Principles of Managerial Finance Exam
Materials
Course Introduction
Principles of Managerial Finance introduces students to the fundamental concepts and tools required for effective financial management within organizations. The course covers the role of the financial manager, time value of money, risk and return analysis, valuation of securities, financial statement analysis, and capital budgeting techniques. Students will explore methods for making informed financing, investment, and dividend decisions aimed at maximizing firm value. Through real-world examples and case studies, the course emphasizes analytical skills and practical applications essential for sound financial planning and decision-making in todays dynamic business environment.
Recommended Textbook
Principles of Managerial Finance 13th Edition by Lawrence
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19 Chapters
3260 Verified Questions
3260 Flashcards
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Page 2
J. Gitman
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Financial services are concerned with the duties of the financial manager.
A)True
B)False
Answer: False
Q2) A major weakness of a partnership is
A) limited liability.
B) difficulty liquidating or transferring ownership.
C) access to capital markets.
D) low organizational costs.
Answer: B
Q3) The primary emphasis of the financial manager is the use of A) accrued earnings.
B) cash flow.
C) organization charts.
D) profit incentives.
Answer: B
Q4) The wealth of corporate owners is measured by the share price of the stock.
A)True
B)False
Answer: True
Page 3
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) A competitive market that allocates funds to their most productive use is called a(n)
A) liquid market.
B) middleman's market.
C) efficient market.
D) investor's market.
Answer: C
Q2) In a ________ market, the buyer and seller are brought together to trade securities in an organization called ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
Answer: C
Q3) When home prices are falling we would expect
A) high mortgage default rates.
B) low mortgage default rates.
C) unchanged mortgage default rates.
D) a higher percentage of owner home equity.
Answer: A
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) All of the following are examples of current liabilities EXCEPT
A) accounts receivable.
B) accounts payable.
C) accruals.
D) notes payable.
Answer: A
Q2) The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity.
A)True
B)False
Answer: True
Q3) Total assets for CEE in 2010 were ________. (See Table 3.1)
A) $ 45,895
B) $124,300
C) $ 58,603
D) $ 97,345
Answer: D
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. The excess cash balance (required financing) for August is
A) required total financing of $500.
B) excess cash balance of $5,500.
C) excess cash balance of $500.
D) required total financing of $2,500.
Q2) Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).
A)True
B)False
Q3) Operating cash flow (OCF) is equal to the firm's net operating profits after taxes minus all non-cash charges.
A)True
B)False
Q4) If a pro forma balance sheet dated at the end of May was prepared from the information presented, the accounts receivable would total ________. (See Table 4.3)
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) How long would it take for Nico to save an adequate amount for retirement if he deposits $40,000 per year into an account beginning one year from today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?
A) 15.0 years
B) 15.5 years
C) 14.5 years
D) 16.5 years
Q2) You have been given the opportunity to earn $20,000 five years from now if you invest $9,524 today. What will be the rate of return to your investment?
Q3) Suzy wants to buy a house but does not want to get a loan. The average price of her dream house is $500,000 and its price is growing at 5 percent per year. How much should Suzy invest in a project at the end of each year for the next 5 years in order to accumulate enough money to buy her dream house with cash at the end of the fifth year? Assume the project pays 12 percent rate of return.
Q4) Everything else being equal, the longer the period of time, the lower the present value.
A)True
B)False
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) The yield curve in an economic period where higher future inflation is expected would most likely be
A) upward-sloping.
B) flat.
C) downward-sloping.
D) linear.
Q2) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity. This option has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have fallen since the bond was issued.
A)True
B)False
Q3) A ________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.
A) redemption clause
B) sinking-fund requirement
C) conversion feature
D) subordination clause
Q4) Calculate the current value of Bond M. (See Table 6.2)
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Chapter 7: Stock Valuation
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Sample Questions
Q1) The book value per share of common stock is the amount per share of common stock that would be received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.
A)True
B)False
Q2) Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.
A)True
B)False
Q3) Common stockholders expect to earn a return by receiving
A) semiannual interest.
B) fixed periodic dividends.
C) dividends.
D) annual interest.
Q4) Interest paid to bondholders is tax deductible but dividends paid to stockholders is not.
A)True
B)False
Q5) Calculate the estimated dividend for 2004. (See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets, which portfolio would you recommend? (See Table 8.1)
A) Assets A and B
B) Assets A and C
C) none of the available combinations
D) cannot be determined
Q2) The ________ is a statistical measure of the relationship between series of numbers.
A) coefficient of variation
B) standard deviation
C) correlation
D) probability
Q3) The beta coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset return.
A)True
B)False
Q4) Unsystematic risk can be eliminated through diversification.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The ________ from the sale of a security are the funds actually received from the sale after ________, or the total costs of issuing and selling the security, which have been subtracted from the total proceeds.
A) gross proceeds; the after-tax costs
B) gross proceeds; the flotation costs
C) net proceeds; the flotation costs
D) net proceeds; the after-tax costs
Q2) Weighing schemes for calculating the weighted average cost of capital include all of the following EXCEPT
A) book value weights.
B) optimal value weights.
C) market value weights.
D) target weights.
Q3) The cost of retained earnings equity for Tangshan Mining would be 18.00 percent if the expected return on U.S. Treasury Bills is 5.00 percent, the market risk premium is 10.00 percent, and the firm's beta is 1.3.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If a firm has unlimited funds to invest in capital assets, all independent projects that meet its minimum investment criteria should be implemented.
A)True
B)False
Q2) If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.
A)True
B)False
Q3) A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital is called internal rate of return.
A)True
B)False
Q4) Net present value profiles are most useful when selecting among mutually exclusive projects.
