Principles of Managerial Finance
Textbook Exam Questions
Course Introduction
Principles of Managerial Finance introduces students to the fundamental concepts and tools necessary for effective financial decision-making within organizations. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and financial planning. Emphasis is placed on understanding how managers utilize financial information to plan, evaluate, and control operations while striving to maximize firm value. Students will engage with real-world case studies and quantitative exercises, developing the skills needed to analyze financial performance and support strategic business objectives.
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Principles of Managerial Finance Brief 8th Edition by Chad J. Zutter
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Finance is ________.
A)the system of verifying,analyzing,and recording business transactions
B)the science of the production,distribution,and consumption of goods and services
C)the science and art of how individuals and businesses raise,allocate,and invest money
D)the art of merchandising products and services
Answer: C
Q2) Which of the following is TRUE of sole proprietorships and corporations?
A)It is difficult to transfer ownership of corporations compared to that of sole proprietorships.
B)Income from both forms of organizations are taxed only at the corporate level.
C)Both sole proprietorships and corporations are equally scrutinized and regulated by government bodies.
D)In sole proprietorships,owners have unlimited liability; whereas,in corporations,owners have limited liability.
Answer: D
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3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) The shadow banking system describes a group of institutions that engage in lending activities,much like traditional banks.
A)True
B)False
Answer: True
Q2) Financial markets are intermediaries that channel the savings of individuals,businesses,and government into loans or investments.
A)True
B)False
Answer: False
Q3) Which of the following acts regulates the primary market in which securities are originally issued to the public?
A)The Securities Act of 1933
B)The Gramm-Leach-Bliley Act
C)The Securities Exchange Act of 1934
D)The Glass-Steagall Act
Answer: A
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The use of differing accounting treatments-especially relative to inventory and depreciation-can distort the results of ratio analysis,regardless of whether cross-sectional or time-series analysis is used.
A)True
B)False
Answer: True
Q2) The ________ ratio measures the return earned on the common stockholders' investment in the firm.
A)net profit margin
B)price/earnings
C)return on equity
D)return on total assets
Answer: C
Q3) Time-series analysis evaluates the performance of various firms at the same point in time using financial ratios.
A)True
B)False
Answer: False
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Chapter 4: Long- and Short-Term Financial Planning
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Sample Questions
Q1) The depreciable value of an asset,under MACRS,is the ________.
A)current cost
B)current cost minus salvage value
C)the original cost plus installation
D)the original cost plus installation costs,minus salvage value
Q2) Which of the following represents a cash flow from operating activities?
A)dividends paid
B)increase or decrease in current liabilities
C)increase or decrease in fixed assets
D)repurchasing stock
Q3) The key input to any cash budget is ________.
A)the sales forecast
B)the production plan
C)the pro forma balance sheet
D)the current tax laws
Q4) The depreciable value of an asset,under MACRS,is ________.
A)the full cost excluding installation costs
B)the full cost minus salvage value
C)the full cost including installation costs
D)the full cost including installation costs adjusted for the salvage value
Page 6
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Chapter 5: Time Value of Money
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Sample Questions
Q1) The present value of a $25,000 perpetuity at a 14 percent discount rate is ________.
A)$178,571
B)$285,000
C)$350,000
D)$219,298
Q2) If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years,what is the annual rate of return on the bond?
A)5 percent
B)6 percent
C)7 percent
D)8 percent
Q3) When computing the number of deposits needed to accumulate a future sum,it will take longer if the interest rates are higher,holding the future value and deposit size constant.
A)True
B)False
Q4) Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A call premium is the amount by which the call price exceeds the market price of the bond.
A)True
B)False
Q2) Suppose the expectations hypothesis is true.The interest rate on a bond maturing in one year is 2%,and the interest rate on a bond maturing in two years is 3%.The interest rate that investors expect next year on a one-year bond is ________.
A)2%
B)3%
C)4%
D)5%
Q3) The nominal interest rate on a risk-free investment is approximately equal to the sum of the real rate of interest plus an inflation premium.
A)True
B)False
Q4) The longer the maturity of a Treasury security,the smaller the interest rate risk.
A)True
B)False
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Chapter 7: Stock Valuation
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Sample Questions
Q1) The tax deductibility of interest lowers the cost of debt financing.
A)True
B)False
Q2) Dividends paid to stockholders are tax deductible.
A)True
B)False
Q3) Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.
A)True
B)False
Q4) Ria's Doll Company has an outstanding preferred issue of stock with a par value of $100 and an annual dividend of 10 percent (of par).Similar risk preferred stocks are yielding an 11.5 percent annual rate of return.
(a)What is the current value of the outstanding preferred stock?
(b)What will happen to price if the risk-free rate increases? Explain.
Q5) In an inefficient market,stock prices adjust quickly to new public information.
