Managerial Finance Study Guide
Questions
Course Introduction
Managerial Finance focuses on the principles and techniques that managers use to make financial decisions within organizations. The course covers topics such as financial statement analysis, budgeting, working capital management, capital structure, and investment appraisal. Students learn how to apply financial theory to real-world business scenarios, assess risk and return, and use financial tools to enhance organizational value. Emphasis is placed on using quantitative and qualitative information to make informed decisions that align with corporate strategy and financial objectives.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) With the creation of Internet trading, trading through brokers became less profitable for investors mainly because of the higher fees.
A)True
B)False
Answer: False
Q2) From the 2017 Tax Cuts and Job Act, a reason to choose sole proprietorship, partnership or corporation as a form of organization is:
A) the number of people in the organization.
B) the liability of the owner.
C) the complexity involved with state and federal regulations and taxation.
D) all of the above.
Answer: D
Q3) How investors handle risk is an important topic that usually only economists observe.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) Cash and cash equivalents are considered anything that can convert to cash within one year.
A)True
B)False
Answer: False
Q2) Price-earnings (P/E) ratio is influenced by all of the following BUT
A) the business risk the firm takes on.
B) earnings per share.
C) quality of management.
D) All of the options are true.
Answer: D
Q3) Depreciation is an accrual accounting entry that does not affect the cash account so it needs to be adjusted for when using the indirect method of the Cash Flow Statement.
A)True
B)False
Answer: True
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Chapter 3: Financial Analysis
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Sample Questions
Q1) A firm has operating profit of $210,000 after deducting fixed lease payments of $30,000. The fixed interest expense is $50,000. What is the firm's fixed charge coverage ratio?
A) 6.00x
B) 2.33x
C) 2.00x
D) 3.00x
Answer: D
Q2) LIFO and FIFO are two ways that companies following the generally accepted accounting principles value their inventory. One method may be preferred over the other during inflationary time periods, which results in different profits, even though both methods are legal to use.
A)True
B)False
Answer: True
Q3) A company can improve its return on equity (ROE) by changing its capital structure. A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) The longer the financial forecast (i.e. 5 to 10 years), the better for the company.
A)True
B)False
Q2) The generation of sales and profits does not necessarily ensure there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
Q3) Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level.
A)True
B)False
Q4) Compared to a firm operating at 100% of capacity, firms that are operating at less than full capacity will require greater new external funds when sales increase.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Combined leverage is concerned with the relationship between
A) changes in EBIT and changes in EPS.
B) changes in volume and changes in EPS.
C) changes in volume and changes in EBIT.
D) changes in EBIT and changes in net income.
Q2) The degree of financial leverage measures the percentage change in earnings per share (EPS) for every percentage change in earnings before interest and taxes (EBIT).
A)True
B)False
Q3) To determine the break-even point for a company, you divide the contribution margin by the fixed costs.
A)True
B)False
Q4) Contribution margin is equal to fixed costs minus variable costs.
A)True
B)False
Q5) As the contribution margin rises, the break-even point goes down.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Use of long-term financing and the carrying of highly liquid assets is a high-risk combination.
A)True
B)False
Q2) Cash, accounts receivables, and inventory all move monthly in the same direction under level production.
A)True
B)False
Q3) Normally, permanent current assets should be financed by
A) long-term funds.
B) short-term funds.
C) borrowed funds.
D) internally generated funds.
Q4) As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Just-in-time inventory systems can leave manufacturers empty-handed if suppliers can't keep up with product growth rates.
A)True
B)False
Q2) Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis.
A)True
B)False
Q3) A banker's acceptance
A) is a draft drawn on a bank and paid by that bank when presented to it.
B) may be accepted by the bank for future payment.
C) can be traded in a relatively liquid market until maturity.
D) All of the options are true.
Q4) The three primary policy variables to consider when extending credit include all of the following except A) credit standards.
B) the level of inflation.
