Managerial Finance Test Questions
Course Introduction
Managerial Finance explores the fundamental concepts and analytical tools necessary for effective financial decision-making within organizations. The course covers key topics such as financial statement analysis, budgeting, capital structure, working capital management, and the evaluation of investment opportunities. Emphasis is placed on understanding the financial implications of managerial actions and the use of financial data in strategic planning. Through case studies and practical exercises, students learn how to interpret financial information, assess risk, and optimize resources to achieve organizational goals.
Recommended Textbook
Fundamentals of Corporate Finance Third Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) Who is typically responsible for the day-to-day running of a corporation?
A)the shareholders
B)the board of directors
C)the management team
D)the sole proprietor
E)the limited partner
Answer: C
Q2) Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?
A)It shows how to assign monetary value to intangibles such as good health and well-being.
B)It allows fixed assets and liquid assets to be valued correctly.
C)It gives a good indication of the net worth of a person,item,or company and can be used to estimate any changes in that net worth.
D)It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
E)It allows us to produce accurate financial statements.
Answer: D
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?
Answer: The new loan entry should show as a cash inflow for the firm in financing activities,while the payment for the new processing plant will be entered as a cash outflow in investing activities.
Q2) Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then using the market value of equity,the debt-equity ratio for Luther in 2015 is closest to:
A)1.71
B)1.78
C)2.31
D)2.35
E)2.29
Answer: B
Q3) What role do external auditors play in the firm's financial reporting process?
Answer: As the name implies,external auditors act as third party monitors to the firms' financial reporting process.
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Sample Questions
Q1) To enable costs and benefits to be compared,they are typically converted into cash value at the time the benefit is received.
A)True
B)False
Answer: False
Q2) In general,if an action increases a firm's value by providing benefits with a value greater than any costs involved,then that action is good for the firm's investors.
A)True
B)False
Answer: True
Q3) What is one of the main obstacles in cost benefit analysis?
Answer: One of the main obstacles in cost benefit analysis is that not all benefits that are expected to occur in the future can be stated in dollar terms.
Q4) Costs and benefits must be put in common terms if they are to be compared.
A)True
B)False
Answer: True
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) A rich donor gives a hospital $100,000 one year from today.Each year after that,the hospital will receive a payment 5% larger than the previous payment,with the last payment occurring in ten years' time.What is the present value (PV)of this donation,given that the interest rate is 9%?
A)$467,922.22
B)$585,987.27
C)$772,173.49
D)$779,843.27
E)$1,120,727.79
Q2) You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15-year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:
A)$2585
B)$660
C)$2535
D)$1390
E)$1868
Q3) What is the decision criteria for the Net Present Value rule?
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Page 6
Chapter 5: Interest Rates
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Q1) A construction company takes a loan of $280,000 to cover the cost of a new grader.If the interest rate is 8.75%APR,and payments are made monthly for five years,what percentage of the outstanding principal does the company pay in interest each month?
A)0.73%
B)7.29%
C)8.75%
D)9.25%
E)10.5%
Q2) A 12% APR with bi-monthly compounding is equivalent to an EAR of:
A)11.98%
B)12.50%
C)12.00%
D)12.62%
E)12.14%
Q3) The real interest rate is the rate of growth of one's purchasing power due to money invested.
A)True
B)False
Q4) How are interest and return of principal handled in an amortizing loan payment?
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Chapter 6: Bonds
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Questions
Q1) A firm issues ten-year bonds with a coupon rate of 6.5%,paid semi-annually.The credit spread for this firm's ten-year debt is 0.8%.New ten-year Treasury notes are being issued at par with a coupon rate of 5%.What should the price of the firm's outstanding ten-year bonds be per $100 of face value?
A)$97.28
B)$98.27
C)$100.86
D)$105.26
E)$105.80
Q2) What care,if any,should be taken regarding the sign of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
Q3) 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?
Q4) How much are each of the semi-annual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%,then at what price should this bond trade for?
Q5) Assuming that this bond trades for $1035.44,then what is the YTM for this bond?
Q6) How are the cash flows of a coupon bond different from an amortizing loan?
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Chapter 7: Valuing Stocks
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Q1) The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA)after the close of business on May 30,2008.What is the difference between the opening and closing price of the stock on this date?
A)$0.49
B)$0.27
C)$0.24
D)$0.03
E)$0.18
Q2) The net present value (NPV)of a stock is calculated by discounting cash flows arising from this stock using the risk-free interest rate.
A)True
B)False
Q3) The ownership in a corporation is divided into shares of stock,which carry rights to share in the profits of the firm through future dividend payments.
