Managerial Finance
Textbook Exam Questions
Course Introduction
Managerial Finance explores the principles and practices essential for effective financial management within organizations. The course covers key topics such as financial statement analysis, capital budgeting, risk and return assessment, financial planning, and the valuation of assets and firms. Students will learn how managers make strategic financial decisions that enhance the value of the firm, allocate resources efficiently, and respond to changing market conditions. Emphasis is placed on practical applications, case studies, and analytical tools used to solve real-world financial problems.
Recommended Textbook
Corporate Finance 3rd Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation.
Answer: 11ea7ff1_784f_9ab6_846e_8fd48d865cbf_TB2720_00_TB2720_00
Q2) Which of the following statements regarding limited partnerships is TRUE?
A) There is no limit on a limited partner's liability.
B) A limited partner's liability is limited by the amount of their investment.
C) A limited partner is not liable until all the assets of the general partners have been exhausted.
D) A general partner's liability is limited by the amount of their investment.
Answer: B
Q3) What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest?
Answer: 1. The threat of a hostile takeover
2. Shareholder initiatives
3. Performance based compensation
Q4) Explain the benefits of incorporation.
Answer: 1. Limited liability
2. Unlimited life
3. Access to capital markets/availability of outside funding
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Perrigo's enterprise value is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
Answer: C
Q2) Luther's quick ratio for 2008 is closest to:
A) 0.77
B) 0.87
C) 1.15
D) 1.30
Answer: A
Q3) Luther Corporation's stock price is $39 per share and the company has 20 million shares outstanding. Its excess cash in 2009 is $23.4. If EBIT is 41.2 and tax rate is 35%, its Return on Invested Capital in 2009 is closest to:
A) 0.104
B) 0.064
C) 0.038
D) 0.068
Answer: D
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Rearden Metal needs to order a new blast furnace that will be delivered in one year. The $1,000,000 price for the blast furnace is due in one year when the new furnace is installed. The blast furnace manufacturer offers Rearden Metal a discount of $50,000 if they pay for the furnace now. If the interest rate is 7%, then the NPV of paying for the furnace now is closest to:
A) ($15,421)
B) $15,421
C) ($46,729)
D) $46,729
Answer: Solution: $1,000,000/1.07 - $950,000 = -$15,420.56
Q2) Which of the following statements regarding the NPV decision rule is FALSE?
A) Reject projects with a NPV of zero, as accepting them is equivalent to reducing firm value.
B) When faced with a set of alternatives, choose the one with the highest NPV.
C) Accept those projects with a positive NPV, as accepting them is equivalent to receiving their NPV in cash today.
D) Reject those projects with a negative NPV.
Answer: A
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Chapter 4: The Time Value of Money
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Q1) Which of the following statements regarding timelines is FALSE?
A) Timelines are an important first step in organizing and then solving a financial problem.
B) We refer to a series of cash flows lasting several periods as a stream of cash flows.
C) Not every stream of cash flows can be represented on a timeline.
D) A timeline is a linear representation of the timing of the (expected) cash flows.
Q2) You are looking for a new truck and see the following advertisement. "Own a new truck! No money down. Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to:
A) 9%
B) 8%
C) 8.5%
D) 10%
Q3) Draw a timeline detailing the cash flows from investment "A."
Q4) Draw a timeline detailing Joe's cash flows from the sale of the family business.
Q5) Draw a timeline detailing the cash flows from investment "B."
Q6) The future value at retirement (age 65) of your savings is:
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Chapter 5: Interest Rates
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Q1) Which of the following statements is FALSE?
A) When we refer to the "risk-free interest rate," we mean the rate on U.S. Treasuries.
B) Interest rates vary with the investment horizon.
C) All borrowers, besides the U.S. Treasury, have some risk of default.
D) When interest on a loan is tax deductible, the effective after-tax interest rate is × (1r).
Q2) You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6. 5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay 1 point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points you will need to borrow an additional $3250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the 1 point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Q3) Assuming that you have made all of the first 24 payments on time, then how much interest have you paid over the first two years of your loan?
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Chapter 6: Valuing Bonds
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Q1) Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at
A) a premium.
B) a discount.
C) par.
