Applied Financial Management
Final Test Solutions
Course Introduction
Applied Financial Management explores the practical application of financial theories and tools in business decision-making. This course covers key topics such as financial analysis, capital budgeting, working capital management, risk assessment, and valuation techniques. Students will learn how to interpret financial statements, assess corporate financial health, allocate resources efficiently, and make strategic investment decisions. Emphasis is placed on the use of case studies and real-world scenarios to develop skills necessary for effective financial management in todays dynamic business environment.
Recommended Textbook
Principles of Managerial Finance 13th Edition by Lawrence J. Gitman
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The sole proprietor has unlimited liability; his or her total investment in the business, but not his or her personal assets, can be taken to satisfy creditors.
A)True
B)False
Answer: False
Q2) The board of directors is typically responsible for
A) developing strategic goals and plans.
B) hiring and firing.
C) both A and B.
D) neither A nor B.
Answer: C
Q3) The key role of the financial manager is
A) decision making.
B) the presentation of financial statements.
C) the preparation of data for future evaluation.
D) the collection of financial data.
Answer: A
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) In efficient market is one where
A) prices of stocks move up and down widely without apparent reason.
B) prices of stocks remain steady for long periods of time.
C) prices of stocks are unaffected by market news.
D) prices of stocks incorporate new information quickly and adjust appropriately to their true value.
Answer: D
Q2) A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments.
A)True
B)False
Answer: True
Q3) Firms that require funds from external sources can obtain them from A) private placement.
B) financial institutions.
C) financial markets.
D) all of the above.
Answer: D
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) A firm with a substandard net profit margin can improve its return on total assets by
A) increasing its debt ratio.
B) increasing its total asset turnover.
C) decreasing its fixed asset turnover.
D) decreasing its total asset turnover.
Answer: B
Q2) The return on equity for Dana Dairy Products for 2010 was ________. (See Table 3.2)
A) 0.6 percent
B) 5.6 percent
C) 0.9 percent
D) 50 percent
Answer: B
Q3) On the balance sheet net fixed assets represent
A) gross fixed assets at cost minus depreciation expense.
B) gross fixed assets at market value minus depreciation expense.
C) gross fixed assets at cost minus accumulated depreciation.
D) gross fixed assets at market value minus accumulated deprecation.
Answer: C
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) 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.
Q2) For the year ended December 31, 2008, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The Statement of Cash Flows would show a
A) net decrease of $3,000 in cash and marketable securities.
B) net decrease of $5,000 in cash and marketable securities.
C) net increase of $3,000 in cash and marketable securities.
D) net increase of $5,000 in cash and marketable securities.
Q3) ________ forecast is based on the relationships between the firm's sales and certain economic indicators.
A) An internal
B) An external
C) A sales
D) A pro forma
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Chapter 5: Time Value of Money
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Sample Questions
Q1) The time value concept/calculation used in amortizing a loan is
A) future value of a dollar.
B) future value of an annuity.
C) present value of a dollar.
D) present value of an annuity.
Q2) The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.
A) effective
B) nominal
C) discounted
D) continuous
Q3) 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?
Q4) Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.
Q5) Calculate the present value of an annuity of $3,900 each year for four years, assuming an opportunity cost of 10 percent.
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.
A) $656.77
B) $835.45
C) $845.66
D) $2,201.08
Q2) A ________ bond generally has an interest rate that is higher than a similar risk ________ bonds, and a ________ bond generally has an interest rate that is lower than a similar risk ________ bond.
A) callable; non-callable; convertible; non-convertible
B) convertible; non-convertible; callable; non-callable
C) convertible; callable; non-convertible; non-callable
D) callable; non-callable; non-convertible; convertible
Q3) According to Moody's, a bond rated A should provide investors with a higher yield than an otherwise identical bond rated B.
A)True
B)False
Q4) 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) Equity capital can be raised through
A) the money market.