A)True
B)False
Q4) What is the difference between common stock and preferred stock?
Q5) What are the major limitations of valuation using multiples?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A local government awards a landscaping company a contract worth $1.2 million per year for five years for maintaining public parks.The landscaping company will need to buy some new machinery before they can take on the contract.If the cost of capital is 7%,what is the most that this equipment could cost if the contract is to be worthwhile for the landscaping company?
A)$4.55 million
B)$4.61 million
C)$4.92 million
D)$5.26 million
E)$6.00 million
Q2) Refer to the information above.Assuming that the film maker issues the new security,the net present value (NPV)for this project is closest to what amount? Should the film maker make the investment?
A)$1.7 million; Yes
B)$1.7 million; No
C)$2.7 million; Yes
D)$2.7 million; No
E)$5.0 million; Yes
Q3) Under what situation can the net present value (NPV)profile be upward sloping?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The loss in sales of an existing product is a sink cost when assessing the cost of a new product if:
A)A competitor's product would have reduced the sales of the existing product.
B)The existing product is more costly to produce than the new product.
C)The existing product is less costly to produce than the new product
D)The loss in any sales should never be considered a sunk cost.
E)A competitor's product is not expected to create a loss in sales of the existing product.
Q2) Panjandrum Industries,a manufacturer of industrial piping,is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems.It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars).There are some concerns that estimates of manufacturing expenses may be low,due to the rising cost of raw materials.What is the break-even point for manufacturing expenses,if all other estimates are correct and the cost of capital is 10%?
A)$0.78 million
B)$0.88 million
C)$0.97 million
D)$1.22 million
E)$1.36 million
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Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) What is the expected payoff for Little Cure's ten drugs?
A)$500 million
B)$100 million
C)$1 billion
D)$0
E)$50 million
Q2) The geometric average annual return for a large capitalization stock portfolio is 12% for ten years and 5% per year for the next five years.The geometric average annual return for the entire 15-year period is:
A)9.95%
B)9.62%
C)9.11%
D)10.23%
E)10.97%
Q3) Which type of investment has historically had the highest volatility?
Q4) Is volatility a reasonable measure of risk when evaluating large portfolios?
Q5) What is the difference between systematic and unsystematic risk?
Q6) What are the two components of realized return from a stock investment?
Q7) How does diversification affect systematic and unsystematic risk?
Q8) Which type of investment has historically had the lowest volatility?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) A stock market comprises 1000 shares of stock A and 3000 shares of stock B.The share prices for stocks A and B are $25 and $30,respectively.What is the capitalization of the market portfolio?
A)$115,000
B)$100,000
C)$98,000
D)$125,000
E)$90,000
Q2) Suppose you buy 100 shares of RBC at $85 per share,and 80 shares of TD at $75 per share.If RBC's stock goes up to $88.50 per share and TD's stock goes up to $77 per share,what is your portfolio return?
A)2%
B)0%
C)3.5%
D)3%
E)4.5%
Q3) Correlation is the degree to which the returns of two stocks share common risks.
A)True
B)False
Q4) Is it possible for a stock to have high total risk but low systematic risk?
Page 13
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Chapter 12: Determining the Cost of Capital
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Q1) Should a firm with high retained earnings have a lower cost of equity?
Q2) The after-tax cost of debt ________ the before-tax cost of debt for a firm that has a positive marginal tax rate.
A)is always greater than B)is always equal to C)is always less than D)may be greater than or less than E)is never less than
Q3) Anheuser Busch,a manufacturer of beverages,is planning to purchase Six Flags theme parks.Anheuser Busch should use the ________ to evaluate the business of Six Flags.
A)WACC of Anheuser Busch
B)WACC of Six Flags
C)average market return
D)cost of debt
E)cost of equity
Q4) What is the assumption about risk when using WACC to evaluate a project?
Q5) Is it incorrect to use the coupon rate of debt toward cost of debt?
Q6) Why do we use market values rather than book values in calculation of WACC?
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Q7) What is the difference between the effective cost of debt and the cost of debt?
Chapter 13: Risk and the Pricing of Options
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Q1) What effect does volatility of the underlying asset have on the price of the option?
Q2) The price of a European call option on RBC stock with an exercise price of $85 and one year to expiry is trading at $3.15.The current price of the stock is $81.25,and the risk-free rate is 2.5%.With no arbitrage,what must be the price of a European put on RBC with an exercise price of $85?
A)$4.83
B)$3.15
C)$1.47
D)$4.71
E)$2.59
Q3) A European option on a stock is more valuable than an otherwise similar American option on the same stock.
