Managerial Finance Test Bank
Course Introduction
Managerial Finance explores the principles and practices necessary for effective financial management within organizations. The course covers essential topics such as financial analysis, planning, and forecasting, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students will learn to interpret financial data, evaluate investment opportunities, and make sound financial decisions to maximize shareholder value. Practical case studies and real-world examples provide a foundation for understanding the role of finance in strategic management and day-to-day business operations.
Recommended Textbook
Fundamentals of Corporate Finance 4th Edition Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
A) $105,875
B) $127,050
C) $148,225
D) $84,700
Answer: A
Q2) What is the principal guiding factor for the financial manager of a firm?
Answer: Maximizing stockholder wealth is the principal guiding factor for a firm's financial manager.
Q3) Which of the following is NOT a role of financial institutions?
A) moving funds from savers to borrowers
B) spreading out risk-bearing
C) printing money for borrowers
D) moving funds though time
Answer: C
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Page 3
Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Which of the following is NOT an operating expense?
A) interest expense
B) depreciation and amortization
C) selling, general, and administrative expenses
D) research and development
Answer: A
Q2) In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
A)True
B)False
Answer: False
Q3) In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
A) $330,000
B) $660,000
C) $264,000
D) $462,000
Answer: A
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Chapter 3: Time Value of Money: an Introduction
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Sample Questions
Q1) You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?
A) No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360.
B) No, because the market for a used XBOX 360 is a competitive market.
C) Yes, because the market for a used XBOX 360 is a competitive market.
D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
Answer: A
Q2) Whenever a good trades in a competitive market, the ________ determines the value of the good.
A) supply
B) price
C) demand
D) cost
Answer: B
Q3) Explain why a dollar today is worth more than a dollar tomorrow.
Answer: A dollar today can be invested to earn interest, which will make it worth more than a dollar tomorrow.
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?
A) $125,000.00
B) $200,000.00
C) $300,000.00
D) $250,000.00
Q2) Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?
A) $58,334
B) $93,334
C) $116,667
D) $70,000
Q3) Can we apply the growing perpetuity equation for negative growth as well?
Q4) Cash flows from an annuity occur every year in the future.
A)True
B)False
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Chapter 5: Interest Rates
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Q1) Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770. How much was the loan amount for this extension?
A) $33,436
B) $40,123
C) $46,810
D) $53,497
Q2) What is the net present value (NPV) of an investment that costs $2,500 and pays $1,000 at the end of one, three, and five years?
Q3) When computing a present value, which of the following is TRUE?
A) You should adjust the discount rate to match the interval between cash flows.
B) You should adjust the future value to match the present value.
C) You should adjust the time period to match the present value.
D) You should adjust the cash flows to match the time period of the discount rate.
Q4) A 12% APR with bimonthly compounding is equivalent to an EAR of ________.
A) 11.98%
B) 12.50%
C) 12.00%
D) 12.62%
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Chapter 6: Bonds
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Q1) A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750. What is the yield to maturity of this bond?
A) 1.936%
B) 0.968%
C) 62.500%
D) 75.000%
Q2) What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
Q3) Which of the following bonds is trading at a premium?
A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually
B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually
C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually
D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Which of the following is a limitation of the dividend-discount model?
A) It cannot handle negative growth rates.
B) It requires accurate dividend forecasts, which is not possible.
C) It requires that the growth rate always be higher than the required rate of return, which is not realistic.
D) It does not consider past earnings and performance.
Q2) Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital?
A) 7.17%
B) 8.60%
C) 14.33%
D) 17.91%
Q3) The Valuation Principle states that the value of a stock is equal to the present value (PV) of both the dividends and future sale price of that stock which the investor will receive.
A)True
B)False
Q4) What role do dividends play in stock investing?
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Chapter 8: Investment Decision Rules
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Q1) A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist?
A) Hoist A, since it has a greater present value (PV).
B) Hoist B, since it has a greater present value (PV).
C) Hoist A, since it has a greater equivalent annual annuity.
D) Hoist B, since it has a greater equivalent annual annuity.