B) the NYSE bond market.
C) retained earnings and the stock market.
D) a private placement with an insurance company as the creditor.
Q2) Nico Corporation expects to generate free-cash flows of $200,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the market value of the firm's debt is $500,000, and Nico has a half million shares of stock outstanding, what is the value of Nico's stock?
A) $2..43
B) $3.43
C) $1.43
D) $0.00
Q3) Assuming that economic conditions remain stable, any management action that would cause current and prospective stockholders to raise their dividend expectations should decrease the firm's value.
A)True
B)False
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Page 9
Chapter 8: Risk and Return
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Sample Questions
Q1) Strikes, lawsuits, regulatory actions, and increased competition are all examples of A) diversifiable risk.
B) nondiversifiable risk.
C) economic risk.
D) systematic.
Q2) Using the data from Table 8.3, what is the systematic risk for a portfolio with two-thirds of the funds invested in X and one-third invested in Y?
A) 0.88
B) 1.17
C) 1.33
D) 1.67
Q3) A portfolio of two negatively correlated assets has less risk than either of the individual assets.
A)True
B)False
Q4) Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) In computing the weighted average cost of capital, the target weights are either book value or market value weights based on actual capital structure proportions.
A)True
B)False
Q2) The weighted average cost of capital (WACC) reflects the expected average future cost of funds over the long run.
A)True
B)False
Q3) The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.
A)True
B)False
Q4) Firms typically raise long-term funds
A) only at the inception of the firm.
B) on a continuous basis.
C) in lump sums as needed.
D) in proportion to the capital mixture of the target capital structure.
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) One strength of payback period is that it fully accounts for the time value of money.
A)True
B)False
Q2) Fixed assets that provide the basis for the firm's profit and value are often called
A) tangible assets.
B) non-current assets.
C) earning assets.
D) book assets.
Q3) All of the following are weaknesses of the payback period EXCEPT
A) a disregard for cash flows after the payback period.
B) only an implicit consideration of the timing of cash flows.
C) the difficulty of specifying the appropriate payback period.
D) it uses cash flows, not accounting profits.
Q4) If a firm has unlimited funds, it is able to accept all independent projects that provide an acceptable return.
A)True
B)False
Q5) Use the IRR approach to select the best group of projects. (See Table 10.5)
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) For Proposal 1, the depreciation expense for year 1 is ________. (See Table 11.2)
A) $110,400
B) $115,200
C) $150,000
D) $300,000
Q2) The book value of an asset is equal to its depreciable value minus the accumulated depreciation.
A)True
B)False
Q3) The payback period for the project is ________. (See Table 11.5)
A) 2 years
B) 3 years
C) between 3 and 4 years
D) between 4 and 5 years
Q4) In computing after-tax operating cash flows, only operating costs but not financing costs must be deducted from any cash inflows received.
A)True
B)False
Q5) Calculate the initial investment of the new asset. (See Table 11.1)
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintain a diversified portfolio of assets.
A)True
B)False
Q2) Projects with a small chance of being acceptable and a broad range of expected cash flows are more risky than projects having a high chance of being acceptable and a narrow range of expected cash flows.
A)True
B)False
Q3) The risk-adjusted discount rate is the rate of return that a project must earn to maintain or improve the firm's share price.
A)True
B)False
Q4) In general, exchange rate risk is easier to protect against than political risk.
A)True
B)False
Q5) 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)
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Earnings before interest and taxes (EBIT) is a descriptive label for
A) operating profits.
B) net profits before taxes.
C) earnings per share.
D) gross profits.
Q2) The higher the financial breakeven point and the steeper the slope of the capital structure line, the greater the financial risk.
A)True
B)False
Q3) ________ is the risk to the firm of being unable to cover operating costs.
A) Total risk
B) Business risk
C) Financial risk
D) Diversifiable risk
Q4) In general, a firm's theoretical optimal capital structure is that which balances the tax benefits of debt financing against the increase probability of bankruptcy that result from its use.