D) None of the above
Q2) An exception to the key difference between sovereign default and corporate bonds is:
A) member states of the U.S.
B) member states of the EMU.
C) member states of the African Union.
D) member states of the NAFTA.
Q3) Which of the following statements is FALSE?
A) A bond trades at par when its coupon rate is equal to its yield to maturity.
B) The clean price of a bond is adjusted for accrued interest.
C) The price of the bond will drop by the amount of the coupon immediately after the coupon is paid.
D) If a coupon bond's yield to maturity exceeds its coupon rate, the present value of its cash flows at the yield to maturity will be greater than its face value.
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Chapter 7: Investment Decision Rules
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Q1) Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which projects should you invest in and in what order?
A) CBFH
B) CBGF
C) BCFG
D) CBFG
Q2) The IRR for this project is closest to:
A) 15.60%
B) 18.95%
C) 20.00%
D) 25.85%
Q3) Assume that your capital is constrained, so that you only have $500,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to:
A) $111,000
B) $69,000
C) $80,000
D) $58.000
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) The difference between scenario analysis and sensitivity analysis is that:
A) scenario analysis is based upon the IRR and sensitivity analysis is based upon NPV.
B) only sensitivity analysis allows us to change our estimated inputs of our NPV analysis.
C) scenario analysis considers the effect on NPV of changing multiple project parameters.
D) only scenario analysis breaks the NPV calculation into its component assumptions.
Q2) Which of the following statements is FALSE?
A) The ultimate goal in capital budgeting is to determine the effect of the decision to take a particular project on the firm's cash flows.
B) To the extent that overhead costs are fixed and will be incurred in any case, they are incremental to the project and should be included in the capital budgeting analysis.
C) Unlevered Net Income = (Revenue - Costs - Depreciation) × (1 - <sub>c</sub>).
D) Earnings are not cash flows.
Q3) How does scenario analysis differ from sensitivity analysis?
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A) Estimating dividends, especially for the distant future, is difficult.
B) A firm can only pay out its earnings to investors or reinvest their earnings.
C) Successful young firms often have high initial earnings growth rates.
D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate.
Q2) What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?
Q3) Which of the following statements is FALSE?
A) We must discount the cash flows from stock based on the equity cost of capital for the stock.
B) The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock.
C) The firm might pay out cash to its shareholders in the form of a dividend.
D) The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.
Q4) What are the implications of the efficient market hypothesis for corporate managers?
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Page 11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Which of the following types of risk doesn't belong?
A) Idiosyncratic risk
B) Undiversifiable risk
C) Market risk
D) Systematic risk
Q2) What is the standard deviation of Big Cure's average net income for their new blockbuster drug?
A) $0
B) $1 billion
C) $100 million
D) $500 million
Q3) Assume that you purchased General Electric Company stock at the closing price on December 31, 2008 and sold it after the dividend had been paid at the closing price on January 26, 2009. Your dividend yield for this period is closest to:
A) -8.15%
B) 0.75%
C) 0.70%
D) -8.80%
Q4) What is the market portfolio?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) The expected return on your of your investment is closest to:
A) 18%
B) 20%
C) 12%
D) 24%
Q2) Assuming that the risk-free rate is 4% and the expected return on the market is 12%, then required return on Peter's portfolio is closest to:
A) 20%
B) 22%
C) 18%
D) 16%
Q3) California Gold Mining's required return is closest to:
A) -5%
B) 13%
C) 15%
D) 5%
Q4) Will adding the precious metals fund improve your portfolio?
Q5) What is the efficient frontier and how does it change when more stocks are used to construct portfolios?
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Chapter 12: Estimating the Cost of Capital
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Q1) The e<sub>i</sub> in the regression
A) measures the market risk in returns.
B) measures the deviation from the best fitting line and is zero on average.
C) measures the sensitivity of the security to market risk.
D) measures the historical performance of the security relative to the expected return predicted by the SML.
Q2) The value of the oil exploration division is closest to:
A) $4,500
B) $7,500
C) $8,750
D) $10,000
Q3) Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%. Assuming a normal economy the expected return on Wyatt Oil's debt is closest to:
A) 3.0%
B) 3.5%
C) 4.9%
D) 6.7%
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Page 14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Which of the following statements is FALSE?
