Strategic Financial Management Exam Preparation
Guide
Course Introduction
Strategic Financial Management explores the financial decision-making processes that drive long-term value creation for organizations. The course covers topics such as capital budgeting, capital structure, risk management, corporate valuation, and financial planning, with an emphasis on strategic analysis and integration across all areas of finance. Students will learn to apply advanced financial concepts to real-world business scenarios, evaluate investment opportunities, design optimal financial policies, and align financial strategies with overall business objectives in a dynamic and competitive environment.
Recommended Textbook
Intermediate Financial Management 13th Edition by
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Page 2
Eugene F. Brigham
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) one disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.
B) there is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes.
C) bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
D) stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
E) relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.
Answer: D
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3
Chapter 2: Risk and Return-Part I
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Q1) Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.
A)True
B)False
Answer: False
Q2) Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return?(Hint: First find the market risk premium, then find the required returns on the stocks.)
A) 2.75%
B) 2.89%
C) 3.05%
D) 3.21%
E) 3.38%
Answer: E
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4
Chapter 3: Risk and Return-Part II
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Q1) Which of the following statements is CORRECT?
A) the typical R<sup>2</sup> for a stock is about 0.94 and the typicalR<sup>2</sup> for a portfolio is about 0.6.
B) the typical R<sup>2 </sup>for a stock is about 0.3 and the typical R<sup>2</sup> for a large portfolio is about 0.94.
C) the typical R<sup>2</sup> for a stock is about 0.94 and the typical R<sup>2</sup> for a portfolio is also about 0.94.
D) the typical R<sup>2</sup> for a stock is about 0.6 and the typical R<sup>2 </sup>for a portfolio is also about 0.6.
E) the typical R<sup>2</sup> for a stock is about 0.3 and the typical R<sup>2</sup> for a portfolio is also about 0.3.
Answer: B
Q2) The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Bond Valuation
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Q1) Which of the following statements is NOT CORRECT?
A) all else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.
B) if a bond is selling at its par value, its current yield equals its yield to maturity.
C) if a bond is selling at a premium, its current yield will be greater than its yield to maturity.
D) all else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.
E) if a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
Q2) Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?
A) 6.20%
B) 6.53%
C) 6.87%
D) 7.24%
E) 7.62%
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Chapter 5: Financial Options
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Q1) Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share. If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?
A) $3.10
B) $16.90
C) $17.75
D) $22.50
E) $25.60
Q2) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.
A)True
B)False
Q3) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
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Page 7
Chapter 6: Accounting for Financial Management
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Q1) Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
A) the company would have to pay less taxes.
B) the company's taxable income would fall.
C) the company's interest expense would remain constant.
D) the company would have less common equity than before.
E) the company's net income would increase.
Q2) The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings.
A)True B)False
Q3) On the balance sheet, total assets must always equal total liabilities and equity. A)True B)False
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8
Chapter 7: Analysis of Financial Statements
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Q1) It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
A)True
B)False
Q2) Which of the following would indicate an improvement in a company's financial position, holding other things constant?
A) the current and quick ratios both increase.
B) the inventory and total assets turnover ratios both decline.
C) the debt ratio increases.
D) the profit margin declines.
E) the ebitda coverage ratio declines.
Q3) Refer to the data for Pettijohn Inc.What is the firm's EPS?
A) $5.84
B) $6.15
C) $6.47
D) $6.80
E) $7.14
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9
Chapter 8: Basic Stock Valuation
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Q1) Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
\(\begin{array}{lcc} & \underline{X}& \underline{Y} \\
\text { Price }&30\$ &30\$\\
\text { Expected growth (constant) } & 6 \% &4\%\\
\text { Required return } & 12 \% &10\%
\end{array}\)
A) stock y has a higher dividend yield than stock x.
B) one year from now, stock x's price is expected to be higher than stock y's price.
C) stock x has the higher expected year-end dividend.
D) stock y has a higher capital gains yield.
E) stock x has a higher dividend yield than stock y.
Q2) According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
A)True
B)False
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time. However, this assumption can be relaxed when we use the forecasted financial statement method. Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.
A)True
B)False
Q2) Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.
A)True
B)False
Q3) Which of the following assumptions is embodied in the AFN equation?
A) accounts payable and accruals are tied directly to sales.
B) common stock and long-term debt are tied directly to sales.