Q2) The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. If her discount rate is 6%, should she accept the project?
A) Yes, because the NPV is positive at that rate.
B) No, because the NPV is negative at that rate.
C) No, because the NPV is positive at that rate.
D) Cannot be determined from the information given.
Q3) What is a safe method to use when confronted with mutually exclusive projects?
Q4) What is the decision criteria using internal rate of return (IRR) rule?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) Which of the following costs would you consider when making a capital budgeting decision?
A) sunk cost
B) opportunity cost
C) interest expense
D) fixed overhead cost
Q2) An exploration of the effect of changing multiple project parameters on net present value (NPV) is called ________.
A) scenario analysis
B) internal rate of return (IRR) analysis
C) accounting break-even analysis
D) sensitivity analysis
Q3) What are the most difficult parts of capital budgeting?
Q4) How do we handle interest expense when making a capital budgeting decision?
Q5) If available, should MACRS be preferred to straight-line depreciation?
Q6) Why does the option to abandon a project have value?
Q7) How are the taxes paid under MACRS different from that paid under straight-line depreciation?
Q8) What are project externalities?
Q9) What is the most important function of sensitivity analysis? Page 11
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Chapter 10: Stock Valuation: a Second Look
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Q1) Which is the best valuation technique when using comparables?
Q2) An investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. Which of the following is assumed to be the same for these firms?
A) P/E
B) annual growth rates
C) payout rates
D) all of the above
Q3) On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement?
A) The price of the stock would rise.
B) Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high.
C) Investors would increase their forecast of future cash flows in that firm.
D) Investors would revise their estimates of the net present value (NPV) of the firm.
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13
Chapter 11: Risk and Return in Capital Markets
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Q1) Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?
A) $119.43
B) $103.14
C) $108.57
D) $114.00
Q2) The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007's returns?
A) -12.5%, 17.5%
B) -15%, 25%
C) -25%, 35%
D) -25%, 25%
Q3) Investors should earn a risk premium for bearing unsystematic risk.
A)True
B)False
Q4) What is the diversification achieved by an investor if he invests in Exxon Mobil, Dell, and Bank of America?
Q5) What are the two components of realized return from a stock investment?
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) Which of the following statements is FALSE?
A) Stock returns will tend to move together if they are affected similarly by economic events.
B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries.
C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.
D) With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more volatile the portfolio will be.
Q2) The volatility of an individual stock is more than the volatility of a well-diversified portfolio of stocks.
A)True
B)False
Q3) How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?
Q4) In a two asset portfolio, what happens to the portfolio weight of the better performing asset?
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Chapter 13: The Cost of Capital
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Q1) Assume Time Warner shares have a market capitalization of $40 billion. The company is expected to pay a dividend of $0.25 per share and each share trades for $40. The growth rate in dividends is expected to be 7% per year. Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 9%. If the firm's tax rate is 40%, what is the WACC?
A) 5.85%
B) 6.54%
C) 6.88%
D) 7.57%
Q2) Outstanding debt of Home Depot trades with a yield to maturity of 7%. The tax rate of Home Depot is 35%. What is the effective cost of debt of Home Depot?
A) 4.55%
B) 5.01%
C) 5.46%
D) 5.69%
Q3) The fact that the interest paid on debt is a tax-deductible expense increases the cost of debt financing.
A)True
B)False
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Page 16
Chapter 14: Raising Equity Capital
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Sample Questions
Q1) The announcement of an SEO usually raises a stock's price.
A)True
B)False
Q2) Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?
A) The price of the stock will be less than $15 at the close of the first trading day.
B) The cost of the IPO to Dusty will be about $7 million.
C) The stock will perform very well in the three to five years after the issue.
D) None of the above is likely to happen.
Q3) Which of the following statements is FALSE?
A) In a rights offer, a firm offers the new shares only to existing shareholders.
B) Secondary shares are shares sold by existing shareholders, including the company's founder.
C) If a firm's management is concerned that its equity may be underpriced in the market, by using a rights offering, the firm can continue to issue equity without imposing a loss on its current shareholders.
