Managerial Finance
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Course Introduction
Managerial Finance explores the principles and practices behind effective financial management within organizations. The course covers essential topics such as financial statement analysis, budgeting, capital structure, working capital management, and financial planning. Emphasis is placed on decision-making processes that managers use to maximize firm value, assess risk, and allocate resources efficiently. Students will develop analytical skills through case studies and practical exercises, gaining insights into how financial tools and strategies support organizational goals and long-term growth.
Recommended Textbook
Fundamentals of Corporate Finance 10th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange.This transaction:
A)took place in the primary market.
B)occurred in a dealer market.
C)was facilitated in the secondary market.
D)involved a proxy.
E)was a private placement.
Answer: C
Q2) Which one of the following is an agency cost?
A)accepting an investment opportunity that will add value to the firm
B)increasing the quarterly dividend
C)investing in a new project that creates firm value
D)hiring outside accountants to audit the company's financial statements
E)closing a division of the firm that is operating at a loss
Answer: D
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Page 3
Chapter 2: Financial Statements,Taxes,and Cash Flow
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Sample Questions
Q1) A firm has $520 in inventory,$1,860 in fixed assets,$190 in accounts receivables,$210 in accounts payable,and $70 in cash.What is the amount of the current assets?
A)$710
B)$780
C)$990
D)$2,430
E)$2,640
Answer: B
Q2) Net capital spending:
A)is equal to ending net fixed assets minus beginning net fixed assets.
B)is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
C)reflects the net changes in total assets over a stated period of time.
D)is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital.
E)is equal to the net change in the current accounts.
Answer: B
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Oscar's Dog House has a profit margin of 5.6 percent,a return on assets of 12.5 percent,and an equity multiplier of 1.49.What is the return on equity?
A)17.14 percent
B)18.63 percent
C)19.67 percent
D)21.69 percent
E)22.30 percent
Answer: B
Q2) Russell's Deli has cash of $136,accounts receivable of $95,accounts payable of $210,and inventory of $409.What is the value of the quick ratio?
A)0.31
B)0.53
C)0.71
D)1.10
E)1.07
Answer: D
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Chapter 4: Long-Term Financial Planning and Growth
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Sample Questions
Q1) When utilizing the percentage of sales approach,managers:
I.estimate company sales based on a desired level of net income and the current profit margin.
II.consider only those assets that vary directly with sales.
III.consider the current production capacity level.
IV.can project both net income and net cash flows.
A)I and II only
B)II and III only
C)III and IV only
D)I, III, and IV only
E)II, III, and IV only
Q2) Sal's Pizza has a dividend payout ratio of 10 percent.The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy.The firm is profitable.Which one of the following defines the maximum rate at which this firm can grow?
A)internal growth rate × (1 - 0.10)
B)sustainable growth rate × (1 - 0.10)
C)internal growth rate
D)sustainable growth rate
E)zero percent
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Page 6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) At 8 percent interest,how long would it take to quadruple your money?
A)16.55 years
B)16.64 years
C)17.09 years
D)18.01 years
E)18.56 years
Q2) You expect to receive $9,000 at graduation in 2 years.You plan on investing this money at 10 percent until you have $60,000.How many years will it be until this occurs?
A)18.78 years
B)19.96 years
C)21.90 years
D)23.08 years
E)25.00 years
Q3) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
Q4) You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) Your grandfather left you an inheritance that will provide an annual income for the next 10 years.You will receive the first payment one year from now in the amount of $3,000.Every year after that,the payment amount will increase by 6 percent.What is your inheritance worth to you today if you can earn 9.5 percent on your investments?
A)$23,774.36
B)$28,666.67
C)$33,121.21
D)$35,464.12
E)$38,908.17
Q2) You are going to loan a friend $550 for one year at a 6 percent rate of interest,compounded annually.How much additional interest could you have earned if you had compounded the rate continuously rather than annually?
A)$0.84
B)$1.01
C)$1.10
D)$1.23
E)$1.28
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8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) You are trying to compare the present values of two separate streams of cash flows which have equivalent risks.One stream is expressed in nominal values and the other stream is expressed in real values.You decide to discount the nominal cash flows using a nominal annual rate of 8 percent.What rate should you use to discount the real cash flows?
A)8 percent
B)EAR of 8 percent compounded monthly
C)comparable risk-free rate
D)comparable real rate
E)You cannot compare the present values of these two streams of cash flows.
Q2) You own a bond that has a 6 percent annual coupon and matures 5 years from now.You purchased this 10-year bond at par value when it was originally issued.Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?
A)The current yield-to-maturity is greater than 6 percent.
B)The current yield is 6 percent.
C)The next interest payment will be $30.