C) fixed assets, but not current assets, are tied directly to sales.
D) last year's total assets were not optimal for last year's sales.
E) none of the firm's ratios will change.
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) companies with interlocking boards of directors have directors that serve on both boards.
B) the more members of a board of directors, the better its function.
C) a company has an interlocking board of directors if the ceo also serves as the chairman of the board of directors.
D) a company whose board members are elected in staggered terms is said to be an interlocking board of directors.
E) a shareholder-friendly charter will make it harder for a company to be acquired.
Q2) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Page 12
Chapter 11: Determining the Cost of Capital
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Q1) As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and gL = 8.00% (constant). What is the cost of common from reinvested earnings based on the dividend growth approach?
A) 9.42%
B) 9.91%
C) 10.44%
D) 10.96%
E) 11.51%
Q2) Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
A) become less risky over time, and this will maximize its intrinsic value.
B) accept too many low-risk projects and too few high-risk projects.
C) become more risky and also have an increasing wacc. its intrinsic value will not be maximized.
D) continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.
E) become riskier over time, but its intrinsic value will be maximized.
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A) a project's mirr is always less than its regular irr.
B) if a project's irr is greater than its cost of capital, then the mirr will be less than the irr. C) if a project's irr is greater than its cost of capital, then the mirr will be greater than the irr.
D) to find a project's mirr, we compound cash inflows at the irr and then discount the terminal value back to t = 0 at the cost of capital.
E) a project's mirr is always greater than its regular irr.
Q2) Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
A)True
B)False
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Page 14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following factors should be included in the cash flows used to estimate a project's NPV?
A) interest on funds borrowed to help finance the project.
B) the end-of-project recovery of any working capital required to operate the project.
C) cannibalization effects, but only if those effects increase the project's projected cash flows.
D) expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
E) all costs associated with the project that have been incurred prior to the time the analysis is being conducted.
Q2) Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
A)True
B)False
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15
Chapter 14: Real Options
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Q1) Which of the following will NOT increase the value of a real option?
A) an increase in the volatility of the underlying source of risk.
B) an increase in the risk-free rate.
C) an increase in the cost of obtaining the real option.
D) a decrease in the probability that a competitor will enter the market of the project in question.
E) lengthening the time in which a real option must be exercised.
Q2) The option to abandon a project is a real option, but a call option on a stock is not a real option.
A)True
B)False
Q3) Refer to data for Steppingstone Incorporated. Based on the above information, what is the Z 90's expected net present value?
A)$6,678
B)$3,251
C) $15,303
D) $20,004
E) $45,965
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16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following statements is correct?
A) one advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
B) an increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by mm.
C) if the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
D) stock repurchases make the most sense at times when a company believes its stock is undervalued.
E) firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
Q2) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
A)True
B)False
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Chapter 16: Capital Structure Decisions
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Q1) Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization?
A) 4,250
B) 4,500
C) 4,750
D) 5,000
E) 5,250
Q2) Which of these items will not generally be affected by an increase in the debt ratio?
A) total risk.
B) financial risk.
C) market risk.
D) the firm's beta.
E) business risk.
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to the data for NorthWest Water (NWW). What will the after-tax annual interest savings for NWW be if the refunding takes place?
A) $664,050
B) $699,000
C) $768,900
D) $845,790
E) $930,369
Q2) If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision, and if the NPV of refunding is positive, then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.
A)True
B)False
Q3) MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.
A)True
B)False
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Page 19
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Q1) Which of the following statements about listing on a stock exchange is most CORRECT?
A) any firm can be listed on the nyse as long as it pays the listing fee.
B) listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
C) listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the sec.
D) the otc is the second largest market for listed stock, and it is exceeded only by the nyse.
E) listing is a decision of more significance to a firm than going public.
Q2) The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.
A)True
B)False
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Page 20
Chapter 19: Lease Financing
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Q1) Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
A)True
B)False
Q2) Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the A) residual value as a liability.
B) present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
C) undiscounted sum of future lease payments as an asset and as an offsetting liability.
D) undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.
E) residual value as a fixed asset.
Q3) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True B)False
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21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.
A)True
B)False
Q2) A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.
A)True
B)False
Q3) A warrant is an option, and as such it cannot be used as a "sweetener."
A)True
B)False
Q4) Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.
A)True
B)False
Page 22
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Which of the following statements is CORRECT?
