Managerial Finance Test Bank
Course Introduction
Managerial Finance focuses on the principles and techniques that managers use to make financial decisions within organizations. The course covers foundational topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Through real-world case studies and quantitative exercises, students learn to analyze financial information, forecast financial needs, evaluate investment opportunities, and develop strategies for maximizing firm value. Emphasis is placed on the practical application of financial concepts in decision-making processes, equipping future managers with the skills required for effective financial planning and control.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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16 Chapters
1341 Verified Questions
1341 Flashcards
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Chapter 1: An Overview of Financial Management and the Financial Environment
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41 Verified Questions
41 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
B) Corporations face fewer regulations than sole proprietorships.
C) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
D) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
E) If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.
Answer: D
Q2) One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
A)True
B)False
Answer: True
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3
Chapter 3: Analysis of Financial Statements
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104 Flashcards
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Sample Questions
Q1) Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?
A) 2.08%
B) 2.32%
C) 2.57%
D) 2.86%
E) 3.14%
Answer: D
Q2) It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
A)True
B)False
Answer: False
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Page 4
Chapter 4: Time Value of Money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
Q2) Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.
A)True
B)False
Q3) Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.
A)True
B)False
Q4) Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
A)True
B)False
Q5) Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
A)True
B)False
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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101 Flashcards
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Sample Questions
Q1) As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
A)True
B)False
Q2) Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?
A) 6.39%
B) 6.72%
C) 7.08%
D) 7.45%
E) 7.82%
Q3) The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.
A)True
B)False
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6
Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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146 Verified Questions
146 Flashcards
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Sample Questions
Q1) The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.
A)True
B)False
Q2) Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P has 50% invested in Stock A and 50% invested in B. Which of the following statements is CORRECT?
A) Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
B) Portfolio P has more market risk than Stock A but less market risk than B.
C) Stock A should have a higher expected return than Stock B as viewed by the marginal investor.
D) Portfolio P has a coefficient of variation equal to 2.5.
E) Portfolio P has a standard deviation of 25% and a beta of 1.0.
Q3) Diversification will normally reduce the riskiness of a portfolio of stocks.
A)True
B)False
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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91 Flashcards
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Sample Questions
Q1) The required return for Williamson Heating's stock is 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D<sub>4</sub> = $1.00(1.30)<sup>4</sup> = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X?
A) 5.17%
B) 5.44%
C) 5.72%
D) 6.02%
E) 6.34%
Q2) According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
A)True
B)False
Q3) The free cash flow valuation model cannot be used unless a company doesn't pay dividends.
A)True B)False
Page 8
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Chapter 8: Financial Options and Applications in Corporate Finance
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28 Verified Questions
28 Flashcards
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Sample Questions
Q1) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
A) Put
B) Naked
C) Covered
D) Out-of-the-money
E) In-the-money
Q2) If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.
A)True
B)False
Q3) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method, the dividend growth method, and the bond-yield-plus-risk-premium method. However, only the dividend growth method is widely used in practice.
A)True
B)False
Q2) As the winner of a contest, you are now CFO for the day for Maguire Inc. and your day's job involves raising capital for expansion. Maguire's common stock currently sells for $45.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of common from reinvested earnings?
A) 0.09%
B) 0.19%
C) 0.37%
D) 0.56%
E) 0.84%
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Page 10
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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108 Flashcards
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Sample Questions
Q1) When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
B) One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.
C) The higher the cost of capital, the shorter the discounted payback period.
D) The MIRR method assumes that cash flows are reinvested at the crossover rate.
E) The MIRR and NPV decision criteria can never conflict.
Q3) A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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78 Flashcards
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Sample Questions
Q1) Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
A) Shipping and installation costs.
B) Cannibalization effects.
C) Opportunity costs.
D) Sunk costs that have been expensed for tax purposes.
E) Changes in net working capital.
Q2) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects.
A)True
B)False
Q3) A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal.
A)True
B)False
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Chapter 12: Financial Planning and Forecasting Financial Statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
B) Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated.
C) The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
D) The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.
E) Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
Q2) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
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Page 13
Chapter 13: Corporate Valuation, Value-Based
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q3) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q4) A poison pill is also known as a corporate restructuring.
A)True
B)False
14
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) Which of the following statements is NOT correct?
A) After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
B) Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued.
C) Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends.
D) Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
E) Stock repurchases can be used by a firm as part of a plan to change its capital structure.
Q2) If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.
A)True B)False
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
A)True
B)False
Q2) Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Bailey's beta be if it used no debt, i.e., what is its unlevered beta?
A) 0.64
B) 0.67
C) 0.71
D) 0.75
E) 0.79
Q3) Whenever a firm borrows money, it is using financial leverage. A)True
B)False
Q4) The Miller model begins with the MM model with corporate taxes and then adds personal taxes.
A)True
B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Which of the following statements is NOT CORRECT?
A) Accruals are "free" in the sense that no explicit interest is paid on these funds.
B) A conservative approach to working capital management will result in most, if not all, permanent current operating assets being financed with long-term capital.
C) The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
D) Bank loans generally carry a higher interest rate than commercial paper.
E) Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
Q2) Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment. Marketable securities held while awaiting reinvestment are not available for liquidity purposes.
A)True
B)False
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Page 17
Chapter 17: Multinational Financial Management
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Sample Questions
Q1) If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar buy?
A) 0.50
B) 0.71
C) 1.00
D) 1.41
E) 2.81
Q2) A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
A) $396
B) $243
C) $0
D) $243
E) $638
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Page 18