D) In the United States, most offers are rights offers.
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Page 17
Chapter 15: Debt Financing
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Q1) A company issues a 10-year, callable bond at par with 8% annual coupon payments. The bond can be called at par in one year after issue or any time after that on a coupon payment date. The call price is $104 per $100 of face value. What is the yield to call if this bond is called in one year?
A) 7%
B) 12%
C) 10%
D) 4%
Q2) Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?
A) a debenture
B) a mortgage bond
C) an asset-backed bond
D) a foreign bond
Q3) Which of the following is a type of call provision?
A) sinking fund
B) balloon payment
C) conversion feature
D) indenture
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Page 18
Chapter 16: Capital Structure
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Q1) Agency costs arise when ________.
A) there are high labor costs
B) input costs are higher than interest costs
C) interest costs exceed dividend payments
D) conflicts of interest exist between stakeholders
Q2) A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $6000 at 7%, what is the return on levered equity?
A) 35%
B) 52%
C) 43%
D) 61%
Q3) A project will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?
A) $20,000
B) $16,000
C) $24,000
D) more information needed
Q4) What role do industries play in the capital structure choice for a firm?
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Chapter 17: Payout Policy
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Q1) Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?
A) A spin-off increases the transaction costs associated with selling the subsidiary.
B) Shareholders must immediately pay capital gains taxes versus ordinary income taxes on the value of the spin-off.
C) A spin-off guarantees a lower cost of capital.
D) The spin-off is not taxed as a cash distribution.
Q2) When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n) ________.
A) open market repurchase
B) tender offer
C) targeted repurchase
D) greenmail
Q3) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Q4) What is the general trend of dividend payments of U.S. corporations over the last few decades?
Q5) What are the ways in which a firm can retain its free cash flow?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) Assuming that Ideko has an EBITDA multiple of 8.5, then the continuation EV/Sales ratio of Ideko in 2015 is closest to ________.
A) 1.7
B) 1.9
C) 1.6
D) 1.8
Q2) Forecasting a balance sheet with percent of sales method requires two passes-a first pass to determine financing needs and a second pass that shows the sources and amounts of financing.
A)True
B)False
Q3) LG Inc. has done a long-term forecast of its balance sheet. The projected total assets for the next year are $200 million. The current liabilities are projected to be $100 million and other long term liabilities are $70 million. How much net new financing is needed in the following year?
A) $18 million
B) $22 million
C) $25 million
D) $30 million
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Chapter 19: Working Capital Management
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Q1) Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.
A)True
B)False
Q2) Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?
A) certificates of deposit
B) repurchase agreements
C) banker's acceptances
D) commercial paper
Q3) Working capital alters a firm's value by affecting its free cash flow.
A)True
B)False
Q4) Can a firm's cash cycle be longer than a firm's operating cycle?
Q5) What are the five C's of Credit?
Q6) What is credit period?
Q7) What are the advantages of holding inventory?
Q8) What are the costs of holding inventory?
Q9) What is a firm's cash cycle?
Q10) What is cash discount? Page 22
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Page 23
Chapter 20: Short-Term Financial Planning
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Q1) A firm issues six-month commercial paper with $500,000 face value and receives $488,000. What is the EAR the firm is paying for these funds?
A) 2.40%
B) 2.45%
C) 4.98%
D) 6.00%
Q2) What is single, end-of-period payment loan?
Q3) Matt's Machine Company has borrowed $10 million for four months at 5.5% APR compounded monthly, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the beginning of the loan. What is Matt's EAR?
A) 5.5%
B) 7.24%
C) 0.58%
D) 7.01%
Q4) In which of the following secured loans can inventory NOT be used as collateral?
A) public warehousing arrangement
B) private warehousing arrangement
C) trust receipt
D) factoring arrangement
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Chapter 21: Option Applications and Corporate Finance
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Q1) Options are also called derivative assets because they derive their value solely from the price of another asset.
A)True B)False
Q2) For every owner of a call option there is also an option writer, the person who takes the other side.
A)True B)False
Q3) When is an option out-the-money?