A) A momentum strategy is one where you buy stocks that have had low past returns and (short) sell stocks that have had high past returns.
B) Over the years since the discovery of the CAPM, it has become increasing clear to researchers and practitioners alike that forming portfolios based on market capitalization, book-to-market ratios, and past returns, one can construct trading strategies that have a positive alpha.
C) Portfolios containing firms with the highest realized returns over the previous six months have positive alphas over the next six months.
D) If the market portfolio is not efficient, then a portfolio of small stocks will likely have positive alphas.
Q2) Which of the following is NOT an investment likely to be found in any proxy for the market portfolio?
A) Human capital
B) Stocks
C) Bonds
D) Precious metals
Q3) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) What is a market value balance sheet and how does it differ from a book value balance sheet?
Q2) Suppose you are a shareholder in d'Anconia Copper holding 300 shares, and you disagree with the decision to lever the firm. You can undo the effect of this decision by
A) borrowing $2,000 and buying 100 shares of stock.
B) selling 100 shares of stock and lending $2,000.
C) borrowing $1,200 and buying 60 shares of stock.
D) selling 60 shares of stock and lending $1,200.
Q3) The market value of Luther's non-cash assets is closest to:
A) $20 billion
B) $19 billion
C) $25 billion
D) $24 billion
Q4) At the conclusion of this transaction, the number of shares that d'Anconia Copper will repurchase is closest to:
A) 5 million
B) 15 million
C) 20 million
D) 40 million
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Chapter 15: Debt and Taxes
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Questions
Q1) Wyatt Oil has 25 million shares outstanding and has a marginal corporate tax rate of 40%. Wyatt Oil announces that it will payout $40 million in cash to investors through a special dividend. Shareholders had previously assumed that Wyatt Oil would retain this excess cash permanently. The amount that Wyatt Oil's share price can be expected to change upon this announcement is closest to:
A) $0.56
B) $0.64
C) $0.96
D) $1.56
Q2) The income that would be available to equity holders in 2006 if Kroger was not levered is closest to:
A) $1,525 million
B) $2,035 million
C) $1,500 million
D) $1,325 million
Q3) Calculate the interest tax shield, the total amount available to payout to all the investors, and the income that would be available to equity holders if Kroger was not levered all for the year 2004.
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Chapter 16: Financial Distress, Managerial Incentives, and Information
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Q1) Assume that capital markets are perfect except for the existence of corporate taxes. Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity. You ownership stake in the firm following these new issues of debt and equity is closest to:
A) 58%
B) 55%
C) 33%
D) 50%
Q2) Which of the following industries likely to have the highest costs of financial distress?
A) Grocery store
B) Semiconductors
C) Real estate
D) Utilities
Q3) What is the expected payoff to debt holders with the speculative oil lease deal?
A) $10 million
B) $275 million
C) $85 million
D) $160 million
Q4) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) The effective dividend tax rate for a pension fund in 1999 is closest to:
A) 40%
B) 20%
C) 0%
D) 25%
Q2) The price of a share of JRN's stock is closest to:
A) $20.00
B) $24.00
C) $25.00
D) $18.00
Q3) Wyatt Oil pays a regular dividend of $2.50 per share. Typically the stock price drops by $2.00 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent transactions cost, the highest dividend tax rate of an investor who could gain from trading to capture the dividend is closest to:
A) 0%
B) 20%
C) 24%
D) 36%
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Page 19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Nielson's equity cost of capital is closest to:
A) 11.3%
B) 12.2%
C) 14.0%
D) 14.4%
Q2) The NPV for Omicron's new project is closest to:
A) $23.75
B) $27.50
C) $28.75
D) $25.75
Q3) The Free Cash Flow to Equity (FCFE) for the acquisition in year 0 is closest to:
A) $5 million
B) $100 million
C) -$100 million
D) -$50 million
Q4) The Debt Capacity for Iota's new project in year 0 is closest to:
A) $263.25
B) 87.75
C) $50.25
D) $118.00
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) The free cash flow to the firm in 2008 is closest to:
A) -5,005
B) -1,755
C) 5,575
D) 14,995
Q2) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation levered P/E ratio of Ideko in 2010 is closest to:
A) 19.0
B) 17.2
C) 16.4
D) 14.5
Q3) The free cash flow to equity in 2008 is closest to:
A) -5,005
B) -1,755
C) 5,575
D) 9,995
Q4) What range for the market value of equity for Ideko is implied by the range of EV/Sales multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital needs?
