Managerial Finance Test Questions
Course Introduction
Managerial Finance explores the principles and practices of financial management within organizations, focusing on the role of financial managers in decision-making processes. The course covers topics such as financial statement analysis, capital budgeting, risk and return, cost of capital, and short-term and long-term financial planning. Students will learn how to apply quantitative and qualitative techniques to evaluate financial decisions, optimize resource allocation, and support organizational objectives. Through real-world case studies and practical exercises, the course develops critical thinking and analytical skills essential for effective financial management in a dynamic business environment.
Recommended Textbook
Intermediate Financial Management 12th 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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Q1) One drawback of switching from a partnership to the corporate form of organization is the following:
A)It subjects the firm to additional regulations.
B)It cannot affect the amount of the firm's operating income that goes to taxes.
C)It makes it more difficult for the firm to raise additional capital.
D)It makes the firm's investors subject to greater potential personal liabilities.
E)It makes it more difficult for the firm's investors to transfer their ownership interests.
Answer: A
Q2) If a firm's goal is to maximize its earnings per share,this is the best way to maximize the price of the common stock and thus shareholders' wealth.
A)True
B)False
Answer: False
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Chapter 2: Risk and Return: Part I
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Q1) Nystrand Corporation's stock has an expected return of 12.25%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 5.00%,what is the market risk premium?
A)5.80%
B)5.95%
C)6.09%
D)6.25%
E)6.40%
Answer: A
Q2) Recession,inflation,and high interest rates are economic events that are best characterized as being
A)company-specific risk factors that can be diversified away.
B)among the factors that are responsible for market risk.
C)risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
D)irrelevant except to governmental authorities like the Federal Reserve.
E)systematic risk factors that can be diversified away.
Answer: B
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4
Chapter 3: Risk and Return: Part Ii
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Q1) Which of the following statements is CORRECT?
A)The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B)The slope of the characteristic line is the stock's standard deviation.
C)The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D)The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E)"Characteristic line" is another name for the Security Market Line.
Answer: D
Q2) Which is the best measure of risk for an asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?
A)Standard deviation; correlation coefficient.
B)Beta; variance.
C)Coefficient of variation; beta.
D)Beta; beta.
E)Variance; correlation coefficient.
Answer: C
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Chapter 4: Bond Valuation
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Q1) Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.
A)True
B)False
Q2) Which of the following bonds has the greatest interest rate price risk?
A)A 10-year, $1,000 face value, zero coupon bond.
B)A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C)All 10-year bonds have the same price risk since they have the same maturity.
D)A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
Q3) Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?
A)8.56%
B)9.01%
C)9.46%
D)9.93%
E)10.43%
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6
Chapter 5: Financial Options
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Q1) Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45,what would your pre-tax net profit be?
A) $3.10
B)$16.90
C)$17.75
D)$22.50
E)$25.60
Q2) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
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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Page 7
Chapter 6: Accounting for Financial Management
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Q1) Last year Tiemann Technologies reported $10,500 of sales,$6,250 of operating costs other than depreciation,and $1,300 of depreciation.The company had no amortization charges,it had $5,000 of bonds that carry a 6.5% interest rate,and its federal-plus-state income tax rate was 35%.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $750.By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
A) 463.13
B) 487.50
C) 511.88
D) 537.47
E) 564.34
Q2) Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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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%
Q2) Refer to Exhibit 7.1.What is the firm's debt-to-assets ratio?
A)45.93%
B)51.03%
C)56.70%
D)63.00%
E)70.00%
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Page 9
Chapter 8: Basic Stock Valuation
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Q1) If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.
A)True
B)False
Q2) The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?
A)$1,714,750
B)$1,805,000
C)$1,900,000
D)$2,000,000
E)$2,100,000
Q3) The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.
A)True
B)False
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence,they have a greater need for external financing.There are currently no alternatives for these types of firms to lower their asset requirements.
A)True
B)False
Q2) Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year,so its FA/Sales ratio was 50%.However,its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity,with sales held constant at $450 million,how much cash (in millions)would it have generated?
A)$74.81
B)$78.75
C)$82.69
D)$86.82
E)$91.16
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Chapter 10: Corporate Governance
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Q1) 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.
Q2) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q3) A poison pill is also known as a corporate restructuring.
A)True B)False
Q4) 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
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Chapter 11: Determining the Cost of Capital
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Q1) Since 70% of the preferred dividends received by a corporation are excluded from taxable income,the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be
Cost of equity = r<sub>s</sub>(0.30)(0.50)+ r<sub>ps</sub>(1 T)(0.70)(0.50).