A)True
B)False
Q4) Hedging is accomplished by holding contracts or securities whose payoffs are positively correlated with some risk exposure that already exists.
A)True
B)False
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) The Ontario Teachers' Pension Plan is a pension fund for public school teachers in the province of Ontario.It has a large and diverse portfolio of investments,both in Canada and internationally,and had net assets in December 2012 of $108.5 billion.Which of the following best describes the Ontario Teachers' Pension Plan?
A)an angel investor
B)a venture capitalist
C)an institutional investor
D)a family investor
E)a sovereign wealth fund
Q2) An IPO is offered at $6.75 per share for 2 million shares.The IPO underwriters had a spread of 9%.What was the total fee paid to the underwriters?
A)$13,500,000
B)$1,215,000
C)$12,285,000
D)$12,385,000
E)$1,800,000
Q3) Who benefits from IPO underpricing?
Q4) What is the general long-run performance of an IPO?
Q5) What are some of the advantages of going public?
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Chapter 15: Debt Financing
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Q1) A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to call of 4.8%.What is the price of this bond per $100 of face value when it is released?
A)$101.15
B)$109.36
C)$100.00
D)$104.80
E)$95.42
Q2) Which of the following is an advantage of a public bond issue over private placement?
A)It can be tailored to the particular situation.
B)It is less costly to issue.
C)It does not need to be registered with the securities commission.
D)It is freely tradable on the bond market.
E)It is sold to a small group of investors.
Q3) When would a firm choose to call a callable bond?
Q4) What is the difference between secured and unsecured debt?
Q5) What are callable bonds?
Q6) What is the difference between Eurobonds and Foreign bonds?
Page 17
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Chapter 16: Capital Structure
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Q1) A new business requires a $20,000 investment today,and will generate a one-time cash flow of $25,000 after one year.The business will be financed with 50% equity and 50% debt.If the firm can borrow at 7%,what is the return on levered equity?
A)43%
B)25%
C)18%
D)39%
E)7%
Q2) Agency costs arise when:
A)there are high labour costs.
B)input costs are higher than interest costs.
C)interest costs exceed dividend payments.
D)conflicts of interest exist between stakeholders.
E)a firm becomes financially distressed.
Q3) Financial managers prefer to choose the same debt level no matter which industry they operate in.
A)True
B)False
Q4) What are the issues in determining the present value (PV)of financial distress?
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Chapter 17: Payout Policy
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Q1) Why do firms issue stock dividends or split their stock?
Q2) Empirical evidence about the behaviour of financial managers suggests that firms ________ repurchase activity and also ________ dividend payments.
A)smooth,smooth
B)smooth,do not smooth
C)do not smooth,do not smooth
D)do not smooth,smooth
E)sometimes smooth,do not smooth
Q3) An alternate way to pay investors is when the firm uses cash to buy shares of its own outstanding stock,also known as:
A)dividend investment.
B)retained earnings.
C)initial public offering.
D)share repurchases.
E)seasoned equity offering.
Q4) What is the difference between an open market share repurchase and a targeted repurchase?
Q5) Why might a firm choose a spinoff instead of selling a division and distributing the cash?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) A firm expects growth next year to be 10%.Its sustainable growth rate is 12%.Which of the following is TRUE?
A)The firm will need to raise additional debt such that its debt-to-equity ratio will increase.
B)The firm may be able to keep its debt-to-equity ratio the same by reducing dividends (assuming they are projected to be high enough).
C)The firm will need to raise additional capital through a stock issue.
D)The firm will have excess cash to increase dividends,pay back debt,or repurchase equity.
E)The firm will need to cut back on its planned investments.
Q2) The amount of the increase in net working capital for Ideko in 2016 is closest to:
A)$4090
B)$4685
C)$3665
D)$5230
E)$5790
Q3) What are a firm's options when it generates more cash than planned?
Q4) Why is EBITDA multiple used for valuation rather than sales or earnings?
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Page 20
Chapter 19: Working Capital Management
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Q1) Jerome Industries has inventory days of 15,accounts receivable days of 33,and a cash conversion cycle of 41 days.What is its accounts payable days?
A)23 days
B)7 days
C)4 days
D)33 days
E)59 days
Q2) Franklin Industries has a current net working capital of $2.5 million.It expects that this will grow at a rate of 3.5% annually forever.If it could slow that growth to 3% per year,how would that affect the value of the firm,given that it has a cost of capital of 11%?