Q5) What is the purpose of the sensitivity analysis?
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Chapter 20: Financial Options
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Q1) Which of the following statements is FALSE?
A) Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move.
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out of-the-money.
C) Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price.
D) European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date.
Q2) Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.
Q3) Using options to reduce risk is called:
A) speculation.
B) a naked position.
C) hedging.
D) a covered position.
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Chapter 21: Option Valuation
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Q1) Using risk neutral probabilities, the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to:
A) $1.45
B) $2.40
C) $2.00
D) $2.15
Q2) Consider a one-year, at-the-money call option on Taggart stock. The effect on the price of this call option of an increase in the volatility from 25% to 40% is closest to:
A) $0.70 increase
B) $1.70 decrease
C) $2.30 increase
D) $2.80 increase
Q3) The Black-Scholes value of a one-year, at-the-money put option on Taggart stock is closest to:
A) $1.45
B) $3.15
C) $4.75
D) $9.50
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Chapter 22: Real Options
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Q1) Assuming that this project will provide Rearden with perpetual annual cash flows of $55,000, the NPV of investing in the project next year is closest to:
A) -281,000
B) -83,000
C) +46,000
D) +83,000
E) +143,000
Q2) The equivalent annual benefit of project A is closest to:
A) $21.70
B) $5.05
C) $24.00
D) $3.40
Q3) Assume that it will cost you $1 million to shut down the plant, but you are able to sell the plant for $5 million at any time. The value of the option to sell the plant will be closest to:
A) $3.0 million
B) $6.0 million
C) $5.0 million
D) $0.5 million
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Page 24
Chapter 23: Raising Equity Capital
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Q1) Assuming that this is the venture capitalist's first investment in your firm, what percentage of the firm will the venture capitalist own?
A) 50%
B) 40%
C) 25%
D) 33%
Q2) Based upon the price/revenue ratio, what would be a reasonable value for KD?
Q3) Aaron Inc went public at $10 per share. Aaron's investment banker charged them $0.70 per share for the IPO. This fee is called a(n):
A) allocation spread.
B) underwriting spread.
C) greenshoe fee.
D) IPO fee.
Q4) The total cost to the firm's original investors due to the market imperfections from the IPO is closest to:
A) $141 million
B) $210 million
C) $280 million
D) $489 million
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Chapter 24: Debt Financing
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Q1) Treasury securities that are semiannual-paying coupon bonds with maturities longer than 10 years are called:
A) Treasury bonds.
B) TIPS.
C) Treasury bills.
D) Treasury notes.
Q2) Which of the following statements is FALSE?
A) Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously.
B) In a leveraged buyout (LBO), a group of private investors purchases all the equity of a public corporation.
C) A term loan is a bank loan that lasts for a specific term.
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.
Q3) Suppose that in January 2001, the U.S. Treasury issued a ten-year inflation-indexed note with a coupon of 3 1/2%. On the date of issue the consumer price index (CPI) was 175.1. In January 2006, the CPI had increased to 198.3. What coupon payment was made on this bond in January 2006?
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Chapter 25: Leasing
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Q1) A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a:
A) fair market value cap lease.
B) fair market value lease.
C) $1.00 out lease.
D) fixed price lease.
Q2) If Luther acquires the new fleet of delivery trucks using an operating lease, Luther's Debt to Equity ratio will be closest to:
A) 2.0
B) 1.5
C) 0.80
D) 0.66
Q3) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
Q4) If St. Martin purchases the CT scanner, what is the amount of the lease-equivalent loan?
Q5) Is St. Martin's better off leasing the CT scanner or financing the purchase of the CT scanner with a lease-equivalent loan and by how much is St Martin's better off?
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Chapter 26: Working Capital Management
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Q1) Which of the following statements is FALSE?
A) Under the Modigliani-Miller assumptions of perfect capital markets, the amount of inventory is irrelevant.