A)True
B)False
Q2) The cost of debt,r<sub>d</sub>,is normally less than r<sub>s</sub>,so r<sub>d</sub>(1 T)will normally be much less than r<sub>s</sub>.Therefore,as long as the firm is not completely debt financed,the weighted average cost of capital (WACC)will normally be greater than r<sub>d</sub>(1 T).
A)True
B)False
Q3) Refer to Exhibit 11.1.What is the best estimate of the firm's WACC?
A)10.85%
B)11.19%
C)11.53%
D)11.88%
E)12.24%
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Page 13
Chapter 12: Capital Budgeting: Decision Rules
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Q1) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A)A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR.
B)If a project's IRR is greater than the WACC, then its NPV must be negative.
C)To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.
D)To find a project's IRR, we must find a discount rate that is equal to the WACC.
E)A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC.
Q2) Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.
A)True
B)False
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Chapter 13: Cash Flow Estimation and Risk Analysis
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Q1) When evaluating a new project,firms should include in the projected cash flows all of the following EXCEPT:
A)Previous expenditures associated with a market test to determine the feasibility of the project, provided those costs have been expensed for tax purposes.
B)The value of a building owned by the firm that will be used for this project.
C)A decline in the sales of an existing product, provided that decline is directly attributable to this project.
D)The salvage value of assets used for the project that will be recovered at the end of the project's life.
E)Changes in net working capital attributable to the project.
Q2) Accelerated depreciation has an advantage for profitable firms in that it moves some cash flows forward,thus increasing their present value.On the other hand,using accelerated depreciation generally lowers the reported current year's profits because of the higher depreciation expenses.However,the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes.
A)True
B)False
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Page 15
Chapter 14: Real Options
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Q1) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
Q2) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q3) Refer to Exhibit 14.1.Calculate the project's coefficient of variation.(Hint: Use the expected NPV.)
A)5.87
B)6.52
C)7.25
D)7.97
E)8.77
Q4) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Repurchases
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Q1) The Meltzer Corporation is contemplating a 7-for-3 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?
A)$32.06
B)$33.75
C)$35.44
D)$37.21
E)$39.07
Q2) If a firm adheres strictly to the residual dividend policy,the issuance of new common stock would suggest that
A)the dividend payout ratio is increasing.
B)no dividends were paid during the year.
C)the dividend payout ratio is decreasing.
D)the dollar amount of investments has decreased.
E)the dividend payout ratio has remained constant.
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
Page 17
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Chapter 16: Capital Structure Decisions
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Q1) A venture capital investment group received a proposal from Wireless Solutions to produce a new smart phone.The variable cost per unit is estimated at $250,the sales price would be set at twice the VC/unit,fixed costs are estimated at $750,000,and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more.What sales volume would be required in order to meet this profit goal?
A)4,513
B)4,750
C)5,000
D)5,250
E)5,513
Q2) If a firm utilizes debt financing,an X% decline in earnings before interest and taxes (EBIT)will result in a decline in earnings per share that is larger than X.
A)True
B)False
Q3) A firm's capital structure does not affect its calculated free cash flows,because FCF reflects only operating cash flows.
A)True
B)False
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a rate of 5%,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is Firm L's cost of equity?
A)11.4%
B)12.0%
C)12.6%
D)13.3%
E)14.0%
Q2) Refer to Exhibit 17.3.What is the yield on Wilson Dover's debt?
A)6.04%
B)6.36%
C)6.70%
D)7.05%
E)7.42%
Q3) The Miller model begins with the MM model with taxes and then adds personal taxes.
A)True B)False
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Chapter 18: Initial Public Offerings, investment Banking, and Financial Restructuring
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Q1) The term "leaving money on the table" refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm's new stock offering.The banker is,in effect,"buying the job" with the low bid and thus not getting all the money his firm would normally earn on the job.
A)True
B)False
Q2) If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision,and if the NPV of refunding is positive,then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.
A)True
B)False
Q3) The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price.Since this dilutes the value of the public stockholders,it "carves out" some of their value.
A)True
B)False
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Chapter 19: Lease Financing
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Q1) Operating leases often have terms that include
A)full amortization over the life of the lease.
B)very high penalties if the lease is canceled.
C)restrictions on how much the leased property can be used.
D)much longer lease periods than for most financial leases.
E)maintenance of the equipment by the lessor.
Q2) In the lease versus buy decision,leasing is often preferable
A)because, generally, no down payment is required, and there are no indirect interest costs.
B)because lease obligations do not affect the firm's risk as seen by investors.
C)because the lessee owns the property at the end of the least term.
D)because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
E)because it has no effect on the firm's ability to borrow to make other investments.
Q3) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True
B)False
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Page 21
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Q1) Preferred stockholders have priority over common stockholders with respect to dividends,because dividends must be paid on preferred stock before they can be paid on common stock.However,preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
A)True
B)False
Q2) 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
Q3) Refer to Exhibit 20.1.What is the bond's straight-debt value?
