Principles of Financial Management
Exam Questions
Course Introduction
Principles of Financial Management introduces students to the foundational concepts and techniques essential for effective financial decision-making in organizations. Topics include the role of the financial manager, time value of money, risk and return, capital budgeting, financial analysis and planning, and sources of financing. Through case studies and real-world examples, students learn how to evaluate financial performance, manage working capital, and make informed decisions regarding investments and financing to maximize organizational value. This course provides a vital framework for understanding how financial strategies support business objectives and long-term sustainability.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The increase in the internationalization of financial markets has led to A) companies searching the global financial markets for low-cost funds.
B) an increase in American Depository Receipts (ADRs) on the New York Stock Exchange.
C) an increase in debt obligations denominated in foreign currency on U.S. corporate balance sheets.
D) All of the options are true.
Answer: D
Q2) Irrational exuberance is when companies have stock that is undervalued.
A)True
B)False
Answer: False
Q3) Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income.
A)True
B)False
Answer: False
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Chapter 2: Review of Accounting
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Sample Questions
Q1) The sale of a firm's securities is a source of positive funds, whereas the purchase of securities is a use of funds.
A)True
B)False
Answer: True
Q2) Beginning in 2018, one of the major changes regarding the corporate tax rate was its reduction from 35% to a flat rate of 21%.
A)True
B)False
Answer: True
Q3) The long-term investments account represents a commitment of funds of at least one year or more.
A)True
B)False
Answer: True
Q4) Total assets of a firm are paid for with liabilities and stockholders' equity.
A)True
B)False Answer: True
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Industries most sensitive to inflation-induced profits are those with A) seasonal products.
B) cyclical products.
C) consumer products.
D) high-profit products.
Answer: B
Q2) Asset utilization ratios
A) relate balance sheet assets to income statement sales.
B) measure how much cash is available for reinvestment into current assets.
C) are most important to stockholders.
D) measure the firm's ability to generate a profit on sales.
Answer: A
Q3) The most rigorous test of a firm's ability to pay its short-term obligations is its A) current ratio.
B) quick ratio.
C) debt-to-assets ratio.
D) times-interest-earned ratio.
Answer: B
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) A higher growth rate in sales will often require more external funds.
A)True
B)False
Q2) The main consideration in constructing a pro forma income statement is the costs specifically associated with units sold during the time period.
A)True
B)False
Q3) Pro forma income statements and balance sheets refer to projected financial statements.
A)True
B)False
Q4) Required new funds shows that the firms need more cash during times of company growth, especially if sales increases.
A)True
B)False
Q5) The percent-of-sales method would be more accurate under a steady sales assumption than with cyclical sales.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Based on the example in the textbook, the calculation below is of a leveraged firm. DOL = \(\frac{\text {Percent change in operating income }}{\text {Percent change in unit volume }}\) = \(\frac { \frac { \$ 8,000 } { \$ 20,000 } \times 100 } { \frac { 20,000 } { 80,000 } \times 100 }\) = \(\frac { 40 \% } { 25 \% }\) = 1.6
A)True
B)False
Q2) Linear break-even analysis assumes that the change in costs have the same relationship with the change in volume.
A)True
B)False
Q3) Managers who are risk-averse and uncertain about the future would most likely minimize combined leverage.
A)True B)False
Q4) Sales commissions and raw materials are variable costs.
A)True B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Use of long-term financing and the carrying of highly liquid assets is a high-risk combination.
A)True B)False
Q2) Firms with highly volatile and perishable inventory should assume relatively low levels of risk.
A)True B)False
Q3) Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate) and 70% with short-term financing (7%) rate. Assuming a 21% tax rate, what will its annual after-tax interest costs be?
A) $81,000
B) $147,000
C) $182,400
D) $240,160
Q4) A business person's failure to realize the firm is carrying self-liquidating inventory can result in inadequate financing arrangements.
A)True B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Which of the following are characteristics of money market investments?
A) Money market funds are offered by banks.
B) Money market funds are insured up to $100,000 by federal agencies.
C) The minimum balance for money market deposit accounts is normally $5,000.
D) None of the options are true.
Q2) Which of the following is not a strategy to expedite the collection and check-clearing process?
