Principles of Managerial Finance Exam Solutions
Course Introduction
Principles of Managerial Finance introduces the fundamental concepts and tools necessary for effective financial management within organizations. The course covers the role of the financial manager, financial statement analysis, time value of money, valuation of stocks and bonds, risk and return, cost of capital, and capital budgeting. Students learn how financial decisions are made to maximize the value of a firm while considering ethical and global perspectives. Through case studies and practical applications, the course equips students with analytical skills essential for evaluating investment opportunities, managing financial resources, and understanding the financial implications of business decisions.
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Principles of Managerial Finance 14th Edition by Lawrence J. Gitman
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19 Chapters
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Financial managers evaluating decision alternatives or potential actions must consider ________.
A) only risk
B) only return
C) either risk or return
D) risk, return, and the impact on share price
Answer: D
Q2) The implementation of a pro-active ethics program is expected to result in ________.
A) a positive corporate image and increased respect, but is not expected to affect cash flows
B) an increased share price resulting from a decrease in risk, but is not expected to affect cash flows
C) a positive corporate image and increased respect, but is not expected to affect share price
D) a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price
Answer: D
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Which of the following is a means of selling bonds or stocks to the public?
A) private placement
B) public offering
C) organized selling
D) direct placement
Answer: B
Q2) Which of the following is true of preferred stock?
A) It has features of bonds and a common stock.
B) It has a claim on assets prior to creditors in the event of liquidation.
C) Its dividends can be paid only after paying dividends to the common stockholders.
D) It usually has a maturity of thirty years.
Answer: A
Q3) Which of the following is an example of marketable securities?
A) U.S.Treasury bills
B) treasury stock
C) mortgage backed securities
D) loans
Answer: A
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4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) Dana Dairy Products' gross profit margin was inferior to the industry standard. This may have resulted from ________. (See Table 3.2)
A) a high sales price
B) the high cost of goods sold
C) excessive selling and administrative expenses
D) excessive interest expense
Answer: B
Q2) Time-series analysis is the evaluation of a firm's financial performance in comparison to other firm(s) at the same point in time.
A)True
B)False
Answer: False
Q3) Accounting practices and procedures used to prepare financial statements are called ________.
A) SEC
B) IFRS
C) GAAP
D) IRB
Answer: C
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) In general, ________.
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life
Q2) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.
A) $35,000
B) $700,000
C) $70,000
D) $45,000
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Chapter 5: Time Value of Money
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Sample Questions
Q1) The effective rate of interest and compounding frequency are inversely related.
A)True
B)False
Q2) Marc has purchased a new car for $15,000. He paid $2,500 as down payment and he paid the balance by a loan from his hometown bank. The loan is to be paid on a monthly basis for two years charging 12 percent interest. How much are the monthly payments?
Q3) 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) 12.2 years
B) 15.7 years
C) 14.5 years
D) 16.5 years
Q4) Calculate the present value of an annuity of $3,900 each year for four years, assuming an opportunity cost of 10 percent.
Q5) The effective annual rate increases with increasing compounding frequency.
A)True
B)False
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Upward-sloping yield curves result from higher future inflation expectations, lender preferences for shorter maturity loans, and greater supply of short-term as opposed to long-term loans relative to their respective demand.
A)True
B)False
Q2) Bondholders will convert their convertible bonds into shares of stock only when the conversion price is greater than the market price of the stock.
A)True
B)False
Q3) The shorter the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required return.
A)True
B)False
Q4) The components of risk premium includes business risk, financial risk, interest rate risk, liquidity risk, and tax risk.
A)True
B)False
Q5) 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) In the Gordon model, the value of a common stock is the ________.
A) net value of all assets which are liquidated for their exact accounting value
B) actual amount each common stockholder would expect to receive if the firm's assets are sold
C) present value of a non-growing dividend stream
D) present value of a constant growing dividend stream
Q2) In valuation of common stock, the price/earnings multiple approach is considered superior to the use of book or liquidation values since it considers expected earnings.
A)True
B)False
Q3) Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?
A) 8%
B) 9%
C) 10%
D) 11%
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) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent given the facts above?
Q2) A(n) ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, everything else remaining the same.
A) increase; an increase; an increase
B) increase; a decrease; an increase
C) increase; an increase; a decrease
D) decrease; a decrease; a decrease
Q3) Standard deviation is a measure of relative dispersion that is useful in comparing the risks of assets with different expected returns.
A)True
B)False
Q4) Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The capital asset pricing model is used to calculate the effect of increase in prices of capital assets due to inflation.
A)True
B)False
Q2) The cost of retained earnings is ________.
A) less than the cost of debt
B) equal to the cost of a new issue of common stock
C) equal to the cost of common stock equity
D) irrelevant to the investment/financing decision
Q3) One measure of the cost of common stock equity is the rate at which investors discount the expected common stock dividends of the firm to determine its share value.
A)True
B)False
Q4) In computing the weighted average cost of capital, the historical weights are either book value or market value weights based on actual capital structure proportions.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.2)
A) an annuity and a conventional cash flow
B) a mixed stream and a nonconventional cash flow
C) an annuity and a nonconventional cash flow
D) a mixed stream and a conventional cash flow
Q2) Which of the following capital budgeting techniques ignores the time value of money?
A) payback period approach
B) net present value
C) internal rate of return
D) profitability index
Q3) Using the internal rate of return approach to ranking projects, which project(s) should the firm accept? (See Table 10.4)
A) 1, 2, 3, 4, and 5
B) 1, 2, 3, and 5
C) 2, 3, 4, and 6
D) 1, 3, 4, and 6
Q4) 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) Calculate the tax effect from the sale of the existing asset. (See Table 11.1)
Q2) Given the information in Table 11.4, compute the payback period.
