Managerial Finance Review Questions
Course Introduction
Managerial Finance introduces the foundational principles and analytical tools required for effective financial decision-making within organizations. This course covers topics such as financial statement analysis, risk and return assessment, capital budgeting, cost of capital, and short- and long-term financial planning. Students will learn how managers use financial information to evaluate investment opportunities, optimize capital structure, manage working capital, and ultimately maximize firm value. Emphasis is placed on applying quantitative techniques and financial theories to real-world business scenarios to enhance strategic planning and operational efficiency.
Recommended Textbook
Fundamentals of Corporate Finance 11thEdition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which of the following are cash flows from a corporation into the financial markets?
I.repayment of long-term debt
II.payment of government taxes
III.payment of loan interest
IV.payment of quarterly dividend
A)I and II only
B)I and III only
C)II and IV only
D)I, III, and IV only
E)I, II, and III only
Answer: D
Q2) Which one of the following statements is correct?
A)A general partnership is legally the same as a corporation.
B)Both sole proprietorship and partnership income is taxed as individual income.
C)Partnerships are the most complicated type of business to form.
D)All business organizations have bylaws.
E)Only firms organized as sole proprietorships have limited lives.
Answer: B
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) Which one of the following must be true if a firm had a negative cash flow from assets?
A)The firm borrowed money.
B)The firm acquired new fixed assets.
C)The firm had a net loss for the period.
D)The firm utilized outside funding.
E)Newly issued shares of stock were sold.
Answer: D
Q2) The cash flow related to interest payments less any net new borrowing is called the:
A)operating cash flow.
B)capital spending cash flow.
C)net working capital.
D)cash flow from assets.
E)cash flow to creditors.
Answer: E
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) On the Statement of Cash Flows,which of the following are considered operating activities?
I.costs of goods sold
II.decrease in accounts payable
III.interest paid
IV.dividends paid
A)I and III only
B)III and IV only
C)I, II, and III only
D)I, III, and IV only
E)I, II, III, and IV
Answer: C
Q2) The sources and uses of cash over a stated period of time are reflected on the: A)income statement.
B)balance sheet.
C)tax reconciliation statement.
D)statement of cash flows.
E)statement of operating position.
Answer: D
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Page 5
Chapter 4: Long-Term Financial Planning and Growth
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Sample Questions
Q1) Seaweed Mfg.,Inc.is currently operating at only 84 percent of fixed asset capacity.Current sales are $550,000.What is the maximum rate at which sales can grow before any new fixed assets are needed?
A)17.23 percent
B)17.47 percent
C)18.03 percent
D)18.87 percent
E)19.05 percent
Q2) The Cookie Shoppe expects sales of $437,500 next year.The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio.What is the projected increase in retained earnings?
A)$16,231
B)$17,500
C)$18,300
D)$20,600
E)$21,000
Q3) Smith & Daughters is getting ready to compile pro forma statements for the next few years.How can the managers establish a reasonable range of growth rates that they should consider during this planning process?
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Page 6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) You want to have $25,000 saved 6 years from now to buy a house.How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
A)$524.24
B)$691.18
C)$724.60
D)$745.11
E)$819.02
Q2) Imprudential,Inc.has an unfunded pension liability of $850 million that must be paid in 25 years.To assess the value of the firm's stock,financial analysts want to discount this liability back to the present.The relevant discount rate is 6.5 percent.What is the present value of this liability?
A)$159,803,162
B)$171,438,907
C)$176,067,311
D)$184,519,484
E)$191,511,367
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year.The bank uses daily compounding on its loans.By law,what interest rate is the bank required to report to potential borrowers?
A)9.23 percent
B)9.38 percent
C)9.53 percent
D)9.72 percent
E)10.00 percent
Q2) The Wine Press is considering a project which has an initial cash requirement of $187,400.The project will yield cash flows of $2,832 monthly for 84 months.What is the rate of return on this project?
A)6.97 percent
B)7.04 percent
C)7.28 percent
D)7.41 percent
E)7.56 percent
Q3) Explain the difference between the effective annual rate (EAR)and the annual percentage rate (APR).Of the two,which one has the greater importance and why?
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Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) The Corner Grocer has a 7-year,6 percent annual coupon bond outstanding with a $1,000 par value.The bond has a yield to maturity of 5.5 percent.Which one of the following statements is correct if the market yield suddenly increases to 7 percent?
A)The bond price will increase by $57.14.
B)The bond price will increase by 5.29 percent.
C)The bond price will decrease by $53.62.
D)The bond price will decrease by 8 percent.
E)The bond price will decrease by 8.36 percent.
Q2) A bond's coupon rate is equal to the annual interest divided by which one of the following?