A) Utilizing a variety of collection centers throughout a marketing area.
B) Utilizing a lockbox system.
C) Mailing checks and waiting for the check to clear.
D) Utilizing electronic payment between banks.
Q3) All of the following are methods of controlling receivables except
A) offering a cash discount.
B) reducing net terms.
C) using DBIS.
D) reducing cash sales.
Q4) Cash management becomes more important as the level of short-term interest rates rises.
A)True
B)False
Page 9
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Commercial bank term loans
A) usually carry fixed interest rates.
B) are very short-term in nature.
C) are offered to superior credit applicants.
D) are very short-term in nature and are offered to superior credit applicants.
Q2) One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.
A)True
B)False
Q3) Which of the following is not a true statement about commercial paper?
A) Finance paper is sold directly to the lender by the finance company.
B) Finance paper is also referred to as direct paper.
C) Dealer paper is sold directly to the lender by a finance company.
D) Industrial companies, utility firms, or finance companies too small to sell direct paper sell dealer paper instead.
Q4) It is difficult to acquire a loan in U.S. dollars outside the United States.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) If an individual's cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now.
A)True
B)False
Q2) The higher the interest rate used in determining the future value of a $1 annuity,
A) the smaller the future value at the end of the period.
B) the greater the future value at the end of a period.
C) the greater the present value at the beginning of a period.
D) None of these options. The interest has no effect on the future value of an annuity.
Q3) As the interest rate increases, the present value
A) increases.
B) decreases.
C) remains the same.
D) Not enough information is given to tell.
Q4) The process of earning more interest on a previous period's interest is called future value.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) An increase in inflation will cause a bond's required return to rise.
A)True
B)False
Q2) Star Corp. issued bonds two years ago with a 7% coupon rate. The bonds are currently trading for $928 in the market. Which of the following most likely has occurred since the time of issue?
A) Interest yields decreased
B) Inflation increased
C) Risk decreased
D) Real rates of return decreased
Q3) The risk premium is equal to the required yield to maturity (or rate of return) minus both the real rate of return and the inflation premium.
A)True
B)False
Q4) The discount rate depends on the market's perceived level of risk associated with an individual security.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm should always be at a single optimum debt-to-equity ratio to minimize its cost of capital.
A)True
B)False
Q2) New common stock is more expensive than required rate of return (K<sub>e</sub>) because new common stock has to
A) compensate for risk.
B) compensate for more dividends.
C) compensate for expansionary problems.
D) cover distribution costs.
Q3) According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes.
A)True
B)False
Q4) The pre-tax cost of debt for a new issue of debt is determined by A) the investor's required rate of return on issued stock. B) the coupon rate of existing debt.
C) the yield to maturity of outstanding or comparable bonds.
D) All of these options are true.
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) If a firm is experiencing no capital rationing, it should accept all investment proposals
A) as long as it has available funds.
B) that return an amount equal to or greater than the cost of capital.
C) that return an amount greater than the cost of equity.
D) that are available, regardless of return.
Q2) The profitability index is calculated by dividing the project's net present value by the present value of the projected cash outflows.
A)True
B)False
Q3) For a small business, it is possible for the purchase price of an asset to be expensed rather than depreciated.
A)True
B)False
Q4) To find the exact internal rate of return for projects with uneven cash flows, we can interpolate between two factors from the time value of money table: present value of a $1.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) If one project has a higher standard deviation than another, A) it may have a lower risk.
B) it may have a lower expected value.
C) it has fewer possible outcomes.
D) it may be riskier, but this can only be determined by the coefficient of variation.
Q2) A project that carries a normal amount of risk and does not affect the risk exposure of the firm should be discounted back at the A) coefficient of variation.
B) beta.
C) risk-free rate.
D) firm's weighted average cost of capital.
Q3) If possible outcomes are D and probabilities are P, the standard deviation is defined as ? =
\(\sqrt { \sum ( D - D ) ^ { 2 } P }\)
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) Commission rates for stock transactions are fixed as a result of the Securities Act Amendments of 1975.
A)True
B)False
Q2) The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds.
A)True
B)False
Q3) Brokers actually own the securities they buy and sell on the floor of the exchange.