Q4) Suppose that a stock sells at a price of $40 on the expiration date. Compute the payoff to the seller of a put option if the option strike price is $50.
A) -$20
B) -$10
C) 0
D) $40
Q5) What is a put option?
Q6) What are European options?
Q7) What is a call option?
Q8) What are American options?
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Chapter 22: Mergers and Acquisitions
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Q1) An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a
A) golden parachute
B) white knight
C) poison pill
D) classified board
Q2) For a hostile takeover to succeed, the acquirer must appeal to the target shareholders; this is usually done through ________.
A) a tender offer and a proxy fight
B) a tender offer and a poison pill
C) a white knight and a proxy fight
D) a staggered board and a white knight
Q3) You work for a levered buyout firm and are evaluating a potential buyout of Boogle Inc. Boogle's stock price is $18, and it has 3 million shares outstanding. You believe that if you buy the company and replace its dismal management team, its value will increase by 50%. You are planning on doing a levered buyout of Boogle and will offer $25 per share for control of the company. Assuming you get 50% control, what will your gain from the transaction be?
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Page 26
Chapter 23: International Corporate Finance
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Q1) A U.S. firm acquires a British firm that will generate cash flows of 30,000 pounds next year and these cash flows will grow at 3% a year. If the British WACC is 9% and the spot exchange rate is $1.7/pound, what is the present value (PV) of the cash flows from this acquisition to domestic shareholders?
A) $820,000
B) $850,000
C) $870,000
D) $890,000
Q2) The spot exchange rate for the British pound is 0.6 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 6%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.606 pounds/dollar
B) 0.612 pounds/dollar
C) 0.617 pounds/dollar
D) 0.624 pounds/dollar
Q3) What are internationally integrated capital markets?
Q4) What is foreign exchange market?
Q5) What are the timings of the foreign exchange market?
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Chapter 24: Leasing
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Q1) Suppose the lease is a five-year fair market value lease, and the trucks have a remaining useful life of 8 years. If the monthly lease payments are $25,000 and the appropriate discount rate is 6% APR with monthly compounding, will the lease be classified as an operating lease or a capital lease for the lessee?
A) Capital lease, because the title to the property transfers to the lessee at the end of the lease term.
B) Capital lease, because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value.
C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value.
D) Operating lease, because the lease term is more than 75% of the estimated economic life of the asset.
Q2) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?
Q3) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
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Page 28
Chapter 25: Insurance and Risk Management
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Q1) Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called ________.
A) key personnel insurance
B) business liability insurance
C) property insurance
D) business interruption insurance
Q2) Farmville Industries is a major agricultural firm and is concerned about the possibility of drought impacting corn production over the next year. In the event of a drought, Farmville Industries anticipates a loss of $75 million. Suppose the likelihood of a drought is 10% per year, and the beta associated with such a loss is 0.4. If the risk-free interest rate is 5% and the expected return on the market is 10%, then what is the actuarially fair insurance premium?
Q3) If your firm is uninsured, the NPV of implementing the new safety policies is closest to ________.
A) $2.25 million
B) -$.25 million
C) $2.5 million
D) $2.15 million
Q4) What is the actuarially fair cost of full insurance?
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Chapter 26: Corporate Governance
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Q1) Which of the following statements is FALSE?
A) The shareholders as a group elect a board of directors to monitor managers. The directors themselves, however, have the same conflict of interest-monitoring is costly and in many cases directors do not get significantly greater benefits than other shareholders from monitoring the managers closely.
B) In principle, the board of directors hires the executive team, sets its compensation, approves major investments and acquisitions, and dismisses executives if necessary.
C) In the United States, the board of directors has a clear fiduciary duty to protect the interests of both the owners of the firm (the shareholders) and the interests of other stakeholders in the firm (such as the employees).
D) When the ownership of a corporation is widely held, no one shareholder has an incentive to bear the cost of monitoring, because she bears the full cost of monitoring but the benefit is divided among all shareholders.
Q2) What is corporate governance?
Q3) What is the difference between inside, gray, and outside directors?
Q4) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
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