Managerial Finance
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Course Introduction
Managerial Finance provides an in-depth exploration of financial principles and techniques essential for effective decision-making within organizations. The course examines topics such as financial statement analysis, budgeting, capital structure, working capital management, investment appraisal, and risk assessment. Emphasizing the application of quantitative and qualitative approaches, students learn how financial managers plan, control, and allocate resources to maximize firm value. Real-world case studies, financial modeling, and ethical considerations are integrated to develop critical thinking and problem-solving skills crucial for todays dynamic business environment.
Recommended Textbook Business Finance 11th Edition by Graham Peirson
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Page 2
Chapter 1: Introduction
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Q1) Interest rates can be expressed in real or nominal terms.Which of the following is most correct?
A)Market rates are always expressed in real terms,because it is important that inflation be included in financial assessment.
B)Real interest rates can be calculated as the difference between nominal rates and the inflation rate.
C)Because market rates are usually in nominal terms,cash flows will usually be in inflation-adjusted terms.
D)Market rates are only meaningful in nominal terms,because an accurate adjustment for inflation is not possible.
Answer: C
Q2) The valuation of a firm is best described as depending on:
A)the market value of the assets employed by the firm.
B)the value of land and property held by the firm.
C)the value that the market places on the combined debt and equity of the firm.
D)the capitalised value of the dividends paid by the firm.
Answer: C
Q3) A company is a separate legal entity formed under the _______________.
Answer: Corporations Act 2001
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Page 3
Chapter 2: Consumption, Investment and the Capital Market
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Q1) Which statement is false with respect to the decision rule: accept a project if and only if [Return at Time 2 / (1 + i)- ] > 0?
A)The decision rule is completely consistent with Fisher's separation theorem.
B)The decision rule is the same as the net present value rule.
C)A company that always applies the decision rule to its investment decisions will be able to locate the optimal investment/dividend policy and will maximise the wealth of its shareholders.
D)None of the given options.
Answer: D
Q2) The assumed overall financial objective of a company is to:
A)raise capital.
B)reduce debt.
C)maximise profits.
D)maximise the market value of its ordinary shares.
Answer: D
Q3) A company can make optimal decisions to the benefit of all shareholders if they use the _________________ rule to analyse investment proposals.
Answer: net present value
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Chapter 3: The Time Value of Money: An Introduction to Financial Mathematics
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Q1) A principle that a dollar is worth more the sooner it is to be received,all other things equal,is:
A)the time value of money.
B)the value of money.
C)Fisher's effect.
D)net present value.
Answer: A
Q2) Calculate the present value of the following cash flows assuming they occur at the end of each year and the interest rate is 12% p.a.: Year 0,($12 000);Year 1,$5670;Year 2,$11 250.
A)$2030.93
B)$26 030.93
C)$28 920
D)($1163.19)
Answer: A
Q3) An __________ interest rate is one where the frequency of payment does not match the time period specified by the interest rate.
Answer: effective
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Chapter 4: Applying the Time Value of Money to Security Valuation
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Q1) A Ltd is currently paying a dividend of 90 cents per share.Assume that the investors expect this dividend to be maintained indefinitely and that they require a return of 15% on the investment.What is the value of A's shares?
A)$0.14
B)$16.66
C)$6.00
D)$1.05
Q2) The 'price effect',with regards to bonds,refers to the:
A)capital gains or losses that occur when interest rates change.
B)relationship between market interest rates and bond prices.
C)present value of interest income and redemption value.
D)relationship between risk and bond prices.
Q3) The return on a share listed on the stock exchange is likely to be:
A)less than the short-term rate of interest but greater than the long-term rate of interest.
B)more than the short-term rate of interest but less than the long-term rate of interest.
C)greater than the market rate of interest.
D)comparable to the rate of return earned on government securities.
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Page 6
Chapter 5: Project Evaluation: Principles and Methods
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Q1) The benefit-cost ratio is also known as the profitability index.
