Strategic Financial Management
Study Guide Questions
Course Introduction
Strategic Financial Management focuses on the integration of financial management with strategic planning and decision-making within organizations. The course covers key concepts such as capital budgeting, financial analysis, risk management, capital structure, cost of capital, value creation, and financial strategies for growth and sustainability. Students learn how to align financial policies with broader business objectives, evaluate investment opportunities, and develop long-term financial plans that enhance shareholder value. Through real-world case studies and applied projects, the course prepares students to make informed and impactful financial decisions in competitive business environments.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.
A)True
B)False
Answer: True
Q2) A financial manager's goal of maximizing current or short-term earnings may not be appropriate because
A) it fails to consider the timing when shareholders want increased earnings and may instead consider the manager's own goals.
B) increased earnings may be accompanied by unacceptably higher levels of risk.
C) earnings are subjective; they can be defined in various ways such as accounting or economic earnings.
D) All of the options are true.
Answer: D
Q3) A corporation must have more than 100 stockholders to qualify for Subchapter S designation.
A)True
B)False
Answer: False
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Which of the following would not be classified as a current asset?
A) Marketable securities
B) Plant property and equipment
C) Prepaid expenses
D) Inventory
Answer: B
Q2) A firm with earnings per share of $3 and a price-earnings (P/E) ratio of 24 will have a stock market price of
A) $72.00.
B) $15.00.
C) $6.67.
D) $3.00.
Answer: A
Q3) The income statement shows the amount of profits earned based on any one given day.
A)True
B)False
Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) Ratio analysis can be useful for
A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of debt or equity financing.
D) All of the options are true.
Answer: D
Q2) Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one-time events, and can distort annual results from normal operations.
A)True
B)False
Answer: True
Q3) A firm has a debt-to-equity ratio of 40%, a debt of $250,000, and a net income of $100,000. The return on equity is
A) 60%.
B) 16%.
C) 30%.
D) There's not enough information to determine the return on equity.
Answer: B
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) In using a systems approach to financial planning, it is necessary to develop a A) pro forma income statement.
B) cash budget.
C) production plan.
D) All of the options are true.
Q2) Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level.
A)True
B)False
Q3) An increase in sales and/or profits means there is also an increase in cash on the balance sheet.
A)True
B)False
Q4) The purpose of pro-forma financial statements is so that cash is never left short and a financial outlook of the firm is created and analyzed.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) As the contribution margin rises, the break-even point goes down.
A)True
B)False
Q2) Cash break-even analysis
A) is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially.
B) is important when analyzing long-term profitability.
C) includes depreciation expense as a fixed cost when calculating the degree of financial leverage.
D) None of the options are true.
Q3) Operating leverage determines how income from operations is to be divided between debt holders and stockholders.
A)True
B)False
Q4) A high degree of operating leverage means
A) there are high labor costs.
B) there is high debt.
C) there is a large amount of equity.
D) there are high fixed costs.
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Working capital management is primarily concerned with the management and financing of
A) cash and inventory only.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.
Q2) The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory.
A)True
B)False
Q3) Riley Co. is considering a short-term or long-term financing plan of $4,000,000 assets. It expects the following one-year interest rates over the next three years: 6.5%, 7.75%, and 9%. The long-term interest rate will be 7.5% during those three years. What will be the difference in interest costs over the three years?
A) Long-term interest will be $630,000 more than short-term interest.
B) Long-term interest will be $30,000 less than short-term interest.
C) Long-term interest will be $140,000 less than short-term interest.
D) None of the options are true.
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Page 8
Chapter 7: Current Asset Management
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Sample Questions
Q1) We expect that we can receive annual incremental income after taxes of $25,000, including an adjustment for uncollectible accounts. What is the maximum commitment to A/R that we should be willing to assume if our firm's minimum required after-tax return is 8%?
A) $36,000
B) $312,500
C) $168,000
D) $180,000
Q2) If a firm's average collection period increases, this could be because the company gave credit to customers with a low credit report.
A)True
B)False
Q3) For a given firm, holding other factors constant, ordering costs per unit generally
A) decline as average inventory increases.