D)The bond is currently valued at one-half of its issue price.
E)You will realize a capital gain on the bond if you sell it today.
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Page 9
Chapter 8: Stock Valuation
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Sample Questions
Q1) An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
A)broker.
B)floor trader.
C)capitalist.
D)principal.
E)dealer.
Q2) Which one of the following statements currently applies to a NYSE broker?
A)owns a "seat" on the exchange
B)buys at the bid price
C)remains at his or her specified post
D)matches customer buy and sell orders
E)trades for his or her personal account
Q3) An ECN is best described as:
A)an electronic network which transmits orders directly to the floor of the NYSE.
B)the network used in the primary market for selling newly issued shares.
C)the international trading network of the NYSE.
D)a website that allows individual investors to trade directly with one another.
E)a computerized network used by independent brokers.
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?
A)conflicts with the results of the net present value decision rule
B)assumes the firm has sufficient funds to undertake both projects
C)agrees with the decision that would also apply if the projects were mutually exclusive
D)bases the accept/reject decision on the same variables as the average accounting return
E)fails to provide useful information as the firm must reject at least one of the projects
Q2) Applying the discounted payback decision rule to all projects may cause:
A)some positive net present value projects to be rejected.
B)the most liquid projects to be rejected in favor of the less liquid projects.
C)projects to be incorrectly accepted due to ignoring the time value of money.
D)a firm to become more long-term focused.
E)some projects to be accepted which would otherwise be rejected under the payback rule.
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11
Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Home Furnishings Express is expanding its product offerings to reach a wider range of customers.The expansion project includes increasing the floor inventory by $430,000 and increasing its debt to suppliers by 70 percent of that amount.The company will also spend $450,000 for a building contractor to expand the size of its showroom.As part of the expansion plan,the company will be offering credit to its customers and thus expects accounts receivable to rise by $90,000.For the project analysis,what amount should be used as the initial cash flow for net working capital?
A)-$39,000
B)-$70,000
C)-$156,000
D)-$219,000
E)-$391,000
Q2) 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.
Q3) Assume a firm sets its bid price for a project at the minimum level as computed using the discounted cash flow method.Given this,what do you know about the net present value and the internal rate of return on the project as bid?
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Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) Mr.Bear,your boss,will only agree to accept a project that,as a minimum,provides a rate of return equal to the requirement he has set for the project.Given this,explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.
Q2) An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.
A)forecasting
B)combined
C)complex
D)simulation
E)break-even
Q3) The contribution margin per unit is equal to the:
A)sales price per unit minus the total costs per unit.
B)variable cost per unit minus the fixed cost per unit.
C)sales price per unit minus the variable cost per unit.
D)pre-tax profit per unit.
E)aftertax profit per unit.
Q4) 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) Your friend is the owner of a stock which had returns of 25 percent,-36 percent,1 percent,and 16 percent for the past four years.Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year.Based on these returns,what is the probability that your friend is correct?
A)less than 0.5 percent
B)greater than 0.5 percent but less than 1.0 percent
C)greater than 1.0 percent but less than 2.5 percent
D)greater than 2.5 percent but less than 16 percent
E)greater than 16.0 percent
Q2) Standard deviation is a measure of which one of the following?
A)average rate of return
B)volatility
C)probability
D)risk premium
E)real returns
Q3) Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500,a measure of the overall market,only returned an average of 13.9 percent.Explain how this can occur if the stock market is efficient.
Q4) Define and explain the three forms of market efficiency.
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Chapter 13: Return,Risk,and the Security Market Line
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Sample Questions
Q1) You would like to combine a risky stock with a beta of 1.68 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in the risky stock?
A)32 percent
B)40 percent
C)54 percent
D)60 percent
E)68 percent
Q2) The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock
B.Stock A has a beta of 0.82 and stock B has a beta of 1.29.This information implies that:
A) stock A is riskier than stock B and both stocks are fairly priced.
B) stock A is less risky than stock B and both stocks are fairly priced.
C) either stock A is underpriced or stock B is overpriced or both.
D) either stock A is overpriced or stock B is underpriced or both.
E) both stock A and stock B are correctly priced since stock A is riskier than stock B.
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Page 15
Chapter 14: Cost of Capital
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Sample Questions
Q1) Sweet Treats common stock is currently priced at $18.53 a share.The company just paid $1.25 per share as its annual dividend.The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same.What is this firm's cost of equity?
A)6.03 percent
B)6.18 percent
C)8.47 percent
D)9.41 percent
E)9.82 percent
Q2) Scholastic Toys is considering developing and distributing a new board game for children.The project is similar in risk to the firm's current operations.The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth.How should the firm determine its cost of equity?