A)True
B)False
Q2) Which of the following statements about EVA is false?
A)EVA can be improved by increasing earnings.
B)EVA can be improved by reducing the capital used.
C)EVA ranks projects with the same outlay,life and total earnings equally,even though their patterns of earnings may be different.
D)EVA can be improved either by increasing earnings or by reducing the capital used.
Q3) The net present value for a project with a relatively long life is more sensitive to changes in the required rate of return than the net present value for a project with a relatively short life because:
A)the internal rate of return is greater the longer the term of a project.
B)interest is compounded over time.
C)a change in the discount rate has a much greater impact on more distant cash flows.
D)distant cash flows are more uncertain.
Q4) A company should approve all projects with a ___________ net present value.
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Chapter 6: The Application of Project Evaluation Methods
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Q1) A major flaw of simulation analysis is that it fails to consider the possibility that risk may be removed through diversification.
A)True
B)False
Q2) If a firm is faced with a need to make a sequence of decisions over time,it could use:
A)break-even analysis.
B)simulation analysis.
C)decision-tree analysis.
D)none of the given answers.
Q3) If an investment costing $2000 is expected to generate real cash flows of $900 p.a.for three years,prices are expected to increase at a rate of 10% p.a. ,and the nominal cost of capital is 15%,what is the net present value of the investment?
A)$520.59
B)$740.79
C)$471.97
D)$389.79
Q4) How can we compare mutually exclusive projects with different timeframes?
Q5) How would you go about conducting sensitivity analysis?
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Chapter 7: Risk and Return
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Q1) Where two securities are perfectly positively correlated,there is no reduction in unsystematic risk through diversification.
A)True
B)False
Q2) A popular measure of risk in corporate finance called the value at risk (VaR),which is defined as:
A)the best return from a high risk investment.
B)the worst loss that is possible under normal market conditions.
C)the worst possible loss under any market conditions.
D)the worst return from a low risk investment.
Q3) It is often assumed that an investment's distribution of returns follows a normal distribution because:
A)investment distributions are not usually bell shaped.
B)the expected value is the weighted average expected return from an investment.
C)the expected value gives a measurement of risk.
D)it enables an investment to be described by its expected value and standard deviation.
Q4) What are the two components of expected return in the CAPM?
Q5) Explain the difference between systematic and unsystematic risk.
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Chapter 8: The Capital Market
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Q1) Many stockbroking firms have extended their services beyond those traditionally offered and now also provide a range of services in money markets.
A)True
B)False
Q2) Which of the following is not a function of financial intermediaries?
A)Accept funds from the public and invest them in assets.
B)Harmonise the differences in size,maturity and risk preferences between surplus units and deficit units.
C)Generate economies of scale as a result of the specialist skills that financial intermediaries acquire in credit assessment and monitoring of the performance of borrowers.
D)Result in the pooling of the risks associated with a portfolio of loans.
Q3) Merchant or investment banks are classified under the Financial Corporations Act as:
A)money market corporations.
B)financial agencies.
C)investing institutions.
D)financial institutions.
Q4) Superannuation funds are characterised as ___________ institutions.
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Chapter 9: Sources of Finance: Equity
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Q1) Which of the following is not an advantage of raising equity via the issue of ordinary shares?
A)Dividend payment is not an obligation.
B)It reduces borrowing costs.
C)Borrowing entails higher transaction costs than raising equity,as the company has to prepare disclosure documents to attract lenders.
D)None of the given options.
Q2) No-liability companies have been created because of:
A)the high rate of business failure.
B)the high rate of business failure in the mining sector.
C)the need to encourage investment in high-growth companies.
D)the risk of losing one's investment when a business fails.
Q3) The reason for the requirement by the Australian Stock Exchange (ASX)for a minimum of 500 shareholders in a new listed company is:
A)to ensure that administration costs per shareholder are kept to a minimum.