B) increase in proportion to increases in inventory.
C) are considered fixed costs.
D) are negotiated.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) In times of tight credit in the United States, Eurodollar loans become difficult to obtain.
A)True
B)False
Q2) The movement of the exchange rate between two currencies can increase the total cost of a loan by making the principal repayment require more money than the original amount of the loan.
A)True
B)False
Q3) The London Interbank Offered Rate (LIBOR)
A) competes with the U.S. Prime Rate for those companies with an international presence.
B) has been lower than the U.S. Prime Rate for at least the last decade.
C) is an estimate of the interbank lending rate for London banks.
D) all of these options are correct.
Q4) One major advantage of factoring accounts receivable is that the selling firm receives money from its accounts receivable faster than if it waited until the customers paid.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) If Gerry makes a deposit of $1,500 at the end of each quarter for five years, how much will he have at the end of the five years assuming a 12% annual return and quarterly compounding?
A) $40,305
B) $30,000
C) $108,078
D) $161,220
Q2) The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions.
A)True
B)False
Q3) Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement in 20 years. How much will she have available for retirement if she can make 8% on her investment?
A) $2,150
B) $457,620
C) $46,610
D) $217,250
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The fact that small businesses are usually illiquid does not affect their valuation process.
A)True
B)False
Q2) An increase in the yield of a bond compared to the coupon rate would be associated with an increase in the price of a bond.
A)True
B)False
Q3) When inflation rises, bond sales prices fall.
A)True
B)False
Q4) The market allocates capital to firms based on all of the following except:
A) Higher risk requires lower returns due to higher expectations
B) The level of efficiency
C) Expected returns
D) The degree of past performance
Q5) The variable growth model is most useful for firms in emerging industries. A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) The pretax cost of debt is generally less than the pretax cost of equity.
A)True
B)False
Q2) Earnings before interest, taxes, depreciation and amortization is lower than EBIT as long as the company has depreciation or amortization expenses.
A)True
B)False
Q3) Most firms are able to use ________% debt in their capital structure without exceeding norms acceptable to creditors and investors.
A) 30-50
B) 40-60
C) 50-70
D) 60-80
Q4) Why is the cost of debt normally lower than the cost of preferred stock?
A) Preferred stock dividends are tax deductions.
B) Interest on debt is tax deductible.
C) Preferred stock dividends must be paid before common stock dividends.
D) Common stock dividends are not tax-deductible.
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the internal rate of return of project B?
A) Higher than 6%
B) Lower than 6%
C) Exactly 6%
D) Can not be determined from the given information
Q2) With non-mutually exclusive events and no capital rationing, we will usually arrive at the same conclusions using either the net present value or internal rate of return methods.
A)True
B)False
Q3) Capital rationing
A) is a way of preserving the assets of the firm over the long term.
B) is a less than optimal way to arrive at capital budgeting decisions.
C) assures stockholder wealth maximization.
D) assures maximum potential profitability.
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Simulation models allow the analyst to test possible changes in the variables used in the model.
A)True
B)False
Q2) Place the following investment decisions in order from the lowest risk to the highest risk:
(a) purchase of replacement machinery
(b) new product in a foreign market
(c) new product in the local market
(d) repair of existing machinery
A) b, c, a, d
B) d, a, b, c
C) d, b, a, c
D) d, a, c, b
Q3) The "efficient frontier" indicates
A) alternatives with neutral combinations of risk and return.
B) alternatives with the highest returns.
C) alternatives with the best combination of risk and return.
D) alternatives with no risk.
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Page 15
Chapter 14: Capital Markets
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Sample Questions
Q1) Financial intermediaries serve which of the following purposes?
A) They allow for indirect investment in the capital markets by households.
B) They aid in the flow of funds through the economy.
C) They help provide allocation of funds to the best investments.
D) All of these options are correct.
Q2) Corporations tend to shift from debt financing to equity financing during bull markets.
A)True
B)False
Q3) Capital markets consist of securities having maturities greater than one year. A)True
B)False
Q4) The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds. A)True
B)False
Q5) The market for U.S. government securities is the most efficient in the world. A)True
B)False
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) The goal of underpricing is to ensure that a large amount of shares of stock is sold.