B) Unlike trade credit, inventory represents one of the required factors of production.
C) It is the firm's financial manager who must arrange for the financing necessary to support the firm's inventory policy and who is responsible for ensuring the firm's overall profitability.
D) Inventory management receives extensive coverage in courses on operations management.
Q2) Your firm purchases goods from its supplier on terms of 1/10, net 30. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:
A) 16.8%
B) 44.6%
C) 20.1%
D) 13.0%
Q3) What is a compensating balance?
Q4) Calculate the number of days in Luther's Operating Cycle.
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Chapter 27: Short-Term Financial Planning
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Q1) A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000. The effective annual rate that this firm is paying is closest to:
A) 8.0%
B) 7.5%
C) 1.8%
D) 7.3%
Q2) Which of the following statements is FALSE?
A) Bank loans are typically initiated with a promissory note, which is a written statement that indicates the amount of the loan, the date payment is due, and the interest rate.
B) The most straightforward type of bank loan is a single, end-of-period-payment loan.
C) With a fixed interest rate, the specific rate that the bank will charge is stipulated at the time the loan is made.
D) One of the primary sources of short-term financing, especially for small businesses, is the investment bank.
Q3) Calculate the temporary working capital needs for each of the four quarters for Hasbeen Toys.
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Chapter 28: Mergers and Acquisitions
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Q1) Which of the following questions is FALSE?
A) The method of payment (cash or stock) affects how the value of the target's assets is recorded for tax purposes and it affects the combined firm's financial statements for financial reporting.
B) The combined firm must mark up the value assigned to the target's assets on the financial statements by allocating the purchase price to target assets according to their fair market value.
C) Any goodwill created in a merger deal can be amortized for tax purposes over 15 years.
D) Many transactions are carried out as acquisitive reorganizations under the tax code. These structures allow the target shareholders to defer their tax liability on the part of the payment made in acquirer stock but they do not allow the acquirer to step up the book value of the target assets.
Q2) The structure of a merger transaction is summarized in a(n):
A) swap sheet.
B) term sheet.
C) exchange sheet.
D) merger sheet.
Q3) What is a white knight?
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Chapter 29: Corporate Governance
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Q1) Which of the following statements is FALSE?
A) When the CEO is also chairman of the board, the nominating letter offering a seat to a new director comes from her. This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders.
B) Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO.
C) Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance.
D) The CEO can be expected to stack the board with directors who are less likely to challenge her.
Q2) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
Q3) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q4) How does a pyramid structure work?
Q5) What is the role of takeovers in corporate governance?
Q6) What is the difference between Inside, gray, and outside directors?
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Chapter 30: Risk Management
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Q1) The actuarially fair premium for this insurance policy is closest to:
A) $417,000
B) $446,000
C) $500,000
D) $568,000
Q2) The cash-and-carry strategy consists of all of the following simultaneous trades
EXCEPT:
A) borrow euros today using a one-year loan with the interest rate r<sub> .</sub>
B) exchange the euros for dollars today at the spot exchange rate S $/ .
C) purchase a forward contract to convert $ to .
D) invest the dollars today for one year at the interest rate r<sub>$.</sub>
Q3) In reality market imperfections exist that can raise the cost of insurance above the actuarially fair price and offset some of these benefits. These insurance market imperfections include all of the following EXCEPT:
A) adverse selection.
B) agency costs.
C) administrative and overhead costs.
D) taxation of insurance payments.
Q4) What is the actuarially fair cost of full insurance?
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Chapter 31: International Corporate Finance
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Q1) Hammond's Euro WACC is closest to:
A) 7.9%
B) 8.7%
C) 10.2%
D) 12.1%
Q2) The present value of Rearden Metal's cash outflow computed by first converting to dollars and then discounting the cash flow at the appropriate Argentine Peso rate is closest to:
A) $469,500
B) $475,000
C) $481,000
D) $484,500
Q3) Using the covered interest parity condition, the calculated three-year forward rate F<sub>3 </sub>is closest to:
A) $1.8568/£
B) $1.9161/£
C) $1.8961/£
D) $1.8764/£
Q4) How do we make adjustments when a project has inputs and outputs in different currencies?
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