Advanced Financial Management
Exam Answer Key
Course Introduction
Advanced Financial Management explores the principles, strategies, and analytical tools essential for effective financial decision-making in modern organizations. The course delves into complex topics such as capital budgeting, risk assessment, financial forecasting, capital structure optimization, mergers and acquisitions, and international financial management. Emphasis is placed on real-world applications, case studies, and the ethical considerations underlying financial strategy. By the end of the course, students will be equipped with advanced skills to analyze financial situations critically, develop strategic recommendations, and implement financial policies to maximize organizational value.
Recommended Textbook
Financial Management Theory and Practice 3rd Canadian Edition by Eugene Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements is NOT correct?
A)When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held."
B)"Going public" establishes a firm's true intrinsic value, and it also ensures that a highly liquid market will always exist for the firm's shares.
C)When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
D)Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC.
Answer: B
Q2) Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business's debts.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) Which statement about depreciation is true?
A)The more depreciation a firm reports, the higher its tax bill, other things held constant.
B)Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
C)Net Cash Flow = Net Income + Depreciation and Amortization Charges.
D)Depreciation and amortization are not cash charges, so neither has an effect on a firm's reported profits.
Answer: C
Q2) Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.
A)True
B)False
Answer: True
Q3) Total net before-tax operating income is equal to net fixed assets. A)True
B)False
Answer: False
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4
Chapter 3: Analysis of Financial Statements
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Q1) Helmuth Inc.'s latest net income was $1,250,000,and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare?
A)$2.14
B)$2.26
C)$2.38
D)$2.50
Answer: D
Q2) A firm wants to strengthen its financial position.Which action would increase its quick ratio?
A)offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable
B)issue new common stock and use the proceeds to increase inventories
C)speed up the collection of receivables and use the cash generated to increase inventories
D)use some of its cash to purchase additional inventories
Answer: A
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Chapter 4: Time Value of Money
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Q1) Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years.How much interest would you have to pay in the first year?
A)$925.97
B)$974.70
C)$1,026.00
D)$1,080.00
Q2) How many years would it take $50 to triple if it were invested in a bank that pays 3.8% per year?
A)25.26
B)26.58
C)27.98
D)29.46
Q3) When inputting information into a financial calculator,one of the cash flow components must be negative since the calculator is set up to solve an equation equal to zero.
A)True
B)False
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6
Chapter 5: Financial Planning and Forecasting Financial Statements
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Q1) When a firm wants to maintain its ratios at their existing levels,if it has a positive sales growth rate of any amount,it will require some amount of external funding.
A)True
B)False
Q2) Last year Handorf-Zhu Inc.had $850 million of sales,and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
A)57.16%
B)60.17%
C)63.33%
D)66.67%
Q3) Which of the following is NOT an issue in the process of the FFS method?
A)analyzing the interaction of all decisions of the firm
B)projecting the consequences of decisions to avoid surprises
C)establishing capital budgeting procedures
D)measuring performance against the plan
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Chapter 6: Bonds, Bond Valuation, and Interest Rates
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Q1) Which statement regarding bond prices is true?
A)If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
C)If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
D)If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
Q2) Risky Inc.issued a bond 5 years ago with a term to maturity of 10 years.The bond pays a coupon of 12% (stated annually,paid semiannually).It Risky Inc.'s bond is currently priced at $842,what is this bond's yield to maturity?
A)8.39%
B)16.79%
C)12%
D)6%
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8
Chapter 7: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is correct?
A)Stock A has more market risk than Portfolio AB.
B)Stock A has more market risk than Stock B but less stand-alone risk.
C)Portfolio AB has more money invested in Stock A than in stock B.
D)Portfolio AB has the same amount of money invested in each of the two stocks.
Q2) What is the effect on portfolio beta of a larger number of assets in a portfolio and a longer time period?
A)It is less stable.
B)It is more stable.
C)It is more consistent.
D)It is less consistent.
Q3) Risk aversion implies that investors require higher expected returns on risky securities if they are to be induced to purchase them.
A)True
B)False
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9
Chapter 8: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) You must estimate the intrinsic value of Tsetseko Technologies' stock.Tsetseko's end-of-year free cash flow (FCF) is expected to be $17.50 million,and it is expected to grow at a constant rate of 7.00% a year thereafter.The company's WACC is 10.00%.Tsetseko has $125.00 million of long-term debt plus preferred stock,and there are 15.00 million shares of common stock outstanding.What is Tsetseko's estimated intrinsic value per share of common stock?
A)$28.16
B)$29.33
C)$30.56
D)$31.78
Q2) Clinton's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $50.00,what is its effective annual (not nominal) rate of return?
A)7.52%
B)7.76%
C)8.00%
D)8.24%
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Chapter 9: The Cost of Capital
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Q1) Vang Inc.estimates that its average-risk projects have a WACC of 10%,its below-average risk projects have a WACC of 8%,and its above-average risk projects have a WACC of 12%.Which project (A,B,C,or D) should the company accept?