A)True
B)False
Q2) Which investment bank underwrote the most bonds in 2013 and 2014?
A) Merrill Lynch
B) J.P. Morgan
C) Deutsche Bank
D) Citigroup
Q3) Google's IPO was controversial because Google used a Dutch investment banking firm to underwrite the IPO.
A)True
B)False
Q4) When stock is exchanged in the NYSE that is considered secondary offerings, while when stock is exchanged during an initial public offering that is considered primary offerings.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) In an inflationary economy, debt is adjusted for inflation and must be paid back with "more expensive dollars."
A)True
B)False
Q2) A bond with a coupon rate of 6.5% (assume it is paid once annually), maturing in 10 years at a value of $1,000 and a current market price of $695, will have a current yield of
A) 11.3%.
B) 10.2%.
C) 9.4%.
D) 8.5%.
Q3) A capital lease has many of the characteristics of a long-term debt obligation.
A)True
B)False
Q4) What discount rate is used in the net present value of the refunding decision?
A) The before-tax cost of the new debt
B) The after-tax cost of new debt
C) The weighted average cost of capital
D) The after-tax cost of total firm capital
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Page 18
Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) To the individual recipient, preferred stock dividends offer no tax advantage over bonds.
A)True
B)False
Q2) If a preferred stock is of the cumulative type,
A) dividends must be paid on an equal basis with common stock, so long as earnings permit.
B) dividends cannot be passed if they are earned.
C) dividends must be paid, and if not a liability is created.
D) unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common stockholders.
Q3) When comparing common stock of the same company, it is fair to say that
A) all shares, no matter how many classes, are all created with the same equal rights. B) companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C) the Securities and Exchange Commission allows only one class of common stock. D) investors are indifferent between class A and class B shares.
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) When a firm raises its dividends, the information content is usually positive for investors.
A)True
B)False
Q2) The repurchase of a corporation's own stock will generally have a negative impact on the stock market price.
A)True
B)False
Q3) Stock splits are usually utilized to place stock in a lower-price trading range.
A)True
B)False
Q4) A 2-for-1 stock split is declared. In this case, which of the following statements is true?
A) The cash account declines.
B) The common stock account rises.
C) The retained earnings fall.
D) The par value of the common stock is reduced.
Q5) With a dividend reinvestment plan, an investor might receive fractional shares. A)True
B)False
Page 20
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Warrants are similar to convertible debt in that they give the warrant holder the right to acquire common stock.
A)True
B)False
Q2) Most corporations include call provisions in agreements relating to the issue of warrants.
A)True B)False
Q3) The primary issuers of convertible bonds are smaller companies with low credit scores and high risk, but are growing.
A)True
B)False
Q4) Conversion premiums are influenced heavily by expectations of future stock performance.
A)True B)False
Q5) The conversion premium is equal to the market price minus the conversion value. A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The price that a company has to pay to purchase another firm is usually
A) the book value.
B) the market value.
C) some premium over the current market value.
D) some discount of the current market value.
Q2) Nonfinancial motives for mergers include
A) synergy.
B) the portfolio effect.
C) vertical integration.
D) synergy and vertical integration.
Q3) Which of the following types of mergers goes against the antitrust policy?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
Q4) Selling stockholders during a merger may receive a price well above current market or book value.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) In a licensing agreement, the multinational corporation will very likely
A) be able to compete with the local domestic manufacturers.
B) experience lower tariffs by the foreign government.
C) allow a foreign firm to use its technology in exchange for a fee.
D) none of these options are true.
Q2) Political risks include the possibility that a government may expropriate a firm's profits, or worse, repatriate all of the firm's assets.
A)True
B)False
Q3) In the financing of a foreign affiliate, the simplest and most common arrangement is a direct loan from the parent company to the subsidiary.
A)True
B)False
Q4) Selling common stock to residents of foreign countries is illegal in most countries, although it minimizes risk for any multinational corporation.
A)True
B)False
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