Managerial Finance Test Bank
Course Introduction
Managerial Finance explores the fundamental principles and practices underlying financial decision-making in businesses. The course covers key topics such as financial analysis, planning and control, working capital management, capital budgeting, risk assessment, and valuation. Students learn how to apply financial concepts and analytical tools to evaluate investment opportunities, manage financial resources, and develop strategies to maximize firm value. Emphasis is placed on real-world problem-solving and ethical considerations in managerial finance, preparing students for effective financial management roles within organizations.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements is NOT CORRECT
A) when a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held."
B) "going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares.
C) when stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
D) publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the sec.
E) it is possible for a firm to go public and yet not raise any additional new capital at the time.
Answer: B
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Chapter 2: Risk and Return-Part I
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Sample Questions
Q1) We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.
A)True
B)False
Answer: False
Q2) Calculate the required rate of return for Everest Expeditions Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.
A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%
Answer: D
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Risk and Return-Part II
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Sample Questions
Q1) Assume an economy in which there are three securities: Stock A with rA = 10% and A = 10%; Stock B with rB = 15% and B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?
A) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (sd) of approximately 10%.
B) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (sd) that is between 10% and 20%.
C) the investor's risk/return indifference curve will be tangent to the cml at a point where the expected return is in the range of 7% to 10%.
D) since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
E) the expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (sd) of approximately 20%.
Answer: B
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Chapter 4: Bond Valuation
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Sample Questions
Q1) Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.
A) 4,228
B) 4,337
C) 4,448
D) 4,562
E) 4,676
Q2) Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
A)True
B)False
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Page 6
Chapter 5: Financial Options
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Q1) 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
Q2) 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
Q3) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.
A)True
B)False
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7
Chapter 6: Accounting for Financial Management
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Sample Questions
Q1) TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000.
Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?
A) $383
B) $425
C) $468
D) $514
E) $566
Q2) Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ
A) $27.50
B) $28.88
C) $30.32
D) $31.83
E) $33.43
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Page 8
Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) Refer to the data for Pettijohn Inc.What is the firm's ROA?
A) 2.70%
B) 2.97%
C) 3.26%
D) 3.59%
E) 3.95%
Q2) Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?
A) if the interest rate the companies pay on their debt is less than their basic earning power (bep), then company heidee will have the higher roe.
B) given this information, leaudy must have the higher roe.
C) company leaudy has a higher basic earning power ratio (bep).
D) company heidee has a higher basic earning power ratio (bep).
E) if the interest rate the companies pay on their debt is more than their basic earning power (bep), then company heidee will have the higher roe.
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Page 9
Chapter 8: Basic Stock Valuation
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Sample Questions
Q1) McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
A) $26.77
B) $27.89
C) $29.05
D) $30.21
E) $31.42
Q2) A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
A) $16.28
B) $16.70
C) $17.13
D) $17.57
E) $18.01
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) A firm's AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
Q2) A firm's profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout ratio is 40%. If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require some external financing.
A)True
B)False
Q3) The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) a manager/shareholder agency conflict arises when the manager's actions aren't in the company's best interest.
B) an agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
C) an agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
D) a quarter-end bonus is an example of a nonpecuniary benefit.
E) a company's matching contribution to a retirement plan is a nonpecuniary benefit.
Q2) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True B)False
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Chapter 11: Determining the Cost of Capital
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Q1) Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?
A) 8.72%
B) 9.08%
C) 9.44%
D) 9.82%
E) 10.22%
Q2) For capital budgeting and cost of capital purposes, the firm should always consider reinvested earnings as the first source of capital-i.e., use these funds first because reinvested earnings have no cost to the firm.
A)True
B)False
Q3) The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
A)True
B)False
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Watts Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. \(\begin{array} { l c c c c c }
& r = 10.00 \% \\
\text { Year } &0& 1 & 2 & 3 & 4 \\
\text { Cash flows } & - \$ 850 & 300 & 320 & 340 & 360 \end{array}\)
A) 14.08%
B) 15.65%
C) 17.21%
D) 18.94%
E) 20.83%
Q2) The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are compared to one another. A)True B)False
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Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) The two cardinal rules that financial analysts should follow to avoid capital budgeting errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions.
A)True
B)False
Q2) Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.
A)True
B)False
Q3) Erickson Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation? A) 1.20
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Chapter 14: Real Options
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Q1) Refer to data for Steppingstone Incorporated. Based on the above information, what is the Z 90's expected net present value?
A)$6,678
B)$3,251
C) $15,303
D) $20,004
E) $45,965
Q2) Real options affect the size, but not the risk, of a project's expected cash flows.
A)True
B)False
Q3) Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
A)True
B)False
Q4) The option to abandon a project is a real option, but a call option on a stock is not a real option.
A)True
B)False
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Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.
A)True
B)False
Q2) Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
A) $240,000
B) $228,000
C) $216,600
D) $205,770
E) $0
Q3) The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.
A)True
B)False
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Chapter 16: Capital Structure Decisions
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Q1) Refer to the data for the Anson Jackson Court Company (AJC). What is AJC's current total market value and weighted average cost of capital?
A) $600,000; 7.5%
B) $600,000; 8.0%
C) $800,000; 7.0%
D) $800,000; 7.5%
E) $800,000; 8.0%
Q2) A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.
A)True
B)False
Q3) It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.
A)True
B)False
Q4) Whenever a firm borrows money, it is using financial leverage.