A)Project B is of below-average risk and has a return of 8.5%.
B)Project C is of above-average risk and has a return of 11%.
C)Project A is of average risk and has a return of 9%.
D)Project A has a below-average risk and has a return of 7.5%.
Q2) Suppose you are the president of a small,publicly traded corporation.Since you believe that your firm's share price is temporarily depressed,all additional capital funds required during the current year will be raised using debt.Thus,the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt.
A)True B)False
Q3) The cost of preferred stock to a firm must be adjusted to an after-tax figure because dividends received by a corporation may be excluded from the receiving corporation's taxable income.
A)True B)False
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Page 11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Which of the following statements is correct?
A)If a project with normal cash flows has an IRR greater than the WACC, the project must have a positive NPV.
B)If Project A's IRR exceeds Project B's, then A must have the higher NPV.
C)A project's MIRR can never exceed its IRR.
D)If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.
Q2) Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost) occurs at the end of the project's life.
A)True
B)False
Q3) The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) California Hideaways is considering a new project whose data are shown below.The equipment has a 4-year project life.This equipment falls into class 43 with a CCA rate of 30% and would have zero salvage value.No new working capital would be required.Revenues and cash operating costs are expected to be constant over the project's 4-year life.What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 4.) \(\begin{array}{lr}
\text { WACC } & 10.0 \% \\
\text { Net investment cost } & \$ 65,000 \\
\text { Sales revenues, each year } & \$ 60,000 \\
\text { Cash operating costs } & \$ 25,000 \\
\text { Tax rate } & 35.0 \%
\end{array}\)
A)$28,499
B)$23,402
C)$19,417
D)$16,284
Q2) If a firm's projects differ in risk,then different projects should be evaluated using risk-adjusted discount rates.
A)True
B)False
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Page 13
Chapter 12: Capital Structure Decisions
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Sample Questions
Q1) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True
B)False
Q2) If the value of a levered firm is $5 million,what is the value of the same firm with all-equity financing?
A)$7 million
B)$6 million
C)$5 million
D)$4 million
Q3) Which of the following would increase the likelihood that a company would increase its debt ratio,other things held constant?
A)an increase in costs incurred when filing for bankruptcy
B)an increase in the corporate tax rate
C)an increase in the personal tax rate
D)the company's stock price hitting a new low
Q4) The MM model is the same as the Miller model,but with zero corporate taxes.
A)True B)False
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Chapter 13: Distributions to Shareholders: Dividends and Repurchases
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Q1) Reverse stock splits have which of following effects on the number of shares outstanding?
A)A reverse split reduces the increases of shares outstanding.
B)A reverse split reduces the decreases of shares outstanding.
C)A reverse split has no effect on the number shares outstanding.
D)A reverse split reduces the number of shares outstanding in proportion to the debt outstanding.
Q2) Pate & Co.has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy,what will be its total dividend payment?
A)$205,000
B)$500,000
C)$950,000
D)$2,550,000
Q3) The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock.
A)True
B)False
Page 15
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Chapter 14: Initial Public Offerings Investment Banking and Financial Restructuring
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Sample Questions
Q1) The ICE Futures Canada,originated from the Winnipeg Stock Exchange,is Canada's exchange trading derivatives products.
A)True
B)False
Q2) Which of the following are major sources of equity capital for start-up companies?
A)Personal assets
B)"Love money"
C)Government loans
D)Both A and B
Q3) In an IPO issue,the issuing company has incurred $10 million for the floatation costs and legal fees.The issue involves 50 million shares.As a firm commitment written deal,the underwriter agrees to buy the shares at $18 each and resells to the public at $20 per share.What will be the percentage of direct costs required in this deal?
A)11.50%
B)10.00%
C)9.10%
D)8.40%
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Page 16
Chapter 15: Lease Financing
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Q1) From the lessee viewpoint,the riskiness of the cash flows,with the possible exception of the residual value,is about the same as which of the following?
A)the lessee's equity cash flows
B)the lessee's capital budgeting project cash flows
C)the lessee's debt cash flows
D)the lessee's pension fund cash flows
Q2) Refer to Scenario: ABC Leasing.What is the required annual lease payment that the lessor must charge?
A)$17,391
B)$21,915
C)$26,535
D)$29,318
Q3) Consider the following information: original investment = $20,000,PV of CCA tax shield = $10,000,PV of after-tax lease payments = $15,900.What is the NAL?
A)$2,550
B)$1,650
C)$0.00
D)-$5,900
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Chapter 16: Capital Market Financing: Hybrid and Other Securities
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Q1) Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.
A)True
B)False
Q2) Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have an 8.00% annual coupon,and each bond could be converted into 20 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.00%.The stock currently sells for $40.00 a share,has an expected dividend in the coming year of $2.00,and has an expected constant growth rate of 5.00%.What is the estimated floor price of the convertible at the end of Year 3?