A)call price
B)current price
C)face value
D)clean price
E)dirty price
Q3) Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.
Q4) Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.
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Chapter 8: Stock Valuation
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Sample Questions
Q1) An agent who maintains an inventory from which he or she buys and sells securities is called a:
A)broker.
B)trader.
C)capitalist.
D)principal.
E)dealer.
Q2) Which one of following is the rate at which a stock's price is expected to appreciate?
A)current yield
B)total return
C)dividend yield
D)capital gains yield
E)coupon rate
Q3) Which one of the following transactions occurs in the primary market?
A)purchase of 500 shares of GE stock from a current shareholder
B)gift of 100 shares of stock to a charitable organization
C)gift of 200 shares of stock by a mother to her daughter
D)a purchase of newly issued stock from AT&T
E)IBM's purchase of GE stock
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?
A)The net present value indicates accept while the internal rate of return indicates reject.
B)Payback indicates acceptance.
C)The payback decision rule could override the accept decision indicated by the net present value.
D)The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.
E)The net present value decision rule is the only rule that matters when making the final decision.
Q2) Which one of the following increases the net present value of a project?
A)an increase in the required rate of return
B)an increase in the initial capital requirement
C)a deferment of some cash inflows until a later year
D)an increase in the aftertax salvage value of the fixed assets
E)a reduction in the final cash inflow
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11
Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) The Fluffy Feather sells customized handbags.Currently,it sells 18,000 handbags annually at an average price of $89 each.It is considering adding a lower-priced line of handbags that sell for $59 each.The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so.What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?
A)$146,000
B)$275,000
C)$413,000
D)$623,000
E)$680,000
Q2) Decreasing which one of the following will increase the acceptability of a project?
A)sunk costs
B)salvage value
C)depreciation tax shield
D)equivalent annual cost
E)accounts payable requirement
Q3) Can the initial cash flow at time zero for a project ever be a positive value? If yes,give an example.If no,explain why not.
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Page 12
Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) A proposed project has a contribution margin per unit of $13.10,fixed costs of $74,000,depreciation of $12,500,variable costs per unit of $22,and a financial break-even point of 11,360 units.What is the operating cash flow at this level of output?
A)$0
B)$12,500
C)$62,309
D)$74,816
E)$86,500
Q2) A proposed project has fixed costs of $36,000 per year.The operating cash flow at 18,000 units is $58,000.What will be the new degree of operating leverage if the number of units sold rises to 18,500?
A)1.46
B)1.59
C)1.67
D)2.08
E)2.14
Q3) What are the key features of the accounting,cash,and financial break-even points?
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Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Last year,T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent.Which one of the following terms refers to the difference between these two rates of return?
A)risk premium
B)geometric return
C)arithmetic
D)standard deviation
E)variance
Q2) Which one of the following statements is correct based on the historical record for the period 1926-2010?
A)The standard deviation of returns for small-company stocks was double that of large-company stocks.
B)U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free.
C)Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.
D)Inflation was less volatile than the returns on U.S. Treasury bills.
E)Long-term government bonds underperformed intermediate-term government bonds.
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Page 14
Chapter 13: Return, Risk, and the Security Market Line
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Sample Questions
Q1) A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?
A)portfolio
B)nondiversifiable
C)market
D)unsystematic
E)total
Q2) Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.
Q3) Your portfolio has a beta of 1.12.The portfolio consists of 40 percent U.S.Treasury bills,30 percent stock A,and 30 percent stock B.Stock A has a risk-level equivalent to that of the overall market.What is the beta of stock B?
A) 1.47
B) 1.52
C) 1.69 D) 1.84 E) 2.73
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Chapter 14: Cost of Capital
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Sample Questions
Q1) Highway Express has paid annual dividends of $1.05,$1.20,$1.25,$1.15,and $0.95 over the past five years,respectively.What is the average dividend growth rate?
A)-1.74 percent
B)-3.60 percent
C)2.28 percent
D)2.47 percent
E)4.39 percent
Q2) The Daily Brew has a debt-equity ratio of 0.64.The firm is analyzing a new project which requires an initial cash outlay of $420,000 for equipment.The flotation cost is 9.6 percent for equity and 5.4 percent for debt.What is the initial cost of the project including the flotation costs?
A)$302,400
B)$368,924
C)$456,328
D)$456,700
E)$583,333
Q3) What role does the weighted average cost of capital play when determining a project's cost of capital?
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Chapter 15: Raising Capital
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Sample Questions
Q1) The Woods Co.and the Mickelson Co.have both announced IPOs at $43 per share.One of these is undervalued by $20,and the over is overvalued by $14,but you have no way of knowing which is which.You plan on buying 1,000 shares of each issue.If an issue is underpriced,it will be rationed,and only half your order will be filled.What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson?