A)$684.78
B)$720.82
C)$758.76
D)$798.70
E)$838.63
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Page 22
Chapter 21: Supply Chains and Working Capital Management
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Q1) If a firm has a large percentage of accounts over 30 days old,this is proof positive that its receivables manager is not doing a good job.
A)True
B)False
Q2) Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
A)True
B)False
Q3) If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.
A)True
B)False
Q4) If a firm's suppliers stop offering discounts,then its use of trade credit is more likely to increase than to decrease,other things held constant.
A)True
B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) Danby Design Inc.has approached the bank with its plan to borrow $12,000.The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the approximate (nominal)rate of interest on the 10.19 percent add-on loan?
A)5.10%
B)10.19%
C)12.00%
D)20.38%
E)30.57%
Q2) Refer to Exhibit 22.1.How large are your brother's monthly payments?
A)$6,250
B)$7,000
C)$7,500
D)$5,250
E)$6,875
Q3) The credit period is the amount of time it takes to do a credit search on a potential customer.
A)True
B)False
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Chapter 23: Advanced Issues in Cash Management and Inventory Control
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Q1) If a company increases its safety stock,then its average inventory will go up.
A)True
B)False
Q2) Refer to Exhibit 23.1.According to the Baumol model,what should be Duckett's average cash balance?
A)$35,356
B)$3,536
C)$22,157
D)$70,711
E)$42,918
Q3) Refer to Exhibit 23.2.If the lead time for placing an order is 5 days,and Cartwright holds a safety stock equal to a 30-day supply of chips,then at what inventory level should an order be placed?
A)15,570
B)3,175
C)12,250
D)13,675
E)8,124
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Chapter 24: Enterprise Risk Management
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Q1) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q2) The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.
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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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) Which of the following statements is most CORRECT?
A)The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
B)The basic doctrine of fairness states that all debtholders must be treated equally.
C)Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
D)While a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
E)To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.
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Chapter 26: Mergers and Corporate Control
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Q1) 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.
Q2) The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.
A)True
B)False
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Chapter 27: Multinational Financial Management
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Q1) A U.S.-based company,Stewart,Inc.,arranged a 2-year,$1,000,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos,carries a 10.0% nominal rate,and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar,but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus,Stewart must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period,what effective interest rate will Stewart end up paying on the loan?
A)10.36%
B)11.50%
C)17.44%
D)20.00%
E)21.79%
Q2) 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
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Page 29
Chapter 28: Time Value of Money
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Sample Questions
Q1) Which of the following statements is CORRECT?
A)An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
B)The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
C)If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
D)If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
E)The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
Q2) Your bank pays 4% interest annually.You have $2,500 invested in the bank.How long will it take for your funds to double?
A)14.39
B)15.15
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Chapter 29: Basic Financial Tools: a Review
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Q1) If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.
A)The stock's dividend yield is 5%.
B)The price of the stock is expected to decline in the future.
C)The stock's required return must be equal to or less than 5%.
D)The stock's price one year from now is expected to be 5% above the current price.
E)The expected return on the stock is 5% a year.
Q2) Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective)annual rate of return?
A)8.03%
B)8.24%
C)8.45%
D)8.67%
E)8.89%
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
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Chapter 30: Pension Plan Management
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Q1) Kumar Consulting operates several stock investment portfolios that are used by firms for investment of pension plan assets.Last year,one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15.The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent.What was the portfolio's alpha?
A) 0.75%
B) 0.15%
C)0%
D)0.15%
E)0.75%
Q2) Under a defined contribution plan,employees agree to contribute some percentage of their salaries,up to 20 percent,to the firm's pension fund.
A)True
B)False
Q3) From a pure cost standpoint,a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
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Q1) Which of the following statements about a not-for-profit firm's ownership is most correct?
A)The residual earnings (profits) of not-for-profit firms can be distributed to the firm's top managers.
B)Not-for-profit firms are exempt from federal taxes, but they must pay state and local taxes, including property taxes.
C)Upon liquidation of a not-for-profit firm, the proceeds from the sale of its assets are distributed, on a pro rata basis, to the firm's employees.
D)None of the profits are used for private inurement.
E)Not-for-profit firms are governed by a board of trustees whose members are elected by the community at large.
Q2) The primary goal of investor-owned firms is shareholder wealth maximization,while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example,to provide health care services to the communities served.
A)True
B)False
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Chapter 32: a Values of the Areas Under the Standard
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Q1) To finance the construction of a new plant,Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.If the firm wants its ex-rights price to be $50,what subscription price must it set on the new shares?
A)$29.55
B)$33.78
C)$39.28
D)$41.80
E)$50.00
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