A)True
B)False
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to the data for NorthWest Water (NWW). The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place?
A) $6,480
B) $7,200
C) $8,000
D) $8,800
E) $9,680
Q2) MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.
A)True
B)False
Q3) In a world with no taxes, MM show that a firm's capital structure does not affect the firm's value. However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.
A)True
B)False
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Page 19
Chapter 18: Initial Public Offerings-Investment Banking: and Financial Restructuring
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Q1) Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
Q2) Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another.
A)True
B)False
Q3) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
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Chapter 19: Lease Financing
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Q1) Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.
A)True
B)False
Q2) If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
A)True
B)False
Q3) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
Q4) A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.
A)True
B)False
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Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, which is desirable for liquidity portfolios, and they also benefit from the 70% tax exemption on preferred dividends received.
A)True
B)False
Q2) The common stock of Southern Airlines currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2025. What is the conversion value of the bond?
A) $707.33
B) $744.56
C) $783.75
D) $825.00
E) $866.25
Q3) A convertible debenture can never sell for more than its conversion value or less than its bond value.
A)True B)False
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
A) 10.86%
B) 12.07%
C) 13.41% D) 14.90%
E) 16.55%
Q2) Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?
A) take steps to reduce the dso.
B) start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
C) sell common stock to retire long-term bonds.
D) sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
E) increase average inventory without increasing sales.
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Page 23
Chapter 22: Providing and Obtaining Credit
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Q1) A firm's credit policy consists of which of the following items?
A) credit period, cash discounts, credit standards, collection policy.
B) credit period, cash discounts, receivables monitoring, collection policy.
C) cash discounts, credit standards, receivables monitoring, collection policy.
D) credit period, receivables monitoring, credit standards, collection policy.
E) credit period, cash discounts, credit standards, receivables monitoring.
Q2) Refer to Exhibit Van Doren. What are the incremental pre-tax profits from this proposal?
A) $283,750
B) $250,500
C) $303,250
D) $493,750
E) $288,250
Q3) DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.
A)True
B)False
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Chapter 23: Other Topics in Working Capital Management
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Q1) Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180. In addition, the total estimated cash costs (transfers and carrying cost) for the firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?
A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%
Q2) For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.
A)True B)False
Q3) A just-in-time system is designed to stretch accounts payable as long as possible. A)True B)False
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Chapter 24: Enterprise Risk Management
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Q1) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A) risk management can help a firm maintain its optimal capital budget.
B) risk management can reduce the expected costs of financial distress.
C) risk management can help firms minimize taxes.
D) risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
E) risk management can increase debt capacity.
Q2) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
Q3) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. What is the implied annual interest rate inherent in the futures contract?
A) 6.86%
B) 7.22%
C) 7.60%
D) 8.00%
E) 8.40%
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Page 26
Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
Q2) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments, a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
Q3) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
Q4) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
A)True
B)False
Q2) Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.
A)True
B)False
Q3) Which of the following statements is most CORRECT
A) a defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
B) acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
C) cash payments are used in takeovers but never in mergers.
D) managers often are fired in takeovers, but never in mergers.
E) if a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.
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Chapter 27: Multinational Financial Management
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Q1) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q2) When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
Q3) Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
A) $14.79
B) $63.00
C) $74.55
D) $85.88
E) $147.88
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Chapter 28: Time Value of Money
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Q1) Which of the following statements is CORRECT?
A) if cf0 is positive and all the other cfs are negative, then you cannot solve for i.
B) if you have a series of cash flows, each of which is positive, you can solve for i, where the solution value of i causes the pv of the cash flows to equal the cash flow at time 0.
C) if you have a series of cash flows, and cf0 is negative but each of the following cfs is positive, you can solve for i, but only if the sum of the undiscounted cash flows exceeds the cost.
D) to solve for i, one must identify the value of i that causes the pv of the positive cfs to equal the absolute value of the pv of the negative cfs. this is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
E) if you solve for i and get a negative number, then you must have made a mistake.
Q2) Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
A)True
B)False
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Chapter 29: Basic Financial Tools: A review
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Q1) The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.
A)True
B)False
Q2) Connolly Co.'s expected year-end dividend is D<sub>1</sub> = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?
A) $37.52
B) $39.40
C) $41.37
D) $43.44
E) $45.61
Q3) An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
A)True
B)False
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Chapter 30: Pension Plan Management
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Q1) Which of the following statements about defined contribution plans is incorrect?
A) in general, employees can choose the investment vehicle under a defined contribution plan. thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.
B) in a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.
C) defined benefit plans are used more often by large corporations than by small companies.
D) the pbgc insures a portion of pension benefits.
E) a defined contribution plan places the risk of poor pension portfolio performance on the employee.
Q2) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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Q1) Which of the following statements about project risk analysis in not-for-profit firms is incorrect?
A) a project's corporate beta measures the contribution of the project to the overall corporate risk of the firm.
B) a project's corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.
C) a project's corporate beta is defined as ( p/ f)rpf, where p is the standard deviation of the project's returns, f is the standard deviation of the firm's returns, and rpf is the correlation among the two sets of returns.
D) in practice, it is usually difficult, if not impossible, to directly measure a project's corporate risk, so project risk analysis typically focuses on stand-alone risk.
E) the market risk of a project is not relevant to not-for-profit firms.
Q2) Since not-for-profit firms do not pay taxes, they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
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