A)True
B)False
Q4) A key influence in recent years has been the growth in market value of futures exchanges.
A)True
B)False
Q5) The market for common stocks dominates the corporate bond markets in size.
A)True B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Which of the following is a characteristic of leveraged buyouts?
A) Buyouts are usually financed by debt.
B) Some corporate assets are often sold after the buy-out is completed.
C) Funds for the buy-out are raised through securities markets.
D) all the options are characteristics of a leveraged buyout.
Q2) The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.
A)True
B)False
Q3) Which of the following are advantages of being privately placed?
A) Lower costs
B) Basic registration with the SEC
C) More investors available to purchase shares
D) Two of the options are correct
Q4) In countries where stocks are publicly traded, IPOs are underpriced
A) in very few countries.
B) in less than half the countries.
C) in every country.
D) none of these options are true.
17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) An Aa2 bond is rated lower than a ________ bond.
A) Aa1
B) Aa3
C) A1
D) A2
Q2) Which company is a leader in rating bonds?
A) Goldman Sachs
B) Bloomberg
C) ValueLine
D) Moody's Investor Service
Q3) In an operating lease situation, the lessee shows the asset and the debt on its financial statements.
A)True
B)False
Q4) Which of the following are advantages of leasing?
A) A lease obligation may be substantially less restrictive than the provisions of a bond indenture.
B) There may be no down payment requirement as in a purchase.
C) The negative effects of obsolescence may be eliminated.
D) All of these options are advantages.
Page 18
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Common stockholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place.
A)True
B)False
Q2) A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 21%, would receive an after-tax preferred yield of approximately ________. Assume the tax rate on dividends is 15%.
A) 10.2%
B) 7.7%
C) 8.12%
D) 9.3%
Q3) Some preferred stocks are "participating preferreds," allowing for an increase in the preferred stock dividend when additional profits are available after common stock dividends have been paid.
A)True
B)False
Q4) Bondholders never have any control over the actions of a firm.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into maturity.
A)True
B)False
Q2) A general rule of thumb would be that firms with a faster growth rate have smaller dividend payout ratios.
A)True
B)False
Q3) In the growth stage (Stage III) of the life cycle, the company focuses on growth of the stock and usually doesn't pay any cash dividends.
A)True
B)False
Q4) The Internal Revenue Service generally places a higher tax rate on long-term capital gains than it does upon ordinary or "qualified" dividends.
A)True
B)False
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Page 20
Chapter 19: Convertibles, Warrants, and Derivatives
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Q1) Investors will generally choose the call price rather than the shares of stock during a forced conversion.
A)True
B)False
Q2) On average, convertible bonds have conversion premiums of less than 10% at the time of issue.
A)True B)False
Q3) A convertible bond has two separate sources of value: the bond investment value and the bond conversion value.
A)True
B)False
Q4) A warrant is of huge benefit to the warrant holder when the stock rises far above the exercise price.
A)True B)False
Q5) The conversion premium is equal to the market price minus the conversion value. A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) In planning mergers, there is a tendency to ________ synergistic benefits.
A) overestimate
B) underestimate
C) correctly estimate
D) not estimate
Q2) One motivation to merge is through tax savings.
A)True
B)False
Q3) Horizontal integration is usually prohibited or severely restricted by government antitrust regulations.
A)True
B)False
Q4) When a tobacco firm merges with a steel company, it would be called
A) a horizontal merger.
B) a vertical merger.
C) a conglomerate merger.
D) a consolidation.
Q5) Vertical integration usually represents acquisition of a competitor.
A)True
B)False
Page 22
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Chapter 21: International Financial Management
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Sample Questions
Q1) Companies such as Coca-Cola and McDonald's generate more than 50% of their sales revenues from foreign activities.
A)True
B)False
Q2) The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.
A)True
B)False
Q3) An exporter is able to satisfy foreign demand for a product while avoiding long-term investment in that foreign country, although this method is considered riskier than all other alternatives.
A)True
B)False
Q4) The most widely used currency in the Eurobond market is the euro.
A)True
B)False
Q5) Translation exposure occurs because of changes in foreign exchange rates. A)True
B)False
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