C) the terms of trade.
D) collection policy.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) A compensating balance will be lower in periods of tight money than in periods of credit easing.
A)True
B)False
Q2) Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of $2,000. It has average daily sales of $3,000, and collects accounts in 25 days. What is its net credit position?
A) $15,000
B) $1,000
C) ($1,000)
D) ($15,000)
Q3) The extent to which inventory financing may be used depends on the A) marketability of pledged goods.
B) price stability of goods.
C) perishability of goods.
D) all of these options are correct.
Q4) The largest source of short-term funds for most companies is suppliers (trade credit).
A)True
B)False
Page 10
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 10 equal annual payments. What are John's annual payment amounts?
A) $15,000
B) $20,380
C) $15,445
D) $11,453
Q2) Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment and begins investing one year from now?
A) $566,400
B) $681,550
C) $150,000
D) $162,000
Q3) The future value of an ordinary annuity assumes that the payments are received at the end of the year and that the last payment does not compound.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) An increase in the yield of a bond compared to the coupon rate would be associated with an increase in the price of a bond.
A)True
B)False
Q2) Star Corp. issued bonds two years ago with a 7% coupon rate. The bonds are currently trading for $928 in the market. Which of the following most likely has occurred since the time of issue?
A) Interest yields decreased
B) Inflation increased
C) Risk decreased
D) Real rates of return decreased
Q3) An increase in the riskiness of a particular security would NOT affect
A) the risk premium for that security.
B) the premium for expected inflation.
C) the total required return for the security.
D) investors' willingness to buy the security.
Q4) When inflation rises, preferred stock prices fall.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm's debt-to-equity ratio varies at times because
A) a firm will want to sell common stock when prices are high and bonds when interest rates are low.
B) a firm will want to take advantage of timing its fund-raising in order to minimize costs over the long run.
C) the market allows some leeway in the debt-to-equity ratio before penalizing the firm with a higher cost of capital.
D) All of these are accurate statements.
Q2) There may be a change in the marginal cost of capital curve when
A) the tax rate charged to investors changes.
B) the firm has exhausted its supply of retained earnings.
C) the firm is limited in the amount of depreciation it can take.
D) the tax rate charged to investors changes and the firm has exhausted its supply of retained earnings.
Q3) Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital.
A)True
B)False
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) The ________ assumes returns are reinvested at the cost of capital.
A) payback method
B) internal rate of return method
C) net present value method
D) capital rationing procedure
Q2) Under MACRS depreciation, there are no tax credits for the purpose of calculating the base for depreciation expenses.
A)True
B)False
Q3) The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's combined tax rate is 25%, what is the cash flow from the project in year 1?
A) $4,521
B) $15,100
C) $23,287
D) $16,667
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Which of the following combinations of investments would provide the firm with the highest negative correlation?
A) Fabric firm and retail firm
B) Telecommunications firm and Internet firm
C) Soft drink manufacturer and health care firm
D) Airline company and gasoline manufacturer
Q2) The standard deviation can be defined as
A) \(\sqrt { \sum ( D - D ) ^ { 2 } P }\)
B) \(\sqrt { \sum ( D - D ) P }\)
C) \(\sqrt { ( D - D ) ^ { 2 } P }\)
D) \(\sqrt { ( D - D ) P }\)
Q3) If three investment alternatives all have some degree of risk and different expected returns, which of the following measures could best be used to rank the risk levels of the projects?
A) The coefficient of correlation
B) The coefficient of variation
C) The standard deviation of returns
D) The net present value
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15
Chapter 14: Capital Markets
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Sample Questions
Q1) The emergence of trading via ECNs has A) provided a unique advantage not offered by the NYSE.
B) lowered the cost of trading.
C) made trading more difficult for insider traders.
D) all of these options are true.
Q2) The NASDAQ Small-Cap Market is composed of smaller regionally based companies that often remain controlled by their founders so that fewer shares are available to the public.