A)a decrease of $2.22 million
B)an increase of $12,500
C)an increase of $0.78 million
D)an increase of $2.08 million
E)an increase of $3.14 million
Q3) What is a firm's cash cycle?
Q4) What is the credit period?
Q5) What are the five Cs of Credit?
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Chapter 20: Short-Term Financial Planning
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Q1) How can a conservative financing policy reduce firm value?
Q2) What are loan origination fees and what effect does it have on the loan?
Q3) A firm issues one-month commercial paper with a $500,000 face value and receives $495,000.What is the EAR the firm is paying for these funds?
A)12.8%
B)1.01%
C)12.12%
D)12%
E)13.12%
Q4) ABX Corp.is offered a $1.4 million line of credit for nine months at an APR of 7.5%.This loan has a loan origination fee of 1%.What is the actual nine-month interest rate paid,expressed as an EAR?
A)7.50%
B)7.57%
C)6.69%
D)8.92%
E)9.02%
Q5) How can the application of the matching principle increase firm value?
Q6) How does seasonality lead to short-term financing needs?
Page 22
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Chapter 21: Risk Management
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Q1) A gold mining firm sells futures contracts worth 1000 ounces at a price of $700 per ounce for maturity one year from today.If gold futures prices increase to $752 per ounce,what is the cash flow to the producer?
A)-$2000
B)$2000
C)$0
D)-$52,000
E)$52,000
Q2) ________ is one of the most common methods to reduce the risks related to business liability,business interruption,or loss of key personnel.
A)Management
B)Hedging
C)Insurance
D)Diversification
E)Working capital management
Q3) What is adverse selection?
Q4) How do futures contracts eliminate credit risk?
Q5) What is business liability insurance?
Q6) What is moral hazard?
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Chapter 22: International Corporate Finance
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Q1) The implied foreign interest rate computed using spot and forward exchange rates may be lower than the actual foreign interest rate if the foreign country has a high:
A)default risk.
B)inflation risk.
C)depreciation risk.
D)market risk.
E)systematic risk.
Q2) A Canadian importer needs 10 million U.S.dollars in September,and decides to buy a call option on the USD for September delivery.Suppose a call option on the USD with a September expiration and a strike price of 1.30 USD/CAD trades for 0.0515 CAD per call on 1 USD.If,by the September expiration date,the USD has appreciated to 1.25 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?
A)-$15,000
B)-$207,308
C)$0
D)-$307,692
E)-$500,000
Q3) What are the three factors that drive the supply and demand for each currency?
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Chapter 23: Leasing
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Q1) What is the difference between a security interest and a true lease in bankruptcy?
Q2) Calculate the monthly lease payments for a four-year $1.00 out lease of the bulldozer.
Q3) Which of the following is a valid argument for leasing?
A)avoiding capital expenditure controls
B)preserving capital
C)reducing leverage through off-balance-sheet financing
D)efficiency gains from specialization
E)increased resale costs
Q4) Justine decides to enter into a 6-year car lease agreement.The purchase price of the car is $24,995,and the expected residual value after 5 years is $9,500.If there is no risk of default and the risk-free rate is 7% APR with monthly compounding,what is the monthly lease payment for a 6-year lease in a perfect capital market?
A)$215.21
B)$423.67
C)$317.74
D)$319.59
E)$347.51
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Chapter 24: Mergers and Acquisitions
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Q1) Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's price-earnings ratio as a result of the acquisition?
A)0
B)3.0
C)-3.2
D)-3.6
E)-1.8
Q2) A merger in which the target and acquirer operate in unrelated industries is called a(n):
A)horizontal merger.
B)vertical merger.
C)conglomerate merger.
D)industrial merger.
E)complementary merger.
Q3) Why does a recapitalization make a firm a less attractive target for a takeover?
Q4) What are risk arbitrageurs? Do their actions represent true arbitrage?
Page 26
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Chapter 25: Corporate Governance
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Q1) The costs and benefits of a corporate governance structure:
A)are the same in all countries.
B)are the same for all companies within a country.
C)depend on cultural norms.
D)are not important in maximizing shareholder wealth.
E)are easily quantified.
Q2) Billy,the CEO of Movin On Up Company,was granted stock options with an exercise price of $62.04 per share.Refer to the week-ending stock prices that occurred during the quarter.What is the most likely date on which the stock options were awarded?
A)13-Sep-15
B)11-Oct-15
C)13-Dec-15
D)25-Oct-15
E)7-Sep-15
Q3) How does shareholder voice serve to discipline poorly performing managers?
Q4) How does a pyramid structure work?
Q5) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
Q6) What is tunnelling?
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