Q3) The internal rate of return for the project is ________. (See Table 11.5)
A) between 7 and 8 percent
B) between 9 and 10 percent
C) greater than 12 percent
D) between 10 and 11 percent
Q4) 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
Q5) Compute the initial purchase price for an asset with book value of $34,800 and total accumulated depreciation of $85,200.
Q6) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.
A)True
B)False
Q7) Calculate the initial investment of the new asset. (See Table 11.1)
Q8) Given the information in Table 11.4, compute the initial investment.
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Which project would be preferable if both projects were of average risk as the overall firm and Tangshan Mining has a beta of 1.0? (See Table 12.3)
A) Project M because it has a higher NPV
B) Project N because it has a higher NPV
C) Project N because it has a higher IRR
D) Project M because it has a higher IRR
Q2) Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate (RADR) approach implicitly assumes that risk is an increasing function of time.
A)True
B)False
Q3) Exchange rate risk is the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.
A)True
B)False
Q4) Using the risk-adjusted discount rate method of project evaluation, find the NPV for projects X and Y. Which project should Nico select using this method? (See Table 12.5)
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) Financial leverage measures the effect of fixed financing costs on the relationship between ________.
A) sales and EBIT
B) sales and EPS
C) EBIT and EPS
D) net income and sales
Q2) Because of the extensive research conducted in recent years in the area of capital structure theory, it is now possible for financial managers to pinpoint with great accuracy a firm's optimal capital structure.
A)True
B)False
Q3) Carol's Dolls has fixed operating costs of $25,000. Its sale price is $55 per doll, and its variable operating cost is $30 per doll. It sells 3,000 dolls per month. The firm's earnings before interest and taxes is ________.
A) $37,500
B) $55,000
C) $75,000
D) $50,000
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Chapter 14: Payout Policy
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Sample Questions
Q1) When common stock is repurchased and retired, the underlying motive is to
A) delay taxes
B) boost the stock's dividends
C) distribute the excess cash to the owners
D) reduce the retained earnings balance
Q2) The purpose of a stock split is to ________.
A) change a firm's capital structure
B) decrease the dividend
C) enhance the trading activity of the stock by lowering the market price
D) increase the market price of a stock
Q3) By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at a value that is below the prevailing market price.
A)True
B)False
Q4) A constant-payout-ratio dividend policy is based on the payment of a certain percentage of earnings to owners in each dividend period.
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) Credit analysts usually analyze an applicant's creditworthiness by using the dimensions of credit such as character, capacity, capital, collateral, and conditions.
A)True
B)False
Q2) Assuming that a firm has done all it can to stimulate customers to pay promptly and to select vendors offering the most attractive and flexible credit terms, it can further speed collections and slow disbursements by taking advantage of the "float" existing in the collection and payment systems.
A)True
B)False
Q3) The cash conversion cycle is the sum of average age of the inventory and average collection period minus average payment period.
A)True
B)False
Q4) Processing float is the delay between the receipt of a check by a payee and its deposit in firm's account.
A)True
B)False
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) The major type of loan made by banks to businesses is the ________.
A) fixed-asset-based loan
B) short-term secured loan
C) short-term, self-liquidating loan
D) capital improvement loan
Q2) A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is ________.
A) 8.9 percent
B) 8 percent
C) 7.2 percent
D) 7.0 percent
Q3) In doing business in foreign countries, financing operations in the local market not only improves the company's business ties to the host community but also minimizes exchange rate risk.
A)True
B)False
Q4) Secured short-term financing has specific assets pledged as collateral.
A)True
B)False
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) From a firm's point-of-view, which of the following is true of issuance of convertible bonds?
A) It acts as a permanent source of cheap funds.
B) It results in a non-tax-deductible interest payments.
C) It is an immediate sale of common stock.
D) It decreases financial leverage upon conversion.
Q2) If an investor buys a 100-share put option for $150 with an exercise price of $38 and the underlying price per share of the stock at expiration is $39, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $250.
B) There would be a profit of $150.
C) There would be a loss of $250.
D) There would be a loss of $150.
Q3) Since the conversion feature provides the purchaser of a convertible bond with the possibility of becoming a stockholder, convertible bonds are a less expensive form of financing than similar-risk nonconvertible or straight bonds.
A)True
B)False
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) A tender offer is a formal offer to purchase a given number of shares of a firm's stock at a specified price.
A)True
B)False
Q2) A(n) ________ is undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.
A) operating merger
B) strategic merger
C) financial merger
D) hostile takeover
Q3) A divestiture that results in an operating unit becoming an independent company is a ________.
A) sale of a line of business
B) strategic merger
C) spin-off of an operating unit
D) leveraged buyout
Q4) A congeneric merger is a merger combining firms in unrelated businesses.
A)True
B)False
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) A political risk that might affect all foreign firms in a host country is termed a ________ risk; a political risk that might affect only an individual firm or specific industry in a host country is termed a ________ risk.
A) macro political; micro political
B) micro political; macro political
C) micro political; foreign exchange
D) foreign exchange; micro political
Q2) When fewer units of a foreign currency are required to buy one dollar, the currency is said to have ________.
A) appreciated with respect to the dollar
B) depreciated with respect to the dollar
C) appreciated with respect to the home currency
D) appreciated with respect to the average rate of the home currency
Q3) In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parent's currency is involved.
A)True
B)False
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