A)by adding the market risk premium to the aftertax cost of debt
B)by multiplying the market risk premium by (1 - 0.40)
C)by using the dividend growth model
D)by using the capital asset pricing model
E)by averaging the costs based on the dividend growth model and the capital asset pricing model
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) The total direct costs of underwriting an equity IPO:
A)tends to increase on a percentage basis as the proceeds of the IPO increase.
B)is generally between 7 and 8 percent, regardless of the issue size.
C)can be as high as 25 percent for small issues.
D)excludes the gross spread.
E)excludes both the gross spread and the underpricing cost.
Q2) Which one of the following is probably the most successful means of finding venture capital?
A)internet searches
B)Dutch auctions
C)newspaper advertisements
D)personal contacts
E)personal letters to venture capital firms
Q3) Which one of the following statements is correct?
A)The quiet period commences when a registration statement is filed with the SEC and ends on the day the IPO shares commence trading.
B)Lockup agreements outline how oversubscribed IPO shares will be allocated.
C)Additional IPO shares can be issued in accordance with the lockup agreement.
D)Quiet period restrictions only apply to the issuer of new securities.
E)A TV interview with a firm's CFO could cause a forced delay in the firm's IPO.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) The concept of homemade leverage is most associated with:
A)M & M Proposition I with no tax.
B)M & M Proposition II with no tax.
C)M & M Proposition I with tax.
D)M & M Proposition II with tax.
E)static theory proposition.
Q2) Young's Home Supply has a debt-equity ratio of 0.80.The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9 percent.What will the firm's cost of equity be if the debt-equity ratio is revised to 0.70?
A)10.89 percent
B)11.47 percent
C)11.70 percent
D)13.89 percent
E)13.97 percent
Q3) The present value of the interest tax shield is expressed as:
A)(T<sub>C</sub> × D)/R<sub>A.</sub>
B)V<sub>U</sub> + (T<sub>C</sub> × D).
C)[EBIT × (T<sub>C</sub> × D)]/R<sub>U</sub>.
D)[EBIT × (T<sub>C</sub> × D)]/R<sub>A.</sub>
E)T<sub>C</sub> × D.
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Chapter 17: Dividends and Payout Policy
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Q1) The equity of Blooming Roses has a total market value of $16,000.Currently,the firm has excess cash of $1,400 and net income of $15,400.There are 750 shares of stock outstanding.What will be the percentage change in the stock price per share if the firm pays out all of its excess cash as a cash dividend?
A)-9.40 percent
B)-8.75 percent
C)-7.50 percent
D)-2.75 percent
E)0.00 percent
Q2) Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per share.Assume no market imperfections or tax effects exist.What will the new share price be if the firm declares a 40 percent stock dividend?
A)$31.12
B)$32.08
C)$35.19
D)$38.57
E)$40.00
Q3) Explain the meaning of the dividend clientele effect and why it is important. To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Short-Term Finance and Planning
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Q1) Your firm has an average collection period of 42 days.Current practice is to factor all receivables immediately at a 4 percent discount.Assume that default is extremely unlikely.What is the effective cost of borrowing?
A)28.79 percent
B)36.20 percent
C)37.78 percent
D)40.97 percent
E)42.58 percent
Q2) The Dog House expects sales of $560,$650,$630,and $610 for the months of May through August,respectively.The firm collects 20 percent of sales in the month of sale,70 percent in the month following the month of sale,and 8 percent in the second month following the month of sale.The remaining 2 percent of sales is never collected.How much money does the firm expect to collect in the month of August?
A)$615
B)$628
C)$633
D)$639
E)$643
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Page 20
Chapter 19: Cash and Liquidity Management
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Q1) Which two of the following are the primary reasons why firms temporarily accumulate large cash surpluses?
I.cyclical activities
II.desire to invest funds
III.daily operations
IV.fixed asset purchases
A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I and IV only
Q2) Collection float:
A)is more desirable to firms than disbursement float.
B)is totally eliminated by the installation of a lockbox system.
C)exists when a firm's available balance exceeds its book balance.
D)can be avoided by collecting payments electronically at the time of sale.
E)is eliminated by implementing a concentration banking system.
Q3) Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.
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Page 21
Chapter 20: Credit and Inventory Management
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Q1) Which two of the following are the key considerations for a seller who is establishing the length of the credit period being offered to a customer?
I.seller's operating cycle
II.customer's operating cycle
III.seller's inventory period
IV.customer's inventory period
A)I and II
B)II and III
C)III and IV
D)II and IV
E)I and IV
Q2) Which one of the following factors tends to favor longer credit periods?
A)high consumer demand
B)lower priced merchandise
C)increased credit risk
D)merchandise with low collateral value
E)increased competition
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22
Chapter 21: International Corporate Finance
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Q1) The forward rate market is dependent upon:
A)current forward rates exceeding current spot rates.