B)to ensure that there will be an active market in the company's shares.
C)to convince the ASX of the issuing company's credit-worthiness.
D)to assist in the raising of new capital.
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Chapter 10: Sources of Finance: Debt
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Q1) An advantage of using debt is that:
A)debt-holders have no control over the company's operations.
B)debt-holders usually exert no control over the company's operations.
C)interest payments are fixed.
D)a company may borrow without the security of an asset.
Q2) In a bill discount facility:
A)the borrower undertakes to buy bills of exchange drawn by the bank up to a specified total amount.
B)the bank undertakes to sell bills of exchange drawn by the borrower up to a specified total amount.
C)the bank undertakes to sell bills of exchange drawn by the borrower for an unspecified total amount,usually determined by demand and supply.
D)none of the given options.
Q3) Which of the following statements best describes a swap?
A)It is a contract in which two parties agree to exchange financial securities.
B)It is a contract in which two parties agree to exchange a series of future cash flows over a specified period of time.
C)It is a contract in which two parties agree to exchange assets.
D)Swap is an acronym for 'savings with annual payments'.
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Page 12
Chapter 11: Payout Policy
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Q1) One reason that may explain why dividend policy is relevant to investors is that:
A)shareholders are indifferent between dividend income and capital gains income.
B)valuable inside information is conveyed by announcements of dividend changes.
C)investors,in general,prefer investments in companies that pay dividends.
D)investors do not trust dividend projections.
Q2) For shares listed on the ASX,an ex-dividend date is:
A)four business days after the record date.
B)four business days before the record date.
C)seven business days after the record date.
D)seven business days before the record date.
Q3) If a company earns income of $1 million before company tax,has tax deductions of $0.2 million,has additional taxable income of $0.1 million related to previous years and is on a marginal tax rate of 30%,what is its effective marginal tax rate on current income?
A)30%
B)32.7%
C)24%
D)27%
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Page 13
Chapter 12: Principles of Capital Structure
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Q1) The ___________ theory establishes a hierarchy of financing sources which are preferred by the managers of a company.
Q2) Which of the following statements is true?
A)Bankruptcy costs do not concern shareholders because they are borne entirely by other parties.
B)Debtholders rarely realise the potential for bankruptcy and do not demand a higher rate of interest on their loans in compensation.
C)Debtholders will not demand higher interest rates on loans because in so doing they may increase the likelihood of bankruptcy.
D)For any given level of business risk,the higher the financial risk,the greater the probability of bankruptcy.
Q3) The effect of debt on the rate of return earned by shareholders of the company is known as _____________________.
Q4) Which of the following statements is not true regarding Miller's analysis?
A)There is an optimal debt/equity ratio for the corporate sector.
B)There is no optimal debt/equity ratio for individual companies.
C)Shareholders benefit from the tax saving of interest on debt.
D)Securities issued by different companies will appeal to different clientele.
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Page 14
Chapter 13: Capital Structure Decisions
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Q1) For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:
A)a positive net tax advantage.
B)a net tax disadvantage.
C)a positive impact on financial distress because of the tax deductibility of interest on debt.
D)a benefit of achieving an optimal capital structure.
Q2) Which of the following approaches appears to be ideal for studying the relationship between capital structure and company value?
A)An examination of bankruptcy costs incurred by failed companies.
B)An examination of companies with tax losses carried forward.
C)An examination of transactions in which one type of security is exchanged for another.
D)An examination of capital-raising transactions by companies from different industries.
Q3) The pecking order theory identifies a target debt-equity ratio.
A)True
B)False
Q4) Evidence from surveys of CFOs provides support to the _____________ theory.
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Chapter 14: The Cost of Capital and Taxation Issues in Project Evaluation
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Q1) In the calculation of WACC,each of the debt and equity securities is weighted according to its ___________ values.