A)-$10,000
B)-$6,000
C)-$4,000
D)$4,000
E)$6,000
Q2) To purchase shares in a rights offering,a shareholder generally just needs to:
A)pay the subscription amount in cash.
B)submit the required form along with the required number of rights.
C)pay the difference between the market price of the stock and the subscription price.
D)submit the required number of rights along with a payment for the underwriting fee.
E)submit the required number of rights along with the subscription price.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) Sewer's Paradise is an all equity firm that has 5,000 shares of stock outstanding at a market price of $15 a share.The firm's management has decided to issue $30,000 worth of debt and use the funds to repurchase shares of the outstanding stock.The interest rate on the debt will be 10 percent.What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.
A)$1.46
B)$1.50
C)$1.67
D)$1.88
E)$1.94
Q2) The business risk of a firm:
A)depends on the firm's level of unsystematic risk.
B)is inversely related to the required return on the firm's assets.
C)is dependent upon the relative weights of the debt and equity used to finance the firm.
D)has a positive relationship with the firm's cost of equity.
E)has no relationship with the required return on a firm's assets according to M & M Proposition II.
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Page 18
Chapter 17: Dividends and Payout Policy
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Q1) A $0.60 quarterly cash payment paid by T.L.Jones & Co.to its shareholders in the normal course of business is called a:
A)repurchase.
B)liquidating dividend.
C)regular cash dividend.
D)special dividend.
E)extra cash dividend.
Q2) Steve owns 3,000 shares of NOP,Inc.stock,which he purchased six years ago at a price of $22 a share.Today,these shares are selling for $68 each.Assume the current tax laws are such that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital gains.From Steve's point of view,a stock repurchase today: (Ignore costs)
A)is equivalent to a cash dividend in all respects.
B)is more desirable than a cash dividend in respect to taxes.
C)will result in the same tax liability as an equivalent cash dividend.
D)is more highly taxed than a cash dividend.
E)is totally unacceptable to him.
Q3) Explain how cash dividends affect individual shareholders differently than an equal amount of funds spent on a repurchase.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Q1) A company currently has a 51 day cash cycle.Assume the firm changes its operations such that it decreases its receivables period by 2 days,increases its inventory period by 3 days,and increases its payables period by 4 days.What will the length of the cash cycle be after these changes?
A)42 days
B)45 days
C)48 days
D)49 days
E)51 days
Q2) The Harvester collects 25 percent of sales in the month of sale,60 percent of sales in the month following the month of sale,and 15 percent of sales in the second month following the month of sale.During the month of April,the firm will collect:
A)60 percent of February sales.
B)15 percent of April sales.
C)60 percent of March sales.
D)15 percent of March sales.
E)25 percent of February sales.
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20
Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and maintains a lower cash balance limit of $250,000.The standard deviation of the disbursements is $46,800.The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $60.What is the hotel's optimal upper cash limit based on the Miller-Orr model?
A)$430,836
B)$447,905
C)$528,700
D)$739,459
E)$861,672
Q2) Check kiting is:
A)used by most firms as an ethical means of handling its cash reserves.
B)the process of withdrawing all funds from a bank account as soon as the funds are available.
C)the central core of a good cash management system.
D)using uncollected cash to invest in short-term, liquid assets.
E)increasingly popular due to recent banking law changes.
Q3) Explain how a lockbox system operates and why a firm might consider implementing such a system.
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Page 21
Chapter 20: Credit and Inventory Management
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Sample Questions
Q1) You have recently been hired as an accounting intern for Jefferson Mills.The job that you have been assigned for today is to compile a spreadsheet that has six columns.The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; > 90 days.You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today.Once you have completed that,you are to sort the report by customer name and then total the amounts listed in each column.What is this report called?
A)credit report
B)aging schedule
C)risk assessment report
D)turnover delineation
E)receivables consolidation report
Q2) Any written proof that a customer owes you money for goods or services provided is referred to as a(n):
A)account document.
B)sales draft.
C)credit instrument.
D)commercial paper.
E)letter of debt.
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Page 22
Chapter 21: International Corporate Finance
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Sample Questions
Q1) Which one of the following formulas correctly describes the relative purchasing power parity relationship?
A)E(S<sub>t</sub>) = S<sub>0</sub> × [1 + (h<sub>FC</sub>h<sub>US</sub>)]<sup>t</sup>
B)E(S<sub>t</sub>) = S<sub>0</sub> × [1 - (h<sub>FC</sub>h<sub>US</sub>)]<sup>t</sup>
C)E(S<sub>t</sub>) = S<sub>0</sub> × [1 + (h<sub>US</sub> + h<sub>FC</sub>)]<sup>t</sup>
D)E(S<sub>t</sub>) = S<sub>0</sub> × [1 - (h<sub>US</sub>h<sub>FC</sub>)]<sup>t</sup>
E)E(S<sub>t</sub>) = S<sub>0</sub> × [1 + (h<sub>US</sub>h<sub>FC</sub>)]<sup>t</sup>
Q2) Party A has agreed to exchange $1 million U.S.dollars for $1.21 million Canadian dollars.What is this agreement called?