A)True
B)False
Q6) Calculate the estimated dividend for 2020.(See Table 7.1)
Page 9
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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 if its expected return were 14 percent?
Q2) 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
Q3) Nicole holds three stocks in her portfolio: A,B,and C.The portfolio beta is 1.40.Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0.If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset,her new portfolio beta will be ________.
A)0.60
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) A company's target weights refer to the desired mix of debt and equity,based on market values of each capital source,rather than the current mix of debt and equity.
A)True
B)False
Q2) 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
Q3) In computing the weighted average cost of capital the preferred weighting scheme is generally based on the market values of each source of capital.
A)True
B)False
Q4) 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
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Consider the following projects,X and Y,where the firm can only choose one.Project X costs $600 and has cash flows of $400 in each of the next 2 years.Project Y also costs $600,and generates cash flows of $500 and $275 for the next 2 years,respectively.Which investment should the firm choose if the cost of capital is 10 percent?
A)Project X,since it has a higher NPV than Project Y
B)Project Y,since it has a higher NPV than Project X
C)Project X,since it has a lower NPV than Project Y
D)Project Y,since it has a lower NPV than Project X
Q2) What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1,$1,900,000 in year 2,$1,700,000 in year 3,and $1,300,000 in year 4?
A)$1,700,000
B)$371,764
C)-$137,053
D)-$4,862,947
Q3) If the NPV is greater than $0,a project should be accepted.
A)True
B)False
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Page 12
Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) If an asset is sold for book value,the gain on the sale is composed of two parts: a capital gain and accumulated depreciation.
A)True
B)False
Q2) ________ reflects the return that must be earned on the given project to compensate the firm's owners adequately.
A)Internal rate of return
B)Cost of capital
C)Risk-adjusted discount rate
D)Average rate of return
Q3) A corporation is selling an existing asset for $21,000.The asset,when purchased,cost $10,000,was being depreciated under MACRS using a five-year recovery period,and has been depreciated for four full years.If the assumed tax rate is 40 percent on ordinary income and capital gains,the tax effect of this transaction is ________.
A)$0 tax liability
B)$7,560 tax liability
C)$4,400 tax liability
D)$7,720 tax liability
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) Generally,increases in leverage result in increased return and risk.
A)True
B)False
Q2) Earnings before interest and taxes are positive above the operating breakeven point,and a loss occurs below it.
A)True
B)False
Q3) At the operating breakeven point,the sales revenue is equal to the sum of the fixed and variable operating costs.
A)True
B)False
Q4) The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.
A)the debt holders are the true owners of the firm
B)equity capital has a fixed return
C)long-term debt has a fixed return and a maturity date
D)dividend payments are tax-deductible
Q5) What is the EPS under Financing Plan 1,if the firm projects EBIT of $200,000 and has a tax rate of 21 percent? (See Table 13.1)
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Chapter 13: Payout Policy
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Sample Questions
Q1) In a Dutch auction,________.
A)a firm offers to repurchase a fixed number of shares,at a discount
B)a firm offers to repurchase a fixed number of shares,at a premium
C)a firm specifies a range of prices at which it is willing to repurchase shares and the quantity of shares that it desires
D)a firm enables stockholders to use dividends received on the firm's stock to acquire additional shares
Q2) Regularly paying a fixed or increasing dividend reduces uncertainty about the frequency and magnitude of dividends.
A)True
B)False
Q3) In establishing a dividend policy,a firm should retain funds for investment in projects yielding higher returns than the owners could obtain from external investments of equal risk.
A)True
B)False
Q4) Dividends are the only means by which firms can distribute cash to shareholders.
A)True
B)False
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) In the EOQ model,if carrying costs increase while all other costs remain unchanged,the number of orders placed would be expected to increase.
A)True
B)False
Q2) Other factors remaining constant,an increase in the average collection period will result in ________.
A)an increase in the operating cycle
B)an increase in the average payment period
C)a decrease in the operating cycle
D)a decrease in the average payment period
Q3) An increase in the average payment period will ________ the operating cycle and ________ the cash conversion cycle.
A)increase; decrease
B)decrease; decrease
C)decrease; not affect
D)not affect; decrease
Q4) Treasury notes generate lower returns than U.S.Treasury bills.
A)True
B)False
16
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) ________ ensure that money lent under a line of credit agreement is actually being used to finance seasonal needs.
A)Operating-change restrictions
B)Annual cleanups
C)Compensating balances
D)Commitment fees
Q2) Global Logistics purchased a new machine on October 20th,2019 for $1,000,000 on credit.The supplier has offered A&A terms of 2/10,net 45.The current interest rate the bank is offering is 16 percent.
(a)Compute the cost of giving up cash discount.
(b)Should the firm take or give up the cash discount?
(c)What is the effective rate of interest if the firm decides to take the cash discount by borrowing money on a discount basis?
Q3) A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.
A)True
B)False
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