A)True
B)False
Q5) Which projects should the firm implement? (See Table 10.5)
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included as relevant in computing a project's incremental cash flows.
A)True
B)False
Q2) For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table 11.2)
A) $21,000
B) $42,000
C) $47,850
D) $50,850
Q3) For Proposal 1, the depreciation expense for year 1 is ________. (See Table 11.2)
A) $110,400
B) $115,200
C) $150,000
D) $300,000
Q4) Given the information in Table 11.4, compute the payback period.
Q5) Calculate the tax effect from the sale of the existing asset. (See Table 11.1)
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Scenario analysis is a behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of variables.
A)True
B)False
Q2) Breakeven cash inflow refers to
A) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV > $0.
B) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV < $0.
C) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR < cost of capital.
D) none of the above is correct.
Q3) In the context of capital budgeting, risk generally refers to
A) the degree of variability of the cash inflows.
B) the degree of variability of the initial investment.
C) the chance that the net present value will be greater than zero.
D) the chance that the internal rate of return will exceed the cost of capital.
Q4) Which project do you recommend? (See Table 12.4)
Q5) Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) In general, non-U.S. companies have much higher debt ratios than do their U.S. counterparts because financial markets are much more developed in the United States than elsewhere and have played a much greater role in corporate financing than has been the case in other countries.
A)True
B)False
Q2) Probability of bankruptcy is determined by A) financial risk.
B) total risk.
C) business risk.
D) interest rate risk.
Q3) Generally, ________ in leverage result in ________ return and ________ risk.
A) increases; decreased; increased B) increases; decreased; decreased
C) increases; increased; increased
D) decreases; increased; decreased
Q4) Financial leverage results from the presence of variable financial costs in the firm's income stream.
A)True
B)False
Page 15
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Chapter 14: Payout Policy
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Sample Questions
Q1) The net effect of a stock repurchase is
A) similar to the payment of a stock dividend.
B) similar to a cash dividend.
C) similar to a stock split.
D) similar to a reverse stock split.
Q2) The repurchase of stock ________ the earnings per share and ________ the market price of stock.
A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases
Q3) Modigliani and Miller suggest that the value of the firm is not affected by the firm's dividend policy, due to
A) the relevance of dividends.
B) the clientele effect.
C) the informational content.
D) the optimal capital structure.
Q4) Purchasers of a stock selling ex-dividend receive the current dividend. A)True B)False
Page 16
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) The turnover of accounts receivable can be calculated by dividing annual sales by accounts receivable.
A)True
B)False
Q2) A firm's credit ________ provides guidelines for determining whether to extend credit to a customer and how much credit to extend.
A) scoring
B) terms
C) policy
D) standards
Q3) The conservative financing strategy results in financing all projected funds requirements with ________ funds and use of ________ funds in the event of an unexpected cash outflow.
A) long-term; short-term
B) short-term; long-term
C) permanent; seasonal
D) seasonal; permanent
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Page 17
Chapter 16: Current Liabilities Management
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Sample Questions
Q1) All of the following goods represent appropriate collateral for a secured loan to a school supply manufacturer EXCEPT
A) reams or rolls of paper.
B) unbound pages.
C) notebooks and binders.
D) index cards.
Q2) For firms that are in a financial position to take a cash discount, it is generally a more financially sound decision not to take the discount if the terms offered are 2/10 net 30.
A)True
B)False
Q3) Tangshan Mining borrowed $10,000 for one year under a revolving credit agreement that authorized and guaranteed the firm access to $20,000. The revolving credit agreement had a stated interest rate of 8 percent and charged the firm a half percent commitment fee on the unused portion of the agreement. Based on this information, the effective annual interest rate on the loan was 9.50 percent.
A)True
B)False
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18
Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) A hybrid security is a form of debt or equity financing that possesses characteristics of both debt and equity.
A)True
B)False
Q2) A warrant is attached to a $1,000 par, 10 percent, 15-year bond, paying annual interest and having 10 warrants attached for the purchase of the firm's stock. The bonds were initially sold for $1,020. When issued similar risk straight bonds were selling to yield a 12 percent rate of return. Calculate the implied price of the warrant.
Q3) A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the same asset is called a(n)
A) operating lease.
B) leveraged lease.
C) sale-leaseback arrangement.
D) direct lease.
Q4) Convertibles can normally be sold with lower interest rates than non-convertibles.
A)True
B)False
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19
Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) The debtor in possession in a Chapter 11 bankruptcy proceeding is responsible for valuing the firm both in terms of its liquidation value and as a going concern.
A)True
B)False
Q2) A financial merger is a merger transaction undertaken to achieve economies of scale.
A)True B)False
Q3) The overriding goal for merging is to
A) increase cash flows.
B) maximize shareholder wealth as reflected in the acquirer's share price.
C) maximize shareholder wealth as reflected in the share price of the target firm.
D) maximize operating efficiency.
Q4) One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of relatively liquid assets that could be used as loan collateral.
A)True
B)False
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) When fewer units of a foreign currency are required to buy one dollar, the currency is said to have ________ with respect to the dollar.
A) appreciated
B) depreciated
C) consolidated
D) remained fixed
Q2) A short-term financial decision based on an MNC management's expectation that the local foreign currency will appreciate may be
A) increasing local customers' accounts receivable and increasing local notes payable.
B) decreasing local notes receivable and decreasing accruals.
C) increasing local inventories and increasing local notes payable.
D) increasing local accounts receivable and decreasing local accounts payable.
Q3) ________ is a treaty that has governed world trade throughout most of the post World War II era.
A) NAFTA
B) GATT
C) WTO
D) CAFTA
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