A)gilt
B)LIBOR
C)SWIFT
D)Yankee agreements
E)swap
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Kaiser Marketing recently conducted a survey on behalf of Health Products.The primary purpose of the survey was to illustrate to Health Products that it was relying on results of previous studies that,according to Kaiser,were unreliable due to the wording of the survey questions.To prove this point,Kaiser conducted a two-prong survey.In the first prong,the survey questions were worded such that the answers tended to sound positive.In the second prong,the survey questions were re-worded such that the answers tended to convey a negative feeling.Both sets of survey questions should have resulted in similar results as the information solicited was essentially identical.However,the survey results varied significantly.This survey best illustrates which one of the following?
A)mental accounting
B)overconfidence
C)self attribution bias
D)confirmation bias
E)frame dependence
Q2) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
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Chapter 23: Enterprise Risk Management
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Q1) A forward contract:
A)requires that payment be made in full when the contract is originated.
B)provides the buyer with an option to buy an asset on the settlement date at the forward price.
C)is a binding agreement on both the buyer and the seller and nets out as a zero sum game.
D)is marked to the market daily at the seller's request.
E)allows for immediate delivery at an agreed upon price which is to be paid on the settlement date.
Q2) An option contract:
I.can be used to hedge risk.
II.can be used to speculate in the market.
III.can be based on a futures contract to create a futures option.
IV.cannot be based on a foreign currency.
A)II and III only
B)I and II only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
Q3) Explain why a swap is effectively a series of forward contracts.
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Chapter 24: Options and Corporate Finance
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Q1) Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year.The value of Buckeye's assets is currently $1,350.Jim Tressell,the CEO,believes that the assets in the firm will be worth either $600 or $1,700 in a year.The going rate on one-year T-bills is 6 percent.What is the current value of the firm's debt?
A)$601.18
B)$851.11
C)$864.24
D)$878.78
E)$911.03
Q2) Which of the following will decrease the value of a call option?
I.a decrease in the exercise price
II.a decrease in the value of the underlying security
III.an increase in the risk-free rate
IV.an increase in the time to expiration
A)II only
B)I and II only
C)III and IV only
D)I, II, and IV only
E)I, II, and III only
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Page 26
Chapter 25: Option Valuation
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Q1) Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.
Q2) Under European put-call parity,the present value of the strike price is equivalent to:
A)the current value of the stock minus the call premium.
B)the market value of the stock plus the put premium.
C)the present value of a government coupon bond with a face value equal to the strike price.
D)a U.S. Treasury bill with a face value equal to the strike price.
E)a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return.
Q3) Which one of the five factors included in the Black-Scholes model cannot be directly observed?
A)risk-free rate
B)strike price
C)standard deviation
D)stock price
E)life of the option
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Chapter 26: Mergers and Acquisitions
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Q1) If General Electric,a highly diversified company,were to acquire Ocean Freight Limited,the acquisition would be classified as a _____ acquisition.
A)horizontal
B)longitudinal
C)conglomerate
D)vertical
E)integrated
Q2) The primary purpose of a flip-in provision is to:
A)increase the number of shares outstanding while also increasing the value per share.
B)dilute a corporate raider's ownership position.
C)reduce the market value of each share of stock.
D)give the existing corporate directors the sole right to remove a poison pill.
E)provide additional compensation to any senior manager who loses his or her job as a result of a corporate takeover.
Q3) Firms can frequently create synergy by merging and sharing complementary resources with another firm.Give two examples of situations where this would most likely occur.
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Chapter 27: Leasing
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Sample Questions
Q1) Jamestown Supply is trying to decide whether to lease or buy some new equipment.The equipment costs $72,000,has a 4-year life,and will be worthless after the 4 years.The equipment will be replaced.The cost of borrowed funds is 9 percent and the tax rate is 34 percent.The equipment can be leased for $23,800 a year.What is the amount of the aftertax lease payment?
A)$13,897
B)$14,250
C)$14,667
D)$15,708
E)$15,820
Q2) Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.Which one of the following terms applies to Ron?
A)lessee
B)lessor
C)guarantor
D)trustee
E)manager
Q3) What are some "good" reasons for opting to lease rather than purchase an asset?
Q4) Why might a firm opt to sell and leaseback an asset which it currently owns?
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