A)True
B)False
Q3) Capital markets are becoming increasingly international as investors and issuers seek out the best risk-return opportunities.
A)True
B)False
Q4) In times of recession, a company's retained earnings may decline as a percent of internal funds.
A)True
B)False
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Page 16
Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) When stock is exchanged in the NYSE that is considered secondary offerings, while when stock is exchanged during an initial public offering that is considered primary offerings.
A)True
B)False
Q2) The investment banking industry has shifted its emphasis from mergers and acquisitions to underwriting new securities.
A)True
B)False
Q3) Shelf registration requires the firm to file one comprehensive registration statement, which outlines the company's indefinite financial plan.
A)True
B)False
Q4) The term "underwriter" is synonymous with risk-taker or risk-bearer.
A)True
B)False
Q5) A major trend of privatization in foreign markets began after 1984.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) A capital (or "financing") lease usually calls for an annual expense deduction equal to the lease payment.
A)True
B)False
Q2) Which of the following bonds offers the most security to the bondholder?
A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bonds
D) Income bonds
Q3) A Eurobond is a
A) bond payable in the investor's currency but sold outside the borrower's country.
B) bond payable in the investor's currency but sold inside the borrower's country.
C) bond payable in the borrower's currency and sold inside the borrower's country.
D) bond payable in the borrower's currency but sold outside the borrower's country.
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18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Under normal operating conditions, the board of directors is elected by
A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the options are true.
Q2) If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes more attractive than normal, relative to a debt issuance.
A)True
B)False
Q3) Due to the 2017 Tax Cuts and Jobs Act, for companies owning between 20 and 80 percent of another company, any dividends received from that company are taxed at 35 percent, however most companies don't fall into this category.
A)True
B)False
Q4) Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The repurchase of a corporation's own stock will generally have a negative impact on the stock market price.
A)True
B)False
Q2) Stability of dividends is not important to stockholders, especially to those that rely on fixed income.
A)True B)False
Q3) A stock split involves a reduction in the firm's retained earnings account.
A)True B)False
Q4) The 2017 Tax Act reduced the corporate tax rate to 21% and instituted a territorial tax system that taxes income in the country where income is generated.
A)True B)False
Q5) In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate. A)True B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Warrants are considered in-the-money when the exercise price is above the current market price.
A)True
B)False
Q2) Warrants are similar to convertible debt in that they give the warrant holder the right to acquire common stock.
A)True
B)False
Q3) Forced conversion refers to the corporation calling a convertible bond. This is ideal when the market price of the stock is above the conversion price by more than a small percentage.
A)True
B)False
Q4) The downside risk is defined as the difference between the market price and the floor value of a bond.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Which one of the following types of mergers is most likely to lead to diversification benefits?
A) A horizontal merger
B) A vertical merger
C) A tax-free exchange
D) A conglomerate merger
Q2) Vertical integration usually represents acquisition of a competitor.
A)True
B)False
Q3) The "two-step buyout" procedure allows the acquiring firm to pay a lower total price than if a single offer is made.
A)True
B)False
Q4) In a merger, two or more companies are combined to form an entirely new entity.
A)True
B)False
Q5) Synergy is the greatest and most easily measured nonfinancial benefit in a merger.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) The International Finance Corporation (IFC) is
A) a unit of the World Bank charged with the responsibility of providing capital to multinational corporations and others involved in international trade.
B) a regulatory agency for international trade.
C) a private firm that provides accounts receivable financing to international firms.
D) a foreign affiliate of 10 major U.S. banks.
Q2) A tactic a country can use to promote cheap exports may be to deliberately pursue a policy of maintaining an undervalued currency.
A)True
B)False
Q3) When Country A's currency strengthens against Country B's, citizens of Country A will
A) pay less to buy Country B's products.
B) pay more to buy Country B's products.
C) pay more to buy domestically produced products.
D) not be affected by the change in their currency's value.
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