A)$794.01
B)$835.81
C)$879.80
D)$926.10
Q3) The owner of a convertible bond owns,in effect,both a bond and a call option.
A)True B)False
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Chapter 17: Working Capital Management and Short-Term Financing
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Q1) Other things held constant,which strategy would tend to reduce the cash conversion cycle?
A)maintaining the same level of receivables as sales decline
B)placing larger orders for raw materials to take advantage of price breaks
C)taking all discounts that are offered
D)not taking all discounts that are offered to get more trade credit
Q2) Pledging of receivables involves the sale of accounts receivable.
A)True
B)False
Q3) Which of the following statements is NOT true?
A)Bankers' acceptances are more popular than commercial paper used in Canada as a short-term financing source.
B)Banks are the ultimate guarantors for payments of bankers' acceptances.
C)Bankers' acceptances can be traded in the secondary markets prior to their maturities.
D)Bankers' acceptances are commonly used to finance goods sold with short payment terms.
Q4) The calculated cost of trade credit can be reduced by paying late.
A)True B)False
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Chapter 18: Current Asset Management
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Q1) Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.
A)True
B)False
Q2) Which statement best describes DSO?
A)Other things held constant, the higher a firm's DSO, the better its credit department.
B)If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
C)If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts.
D)DSO indicates the maximum number of days it takes a firm's customers to pay their bills.
Q3) The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.
A)True
B)False
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Page 20
Chapter 19: Financial Options and Applications in Corporate Finance
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Q1) Which of the following statements is correct?
A)If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
B)Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
C)Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
D)Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
Q2) If the market is in equilibrium,then a call option contract must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.
A)True
B)False
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Chapter 20: Enterprise Risk Management
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Q1) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q2) An option is a definite agreement leading to a firm completion of the transaction.
A)True
B)False
Q3) Suppose the quoted price for a June 2008 10-year CGB futures contract has changed from 118.72 to 118.77.What is the corresponding change in value in this futures contract?
A)$70
B)$60
C)$50
D)$30
Q4) Which of the following is correct regarding futures contracts?
A)Futures contracts are marked-to-market on a daily basis.
B)Futures contracts are marked-to-market on a monthly basis.
C)Futures contracts are not marked-to-market.
D)Futures contracts are marked-to-market semiannually.
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Chapter 21: International Financial Management
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Q1) In Japan,90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return.In Canada,90-day securities have a 4% annualized return and 180-day securities have a 4.5% annualized return.All securities are of equal risk,and Japanese securities are denominated in terms of the Japanese yen.Assuming that interest rate parity holds in all markets,which statement about the exchange rate is true?
A)The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
B)The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
C)The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
Q2) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the foreign currency is said to be selling at a discount to the spot rate.
A)True
B)False
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Page 23
Chapter 22: Corporate Valuation and Governance
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Q1) Suppose BC Corp.'s free cash flow in the previous year was $50,000,and FCF is expected to grow at a constant rate of 3%.If the company's weighted average cost of capital is 15%,what is the value of its operations?
A)$416,667
B)$500,000
C)$900,000
D)$429,167
Q2) Based on the corporate valuation model,Bernile Inc.'s value of operations is $750 million.Its balance sheet shows $50 million of short-term investments that are unrelated to operations,$100 million of accounts payable,$100 million of notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital),and $160 million of retained earnings.What is the best estimate for the firm's value of equity,in millions?
A)$450
B)$475
C)$500
D)$525
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Chapter 23: Mergers,Acquisitions,and Restructuring
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Q1) If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.
A)True
B)False
Q2) A taxable merger offer is one where the acquiring company offers to purchase the target company with cash.However,the same deal is not taxable if the merger is paid by exchanging stocks.Such nontaxable bids should be more popular by far.
A)True B)False
Q3) A merger will be financially justified only if a target firm's value is greater to the acquiring firm than its market value as a separate entity.
A)True
B)False
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25
Chapter 24: Decision Trees,real Options and Other Capital Budgeting Techniques
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Q1) Commodore Corporation is deciding whether to invest in a project today or to postpone the decision until next year.The project has a positive expected NPV,but its cash flows could be less than expected,in which case the NPV could be negative.No competitors are likely to invest in a similar project if Commodore decides to wait.Which of the following issues should Commodore consider most seriously when making this investment decision?
A)The more uncertainty about the future cash flows, the more logical it is for Commodore to go ahead with this project today.
B)Since the project has a positive expected NPV today, this means that its expected NPV will be even higher if it chooses to wait a year.
C)Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV.
D)Waiting would probably reduce the project's risk.
Q2) Real options are options to buy real assets,such as stocks,rather than interest-bearing assets,such as bonds.
A)True
B)False
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Page 26