Q2) From the estimates,calculate the return on equity (after tax)if Rf = 5%,E(Rm)= 13%,franking premium = 3%,beta = 1.5 and the corporate tax rate is 30 per cent.
A)15.05%
B)21.5%
C)18.8%
D)15%
Q3) Calculate the weighted average cost of preference shares and ordinary shares if there are: 1 million preference shares with market value of $2.50 each and an opportunity cost of 10.8%;10 million ordinary shares with market value of $4.50 each and an opportunity cost of 16.5%.
A)15.4%
B)16.9%
C)16.2%
D)None of the given options.
Q4) Issue costs should be included in the calculation of cost of capital.
A)True
B)False
Page 16
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Chapter 15: Leasing and Other Equipment Finance
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Q1) Which of the following statements with regards to taxation and leases is the most accurate?
A)Both lease rentals and depreciation on the leased asset are deductible for tax purposes by the lessor.
B)Both lease rentals and depreciation on the leased asset are deductible for tax purposes by the lessee.
C)Lease rentals and depreciation on the leased asset are not deductible for tax purposes by the lessee.
D)If lease rentals are deductible for tax purposes by the lessee then depreciation on the leased asset can be deductible for tax purposes only by the lessor.
Q2) The lessor in a leveraged lease is usually:
A)the lending party.
B)a partnership of debt participants.
C)a partnership of two or more equity participants.
D)a life insurance company or superannuation fund.
Q3) An __________ lease separates the risks of ownership from the use of the asset,and provides advantages such as convenience and flexibility,insurance against obsolescence and lower transaction costs.
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Chapter 16: Capital Market Efficiency
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Q1) If the stock market is efficient then:
A)investors should consider factors,such as risk preferences,when selecting a portfolio of securities.
B)investors should select their investments randomly since all securities are correctly priced anyway.
C)a portfolio of randomly selected securities will necessarily eliminate all unsystematic risk.
D)portfolio selection becomes easy since all information is impounded in share prices.
Q2) Rozeff and Kinney (1976)showed that the average return in January was more than:
A)six times larger than the average returns in the other 11 months.
B)four times larger than the average returns in the other 11 months.
C)five times larger than the average returns in the other 11 months.
D)three times larger than the average returns in the other 11 months.
Q3) Fama and French (1992)found that companies with a low book-to-market ratio tended to earn _________ returns,while companies with a high book-to-market ratio tended to earn _______ returns.
Q4) What are some of the seasonal patterns that have been found in returns that suggest it is possible to predict returns based on these patterns?
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Page 18
Chapter 17: Futures Contracts
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Q1) Which of the following statements is true for a 10-year bond future contract?
A)Trading ceases on the 15th day of the settlement month.
B)Trading ceases on the last business day of the contract month.
C)Settlement day is the third business day after the day when trading ceases.
D)Settlement day is the second business day after the day when trading ceases.
Q2) Distinguish between a forward-rate agreement (FRA)and a futures contract.
Q3) The financial controller of Nointerest Ltd has planned that the company borrow using a 90-day bank bill facility with face value of $500 000 in four weeks.Interest rates on 90-day bank bills are currently 12% p.a.As a protection against possible interest rate increases,she has entered into a futures contract by selling one bank bill futures contract at a price of $88.50.After the four-week period,she reverses the futures position at $86.50 and issues a bank bill at a rate of 14% p.a.Calculate the net dollar shortfall/gain.
A)$2432
B)$70
C)$203
D)$6
Q4) Day traders are prepared to trade as they see fit during a trading day,but regard an overnight position as _____________.
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Page 19
Chapter 18: Options and Contingent Claims
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Q1) There is a ________________ relationship between the price of a call option and the magnitude of expected future dividends.
Q2) American put options are worth more than European put options because:
A)a put would not be exercised unless the share price exceeded the exercise price.
B)it can be rational to exercise an American put option before expiry.
C)they are more volatile.
D)they are less volatile.
