q5) Is forecasting more important for small firms or large firms? Why?
Q6) How is the capital intensity ratio calculated? How is it used in the AFN formula?
Page 16
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Chapter 16: Assessing Long-Term Debt, equity, and Capital Structure
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Sample Questions
Q1) How can an investor leverage itself more than the firm?
A)By borrowing money and investing it in stock along with the money with which they started
B)By buying the firm's bonds
C)By buying the firm's preferred stock
D)Investors cannot leverage themselves more than the firm.
Q2) Describe "The More Debt,The Better" statement with regard to the optimal capital structure.
Q3) A firm faces a 30 percent tax rate and has $200m in assets,currently financed entirely with equity.Equity is worth $10 per share,and book value of equity is equal to market value of equity.Also,let's assume that the firm's expected EBIT is $10m.The firm is considering switching to a 25 percent debt capital structure,and has determined that they would have to pay a 10 percent yield on perpetual debt.What will be the firm's new ROE if they switch to the proposed capital structure?
A)2.33 percent
B)2.86 percent
C)2.39 percent
D)1.04 percent
Q4) Explain why utility firms tend to have fairly high debt ratios.
Page 17
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Chapter 17: Sharing Firm Wealth: Dividends, share
Repurchases and Other Payouts
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Sample Questions
Q1) Suppose a firm has a dividend payout ratio of 25 percent and net income of $5 million.What would be the annual addition to retained earnings?
A)$3,750,000
B)$5,250,000
C)$1,750,000
D)$750,000
Q2) If a firm has retained earnings of $40 million,a common shares account of $50 million,and additional paid-in-capital of $25 million,how much would be transferred in (or out)of these accounts in response to a 40 percent stock dividend,respectively?
A)-40 percent, 0 percent, +40 percent
B)-40 percent, +40 percent, 0 percent
C)-75 percent, +37.5 percent, +37.5 percent
D)-75 percent, +40 percent, +40 percent
Q3) The Modigliani and Miller's Dividend Irrelevance Theorem is set in a "perfect world." List the four elements that are features of their "perfect world."
Q4) Everything else held constant,if a firm announces that it will double the length of time between its ex-dividend date and its payment date,what should be the effect on stock price?
Page 18
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Chapter 18: Issuing Capital and the Investment Banking Process
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Sample Questions
Q1) The advantage of the shelf registration is that:
A)the firm can use their red herring prospectus as a substitute for the master registration statement.
B)the firm can get stocks into the market quickly if the firm feels conditions are right without the time lag.
C)the firm can bypass the lengthy SEC process.
D)none of these.
Q2) Calculating Costs of Issuing Stock Your company needs to raise $50 million to finance plant expansion.In discussions with its investment bank,you learn that the bankers recommend a gross price of $75 per share and that 675,000 shares of stock be sold.If the net proceeds on the stock sale leave your company with $50 million,what is the underwriter's spread on the stock issue?
A)$0.93
B)$1.85
C)$6.67
D)$9.00
Q3) Contrast best efforts underwriting and firm commitment underwriting.
Q4) List the steps for getting shares of stock to the investing public.
Q5) Explain the different methods for small firms to get funding.
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Chapter 19: International Corporate Finance
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Sample Questions
Q1) Currency Exchange Compute the number of dollars that can be bought with 8 million of foreign currency units:
$1 = 7.2501 South African rand
A)$1,103,433.056
B)$5,800,080.00
C)$8,000,000.00
D)$9,103,200.00
Q2) Risks inherent in making investments in foreign countries include:
A)the value of their investment changes as the exchange rates change.
B)cash flows to be received in the future may be worth less when actually received if the foreign exchange rate fluctuates dramatically.
C)political risks due to an unstable government.
D)All of these are risks inherent in making investments in foreign countries.
Q3) Which of these is defined as a contractual agreement that states the exchange rate to be used at a future exchange date?
A)Fixed peg rate
B)Forward exchange rate
C)Managed exchange rate
D)Future strategy rate
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Page 20
Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X<sub>1</sub> = Net working capital/Total assets = 0.25,X<sub>2</sub> = Retained earnings/Total assets = 0.30,X<sub>3</sub> = Earnings before interest and taxes/Total assets = 0.35,X<sub>4</sub> = Market value of equity/Book value of long-term debt = 0.50,X<sub>5</sub> = Sales/Total assets ratio = 0.9.Calculate the Altman's Z-score for this firm.
A)2.30
B)3.075
C)9.8
D)1.96
Q2) Which of the following is a formal bankruptcy proceeding involving the reorganization of the corporation with some provision for repayment to the firm's creditors?
A)Chapter 7
B)Chapter 11
C)Chapter 13
D)Chapter 17
Q3) What is the difference between a Chapter 11 and a Chapter 7 bankruptcy?
Q4) The Altman's Z-score model has several weaknesses.What are they?
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Q5) List and explain the three dimensions of the revenue-enhancement argument.