B)current spot rates exceeding current forward rates over time.
C)current spot rates equaling current forward rates, on average, over time.
D)forward rates equaling the actual future spot rates on average over time.
E)current spot rates equaling the actual future spot rates on average over time.
Q2) Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?
A)unbiased forward rates condition
B)uncovered interest parity
C)international Fisher effect
D)purchasing power parity
E)interest rate parity
Q3) Which one of the following names matches the country where the bond is issued?
A)Empire: United Kingdom
B)Western: United States
C)Samurai: China
D)Bulldog: France
E)Rembrandt: Netherlands
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Assume you are an overconfident manager.You are most apt to do which one of the following more so than you would if you were not overconfident?
A)research a project more thoroughly before committing funds to commence it
B)accept risky projects that turn out to be less profitable than you expected
C)wait until new technology proves its worth before incorporating it into your firm's operations
D)avoid mergers and acquisitions
E)invest excess company cash more conservatively than your peers at other firms
Q2) You are employed as a commission-based sales clerk for a cosmetics retail store.You know that on average,exactly 50 percent of the customers that enter your store will make at least one purchase.Thus far this morning,you have waited on eight customers without making a single sale.You are convinced that the next customer you wait on will buy something.This belief is known as:
A)aversion to ambiguity.
B)the law of small numbers.
C)anchoring and adjusting.
D)gambler's fallacy.
E)false consensus.
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Chapter 23: Enterprise Risk Management
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Q1) Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?
A)setting a permanent price at which a commodity will be traded
B)setting the price at the minimum spot price during a given period of time
C)setting the price equal to the spot price on the delivery date
D)using the average market price over a given period of time
E)setting the contract price equal to some percentage, less than 100 percent, of the market price on any given day
Q2) You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?
A)buying a call
B)selling a call
C)buying a put
D)selling a put
Q3) What are the primary motives for a hedger and a speculator in the derivatives market?
If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.
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Page 25
Chapter 24: Options and Corporate Finance
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Q1) A bond with 10 detachable warrants has just been offered for sale at $1,000.The bond matures in 12 years and has an annual coupon of $80.Each warrant gives the owner the right to purchase two shares of stock in the company at $14 per share.Ordinary bonds (with no warrants)of similar quality are priced to yield 11 percent.What is the value of one warrant?
A)$7.00
B)$13.58
C)$14.00
D)$16.67
E)$19.48
Q2) Rackin Pinion Corporation's assets are currently worth $1,260.In one year,they will be worth either $1,200 of $1,610.The risk-free interest rate is 5 percent.Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200.What is the current value of the firm's debt?
A)$60.00
B)$114.14
C)$1,142.86
D)$1,263.19
E)$1,504.20
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Page 26
Chapter 25: Option Valuation
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Q1) What is the value of d<sub>2</sub> given the following information on a stock?
\[\begin{array} { l l }
\text { Stock price } & \$ 19.20 \\
\text { Exercise price } & \$ 15.00 \\
\text { Time to expiration } & 9 \text { months } \\
\text { Risk-free rate } & 3.75 \text { percent } \\
\text { Standard deviation } & 58 \text { percent } \\
\mathrm { d } _ { 1 } & 0.63355
\end{array}\]
A)0.1218
B)0.1225
C)0.1313
D)0.1335
E)0.1340
Q2) The Black-Scholes option pricing model can be used for:
A)American options but not European options.
B)European options but not American options.
C)call options but not put options.
D)put options but not call options.
E)both zero coupon bonds and coupon bonds.
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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) An auto maker recently acquired a windshield manufacturer.Which type of an acquisition was this?
A)horizontal
B)longitudinal
C)conglomerate
D)vertical
E)indirect
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.
Q4) Identify the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Chapter 27: Leasing
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Sample Questions
Q1) Fireplaces and More is considering the purchase of a delivery truck costing $27,000.The truck will be used for 5 years and then it will be worthless.The financing rate for the purchase is 7.5 percent and the corporate tax rate is 32 percent.The firm uses straight-line depreciation.What is the break-even lease payment amount?
A)$6,655
B)$7,148
C)$7,546
D)$8,038
E)$8,254
Q2) Northern Lights is trying to decide whether to lease or buy some new equipment.The equipment costs $54,000,has a 5-year life,and will be worthless after the 5 years.The company has a tax rate of 34 percent,a cost of borrowed funds of 8.75 percent,and uses straight-line depreciation.The equipment can be leased for $14,100 a year.What is the amount of the annual depreciation tax shield?
A)$3,672
B)$5,878
C)$6,936
D)$8,407
E)$10,200
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