Principles of Managerial Finance Exam Bank
Course Introduction
Principles of Managerial Finance introduces the foundational concepts and tools used in financial management within organizations. The course covers topics such as financial analysis, planning and control, the time value of money, risk and return, asset valuation, and capital budgeting. Students will learn how to interpret financial statements, evaluate investment opportunities, determine financing options, and make effective financial decisions to maximize firm value. Through case studies and real-world applications, the course equips students with practical skills essential for managing financial resources in various business contexts.
Recommended Textbook
Principles of Managerial Finance 14th Edition by Lawrence J. Gitman
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19 Chapters
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The financial manager of a firm prepares financial statements that recognize revenue at the point of sale and expenses when incurred.
A)True
B)False
Answer: False
Q2) A controller administers a firm's credit policy by analyzing or managing the evaluation of credit applications, extending credit, and monitoring and collecting accounts receivable.
A)True
B)False Answer: False
Q3) A major weakness of a partnership is ________.
A) the difficulty in maintaining owners' control
B) the difficulty in liquidating or transferring ownership
C) the double taxation of income
D) its high organizational costs
Answer: B
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) The process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market is called ________.
A) valuation
B) securitization
C) private placement
D) capital restructuring
Answer: B
Q2) When home prices are falling, we would expect a(n) ________.
A) high mortgage default rates
B) low mortgage default rates
C) unchanged mortgage default rates
D) higher percentage of owner home equity
Answer: A
Q3) By definition, the money market involves the buying and selling of ________.
A) stocks and bonds
B) short-term securities
C) all financial instruments except derivatives
D) secured premium notes
Answer: B
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) Which of the following is used to analyze a firm's financial performance over different years?
A) time-series analysis
B) break-even analysis
C) gap analysis
D) marginal analysis
Answer: A
Q2) Which of the following is excluded when calculating quick ratio?
A) accounts receivable
B) accounts payable
C) cash
D) inventory
Answer: D
Q3) Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements?
A) debt equity ratio
B) average payment period
C) quick ratio
D) total asset turnover
Answer: B
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) At the end of May, the firm has an ending cash balance of ________. (See Table 4.3)
A) $9,000
B) $16,750
C) $14,250
D) $12,000
Q2) Which of the following is a cash flow from financing activities?
A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock
Q3) The key aspects of a financial planning process are ________.
A) cash planning and investment planning
B) operations planning and investment planning
C) investment planning and profit planning
D) cash planning and profit planning
Q4) The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.
A)True
B)False
Page 6
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent annually. She plans to leave the funds in this account for seven years earning interest. If the goal of this deposit is to cover a future obligation of $65,000, what recommendation would you make to Aunt Tillie?
Q2) The greater the interest rate and the longer the period of time, the higher the present value.
A)True
B)False
Q3) The present value of a $20,000 perpetuity at a 7 percent discount rate is ________.
A) $186,915
B) $285,714
C) $140,000
D) $325,000
Q4) An annuity due is an amount that occur at the beginning of each period.
A)True B)False
Q5) Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of $960.43. Calculate the original principal amount.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.
A)True
B)False
Q2) Duration measures the sensitivity of a bond's prices to changing interest rates.
A)True
B)False
Q3) A type of long-term financing used by both corporations and government entities is ________.
A) common stocks
B) bonds
C) preferred stocks
D) retained earnings
Q4) ________ allow bondholders to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time.
A) Call options
B) Stock purchase warrants
C) Debentures
D) Put options
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Stock rights provide the stockholder with ________.
A) the right to purchase additional shares in direct proportion to their number of owned shares
B) the right to elect the board of directors
C) cumulative voting privileges over the preference stockholders
D) the opportunity to receive extraordinary earnings
Q2) Smith Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?
A) 10%
B) 12%
C) 13%
D) 14%
Q3) A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left-the residual-after all other claims on the firm's income and assets have been satisfied.
A)True
B)False
Q4) Calculate the estimated dividend for 2015. (See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance.
A)True
B)False
Q2) Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.
A)True
B)False
Q3) The portion of an asset's risk that is attributable to firm-specific, random causes is called ________.
A) unsystematic risk
B) nondiversifiable risk
C) market risk
D) political risk
Q4) For normal probability distributions, 95 percent of the possible outcomes will lie between ±1 standard deviation from the expected return.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The cost of new common stock financing is higher than the cost of retained earnings due to ________.
A) flotation costs and underpricing
B) flotation costs and overpricing
C) flotation costs and commission costs
D) commission costs and overpricing
Q2) The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of a firm as measured by the beta coefficient.
A)True
B)False
Q3) A tax adjustment must be made in determining the cost of ________.
A) long-term debt
B) common stock
C) preferred stock
D) retained earnings
Q4) The cost of new common stock is normally greater than any other long-term financing cost.
A)True
B)False
Page 11
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If a firm has limited funds to invest, all the mutually exclusive projects that meet its minimum investment criteria should be implemented.