Q3) An option creates the obligation for delivery of the underlying asset at a pre-determined point of time in the future.
A)True
B)False
Q4) Which of the following is a potential disadvantage of privately negotiated options?
A)It is often difficult to find a party with whom to contract.
B)It is not possible to reverse out of a contract before the agreed expiry date.
C)It may be necessary to investigate the creditworthiness of the other party.
D)All of the given options.
Q5) A _______________ call option can only be exercised on maturity.
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Page 20
Chapter 19: Analysis of Takeovers
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Q1) Which of the following statements is not one of the three general explanations identified by Jarrell and Poulsen (1989)to explain the negligible wealth effects for acquiring company shareholders?
A)Competition depresses returns to targets.
B)Takeovers are profitable,but the wealth effects are disguised.
C)Takeovers are neutral or poor investments.
D)None of the given options.
Q2) Cost saving is less likely to be a reason for takeover activity in:
A)horizontal takeovers.
B)vertical takeovers.
C)conglomerate takeovers.
D)both horizontal and vertical takeovers.
Q3) Conglomerate takeovers are likely to indicate:
A)agency problems between management and shareholders.
B)benefits from diversification for shareholders.
C)companies can reduce risk.
D)that shareholders can benefit from lower risk of default on debt due to less than perfectly correlated earnings streams between the bidder and target.
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Chapter 20: International Financial Management
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Q1) Which of the following statements is true of international diversification?
A)International diversification is more beneficial to an investor because he/she can trade at any time of the day.
B)Greater diversification benefits arise from holding a portfolio of shares in companies from countries with stable governments,rather than from emerging countries with greater political risk.
C)Holding a portfolio of shares traded on foreign exchanges increases the likelihood that the correlation between the shares is lower because of the larger number of assets that an investor can choose from.
D)Greater diversification benefits arise from holding a portfolio of shares in companies from countries with stable governments,rather than from emerging countries with greater political risk and holding a portfolio of shares traded on foreign exchanges increases the likelihood that the correlation between the shares is lower because of the larger number of assets that an investor can choose from.
Q2) Foreign currency ___________ are a suitable way to undertake contingent hedging.
Q3) ________________ risk is the variability of an entity's value that is due to possible appreciation or depreciation of the currency.
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Chapter 21: Management of Short-Term Assets: Inventory
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Q1) A major reason that companies hold short-term assets is because markets are not frictionless.
A)True
B)False
Q2) DEF Ltd produces a specialised type of metal sheeting.Demand is 5 000 sheets per year.Each production run costs $1 750 to set up and storage costs are $25 per sheet per year.What is the optimal size of a production run?
A)873 sheets.
B)937 sheets.
C)837 sheets.
D)737 sheets.
Q3) The relevant costs to be included in the economic order quantity model are __________ costs.
Q4) The ___________ system of inventory management is based on the concept that raw materials,equipment and labour are each supplied only in the amounts required and at the times required to complete the manufacturing task.
Q5) ___________ includes raw materials,work in progress and finished goods not yet sold.
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Chapter 22: Management of Short-Term Assets: Liquid
Assets and Accounts Receivable
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Q1) The sale of a company's accounts receivable to a financial institution is known as ____________.
Q2) An overdraft facility is:
A)an agreement by the bank to allow a customer to have a negative cash balance.
B)cash held at the bank.
C)a form of factoring.
D)the ability to extend the term of an existing loan with the bank.
Q3) Management of interest-rate risk involves:
A)taking advantage of discrepancies between fixed and floating interest rates.
B)minimising losses due to fluctuations in exchange rates.
C)ensuring a company's assets are liquid.
D)minimising losses due to fluctuations in interest rates.
Q4) Treasury management involves decisions about the composition and level of a company's liquid assets.
A)True
B)False
Q5) A major benefit of granting credit to customers is a reduction in the cost of bad debts.
A)True
B)False
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