A) in managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its dso) sufficiently.
B) because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
C) since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
D) other things held constant, if a firm can shorten its dso, this will lead to a higher current ratio.
E) a firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
Q2) The aging schedule is a commonly used method for monitoring receivables.
A)True B)False
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Page 23
Chapter 22: Providing and Obtaining Credit
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Q1) The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q2) The Arthos Group needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan?
A) 16.22%
B) 17.97%
C) 17.48%
D) 18.67%
E) 18.00%
Q3) Refer to Exhibit Reese Brothers. What would be the incremental cost of carrying receivables if this change were made?
A) $108,750
B) $116,250 (carrying costs would decline)
C) $157,900
D) $225,000 (carrying costs would decline)
E) $260,500
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Chapter 23: Other Topics in Working Capital Management
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Q1) Which of the following is true of the EOQ model?Note that the optimal order quantity, Q, will be called EOQ.
A) if the annual sales, in units, increases by 20%, then eoq will increase by 20%.
B) if the average inventory increases by 20%, then the total carrying costs will increase by 20%.
C) if the average inventory increases by 20% the total order costs will increase by 20%.
D) the eoc is the same for all companies.
E) if the fixed per order cost increases by 20%, then eoq will increase by 20%.
Q2) If a company increases its safety stock, then its average inventory will go up.
A)True B)False
Q3) A just-in-time system is designed to stretch accounts payable as long as possible.
A)True B)False
Q4) If a company increases its safety stock, then its EOQ will go up.
A)True
B)False
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25
Chapter 24: Enterprise Risk Management
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Q1) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. What is the implied annual interest rate inherent in the futures contract?
A) 6.86%
B) 7.22%
C) 7.60%
D) 8.00%
E) 8.40%
Q3) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A) risk management can help a firm maintain its optimal capital budget.
B) risk management can reduce the expected costs of financial distress.
C) risk management can help firms minimize taxes.
D) risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
E) risk management can increase debt capacity.
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Page 26
Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q2) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
Q3) In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.
A)True
B)False
Q2) One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.
A)True
B)False
Q3) Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s
A) a profitable firm acquires a firm with large accumulated tax losses that may be carried forward.
B) attempts to stabilize earnings by diversifying.
C) purchase of assets below their replacement costs.
D) reduction in competition resulting from mergers.
E) synergistic benefits arising from mergers.
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Chapter 27: Multinational Financial Management
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Q1) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
Q2) LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S. corporations.
A)True
B)False
Q3) The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
A)True
B)False
Q4) Multinational financial management requires that financial analysts consider the effects of changing currency values.
A)True
B)False
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Chapter 28: Time Value of Money
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Q1) All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.
A)True
B)False
Q2) Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures?
A) $3,754.27
B) $3,941.99
C) $4,139.09
D) $4,346.04
E) $4,563.34
Q3) What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?
A) $11,262.88
B) $11,826.02
C) $12,417.32
D) $13,038.19
E) $13,690.10
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Page 30
Chapter 29: Basic Financial Tools: A review
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Q1) If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.
A)True
B)False
Q2) A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = 5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
A) the company's dividend yield 5 years from now is expected to be 10%.
B) the constant growth model cannot be used because the growth rate is negative.
C) the company's expected capital gains yield is 5%.
D) the company's expected stock price at the beginning of next year is $9.50.
E) the company's current stock price is $20.
Q3) The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.
A)True
B)False
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Chapter 30: Pension Plan Management
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Q1) Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.
A)True
B)False
Q2) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75. The firm has promised a retirement income of $20,000 at the end of each year following retirement until death. The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits. What is Barrington's annual pension contribution to the nearest dollar for Mr. Rossiter.? (Assume certainty and end-of-year cash flows.)
A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491
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32
Chapter 31: Financial Management in Not for Profit
Businesses
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Q1) Which of the following statements about municipal bond financing is most correct?
A) whereas the vast majority of treasury and corporate bonds are held by institutions, no municipal bonds are held by individual investors.
B) the primary attraction of municipal bonds to individual investors is their high before-tax yields.
C) municipal bonds usually pay higher coupon rates than corporate bonds with similar ratings.
D) municipal bonds are risk-free.
E) in contrast to corporate bonds, municipal bond issues are not required to be registered with the securities and exchange commission.
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
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