A)True
B)False
Q2) The discount rate is the minimum return that must be earned on a project to leave a firm's market value unchanged.
A)True
B)False
Q3) Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because ________.
A) it explicitly considers the time value of money
B) it can be viewed as a measure of risk exposure due to its focus on liquidity
C) the determination of the required payback period is an objectively determined criteria
D) it considers the timing of cash flows and therefore the time value of money
Q4) Which projects should the firm implement? (See Table 10.5)
Q5) Given the information in Table 10.2 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) Capital gain is the portion of the sale price that is in excess of the initial purchase price.
A)True
B)False
Q2) A corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is
A) an increase of $10,000
B) a decrease of $10,000
C) a decrease of $90,000
D) an increase of $80,000
Q3) Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision.
A)True
B)False
Q4) Calculate the initial investment required for the new asset. (See Table 11.4)
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Scenario analysis is a statistics-based behavioral approach that applies predetermined probability distributions and random numbers to estimate risky outcomes.
A)True
B)False
Q2) The range of the annual cash inflows for Project A is ________. (See Table 12.1)
A) $30,000
B) $10,000
C) $5,000
D) $0
Q3) The discount rate that should be used in the net present value calculation to compensate for risk is ________. (See Table 12.2)
A) 6 percent
B) 15 percent
C) 18 percent
D) 24 percent
Q4) For assets traded in an efficient market, the diversifiable risk can be eliminated through diversification.
A)True
B)False
Page 14
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The relationship between operating and financial leverage is additive rather than multiplicative.
A)True
B)False
Q2) Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the breakeven analysis.
A)True
B)False
Q3) Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.
A)True
B)False
Q4) The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth.
A)True
B)False
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Chapter 14: Payout Policy
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Sample Questions
Q1) Paying a stock dividend ________.
A) decreases the retained earnings account
B) has no effect on the retained earnings account
C) increases the retained earnings account
D) reorganizes the income
Q2) A stock split commonly increases the stock's per share par value.
A)True
B)False
Q3) A stock split is usually taxable to a firm as it restructures the capital.
A)True
B)False
Q4) At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash dividend for the holders of record on Monday, May 1. The firm's stock will sell ex dividends on ________.
A) April 28
B) May 5
C) April 29
D) April 27
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Page 16
Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) The cost of marginal bad debts is found by multiplying a firm's opportunity cost by the difference between the level of bad debts before and after the relaxation of credit standards.
A)True
B)False
Q2) By increasing collection expenditures, a firm can decrease bad debt losses up to a point, beyond which bad debts cannot be economically reduced.
A)True
B)False
Q3) A(n) ________ in current assets increases net working capital, thereby ________ the risk of insolvency.
A) decrease; increasing B) increase; increasing C) increase; reducing D) decrease; reducing
Q4) Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates are greater than expected. A)True B)False
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
A)True
B)False
Q2) A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net
30. The firm paid for these goods on the 5th day after the date of sale. The firm must pay ________ for the goods.
A) $990
B) $900
C) $1,000
D) $1,100
Q3) A(n) ________ effectively raises the interest cost to the borrower on a line of credit.
A) operating-change restriction
B) annual cleanup
C) compensating balance
D) commitment fee
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Chapter 17: Hybrid and Derivative Securities
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Q1) The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).
A)True
B)False
Q2) The market value of a warrant is ________ the theoretical value of the warrant. A) below B) equal to C) above
D) less than or equal to
Q3) A lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the assets that are being leased.
A)True
B)False
Q4) A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.
A)True
B)False
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Q1) A major impetus fueling financial mergers during the 1980s was ________.
A) high interest rates
B) high tax rates
C) high cash balances that could be utilized for takeovers
D) ready availability of junk bond financing
Q2) A leveraged buyout needs to be carried out through ________.
A) a hostile takeover
B) a friendly merger
C) a vertical merger or a hostile takeover
D) a conglomerate merger
Q3) Which of the following represents an advantage for holding companies?
A) They are easy to analyze for investment purposes.
B) They are facilitated with reduced federal corporate taxes due to the holding company status.
C) They are exempted from double taxation.
D) They permit a firm to control a large amount of assets with relatively small dollar investment.
Q4) In an LBO, 90 percent or more of the purchase price is financed with debt.
A)True
B)False
Page 20
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) Foreign bonds are sold primarily in ________.
A) countries other than the country in which the issue is denominated
B) U.S by corporations based outside the United States
C) all major international markets except the domestic market
D) the country of the currency of issue
Q2) Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is a differing inflation rate between two countries.
A)True
B)False
Q3) The ________ is the taxation technique that increases the U.S. income of an MNC by the amount of foreign income (before foreign taxes). The U.S. tax calculation is then based on that higher level.
A) unitary tax law
B) grossing up procedure
C) GmbH
D) nationalization procedure
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