A)True
B)False
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Chapter 14: Payout Policy
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Sample Questions
Q1) The purpose of a reverse stock split is to A) issue additional shares.
B) increase the dividend.
C) increase the price of stock.
D) reduce trading activity.
Q2) Gordon's "bird-in-the-hand" argument suggests that A) dividends are irrelevant.
B) firms should have a 100 percent payout policy.
C) shareholders are generally risk averse and attach less risk to current dividends.
D) the market value of the firm is unaffected by dividend policy.
Q3) Since regularly paying a fixed or increasing dividend eliminates uncertainty about the frequency and magnitude of dividends, it increases the owners' wealth.
A)True
B)False
Q4) In most states, legal capital is measured not only by the par value and paid in capital of the stock, but also by any accumulated retained earnings.
A)True
B)False
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) Under conservative financing strategy, short-term financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of the firm's current assets.
A)True
B)False
Q2) Inventory insurance costs are an example of ________ costs.
A) order
B) marginal
C) carrying
D) total
Q3) A firm is analyzing a relaxation of credit standards that is expected to increase sales 10 percent. The firm is currently selling 400 units at an average sale price per unit of $575, and the variable cost per unit is $400 at the current sales volume. The average cost per unit is $425. What is the additional profit contribution from sales if credit standards are relaxed?
A) $23,000
B) $16,000
C) $6,000
D) $7,000
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Much of the commercial paper is issued by
A) commercial finance companies.
B) small businesses.
C) venture capitalists.
D) small manufacturing firms.
Q2) Financing that matures in one year or less and has specific assets pledged as collateral is called
A) spontaneous financing.
B) unsecured short-term financing.
C) secured short-term financing.
D) none of the above.
Q3) In giving up a cash discount, the amount of the discount that is given up is the interest being paid by the firm to keep its money by delaying payment for a number of days.
A)True
B)False
Q4) If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is increased.
A)True
B)False
Page 18
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) A conversion feature is an option that is included as part of a common stock issue that allows its holder to change the stock into a stated number of shares of preferred stock.
A)True
B)False
Q2) In general, the market value of a convertible security is likely to be greater than its straight value or conversion value.
A)True
B)False
Q3) By using convertible bonds, the issuing firm can temporarily raise debt, which is typically less expensive than common stock, to finance projects.
A)True
B)False
Q4) The purchaser of a convertible issue sacrifices a portion of his or her interest return
A) to raise temporarily cheap funds.
B) due to the reduced risk of default.
C) when the call feature is exercised.
D) for the potential opportunity to become a common shareholder in the future.
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) When a merger transaction is endorsed by the target firm's management, approved by its shareholders, and easily consummated, this is an example of A) financial merger.
B) hostile takeover.
C) friendly merger.
D) strategic merger.
Q2) All of the following may be true about tender offers EXCEPT A) they may add pressure to existing merger negotiations. B) management has the exclusive right to accept the offer. C) defensive tactics may be taken to ward off the offer.
D) they may be made without warning as an abrupt attempt at a corporate takeover.
Q3) When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a A) financial merger. B) hostile takeover. C) friendly merger. D) strategic merger.
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) Macro political risk and micro political risk in international business refer to the risk
A) that will affect all foreign firms and the risk that will affect an individual firm or specific industry, respectively.
B) of nationalization of the oil industry and the risk of a political revolution, respectively.
C) that will affect an individual firm or specific industry and the risk that will affect all foreign firms, respectively.
D) of sudden taxes on exporting the manufactured goods of a particular industry and the risk of the devaluation of the host country's currency, respectively.
Q2) The Mercosur Group is a major European trading bloc made up of former Soviet bloc countries in Eastern Europe.
A)True
B)False
Q3) NAFTA is a treaty establishing free trade and open markets between Europe and the United States.
A)True
B)False
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