Finance for Managers
Chapter Exam Questions
Course Introduction
Finance for Managers introduces key financial principles and tools necessary for effective decision-making in a managerial role. The course covers the interpretation and analysis of financial statements, budgeting processes, and the fundamentals of financial planning and control. Students will explore topics such as time value of money, capital budgeting, cost of capital, and financial risk management, with a focus on practical applications within organizations. By the end of the course, students will be equipped to integrate financial considerations into strategic planning and daily management, enhancing their ability to contribute to their organizations financial health and long-term success.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT?
A) If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
B) If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction.
C) The IPO market is a subset of the secondary market.
D) Only institutions, and not individuals, can participate in derivatives market transactions.
E) As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
Answer: E
Q2) Recently,Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to an investment banker,who in turn sold it to individual and institutional investors.This is a primary market transaction. A)True
B)False
Answer: True
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Chapter 2: Financial Statements, cash Flow, and Taxes
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Q1) Which of the following statements is CORRECT?
A) The income statement for a given year, say 2012, is designed to give us an idea of how much the firm earned during that year.
B) The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."
C) The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
D) The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
E) If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.
Answer: A
Q2) Total net operating capital is equal to net fixed assets.
A)True
B)False
Answer: False
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Chapter 3: Analysis of Financial Statements
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Q1) Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000,and it had 225,000 shares outstanding.What dividend per share should it declare?
A) $2.14
B) $2.26
C) $2.38
D) $2.50
E) $2.63
Answer: D
Q2) Refer to Exhibit 3.1.What is the firm's book value per share?
A) $61.73
B) $64.98
C) $68.40
D) $72.00
E) $75.60
Answer: D
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Chapter 4: Time Value of Money
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Q1) Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
A)True
B)False
Q2) 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
Q3) American Express and other credit card issuers must by law print the Annual Percentage Rate (APR)on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?
A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%
Q4) A time line is not meaningful unless all cash flows occur annually.
A)True B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (r<sub>d</sub>)is 4.75%,based on semiannual compounding.What is the bond's price?
A) 1,063.09
B) 1,090.35
C) 1,118.31
D) 1,146.27
E) 1,174.93
Q2) Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.
A)True
B)False
Q3) Junk bonds are high risk,high yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.
A)True
B)False
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Chapter 6: Risk and Return
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Q1) Which of the following statements is CORRECT?
A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio.
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
D) A stock with an above-average standard deviation must also have an above-average beta.
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
Q2) A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.
A)True
B)False
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Chapter 7: Valuation of Stocks and Corporations
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Q1) Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Eagnected diviend \(D _ { 1 }\)         $3.00
Curtent Price, \(P _ { 0 }\)           $50 Eogpected constant prowth rate      6.0%
A) The stock's expected dividend yield and growth rate are equal.
B) The stock's expected dividend yield is 5%.
C) The stock's expected capital gains yield is 5%.
D) The stock's expected price 10 years from now is $100.00.
E) The stock's required return is 10%.
Q2) Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective)annual rate of return?
A) 8.03%
B) 8.24%
C) 8.45%
D) 8.67%
E) 8.89%
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) Which of the following statements is CORRECT?
A) As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
B) Issuing options provides companies with a low cost method of raising capital.
C) The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
D) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
E) An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.
Q2) The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.
A)True
B)False
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Chapter 9: The Cost of Capital
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Q1) If expectations for long-term inflation rose,but the slope of the SML remained constant,this would have a greater impact on the required rate of return on equity,r<sub>s</sub>,than on the interest rate on long-term debt,r<sub>d</sub>,for most firms.Therefore,the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
A)True
B)False
Q2) Since 70% of the preferred dividends received by a corporation are excluded from taxable income,the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be
Cost of equity = r<sub>s</sub>(0.30) (0.50)+ r<sub>ps</sub>(1 - T) (0.70) (0.50).
A)True
B)False
Q3) If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Projects C and D both have normal cash flows and are mutually exclusive.Project C has a higher NPV if the WACC is less than 12%,whereas Project D has a higher NPV if the WACC exceeds 12%.Which of the following statements is CORRECT?
A) Project D is probably larger in scale than Project C.
B) Project C probably has a faster payback.
C) Project C probably has a higher IRR.
D) The crossover rate between the two projects is below 12%.
E) Project D probably has a higher IRR.
Q2) McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback? \(\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3 \\
\text { Cash flows } & -\$ 1.150 & \$ 500 & \$ 500 & \$ 500 \end{array}\)
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) McLeod Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?
A) 0.67
B) 0.73
C) 0.81
D) 0.89
E) 0.98
Q2) In cash flow estimation,the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.
A)True
B)False
Q3) The change in net working capital associated with new projects is always positive,because new projects mean that more working capital will be required.This situation is especially true for replacement projects.
A)True
B)False
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Chapter 12: Corporate Valuation and Financial Planning
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Q1) If a firm with a positive net worth is operating its fixed assets at full capacity,if its dividend payout ratio is 100%,and if it wants to hold all financial ratios constant,then for any positive growth rate in sales,it will require external financing.
A)True
B)False
Q2) Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital.For example,just-in-time inventory systems,multiple shifts for labor,and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.
A)True
B)False
Q3) A firm will use spontaneous funds to the extent possible; however,due to credit terms,contracts with workers,and tax laws there is little flexibility in their usage.
A)True
B)False
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Chapter 13: Agency Conflicts and Corporate Governance
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Q1) 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
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q3) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Warren Supply Inc.is evaluating its capital budget.The company finances with debt and common equity,but because of market conditions,wants to avoid issuing any new common stock during the coming year.It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000,and it is committed to maintaining a $2.00 dividend per share.Given these constraints,what percentage of the capital budget must be financed with debt?
A) 30.54%
B) 32.15%
C) 33.84%
D) 35.63%
E) 37.50%
Q2) If the information content,or signaling,hypothesis is correct,then changes in dividend policy can have an important effect on the firm's value and capital costs.
A)True
B)False
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Chapter 15: Capital Structure Decisions
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Q1) Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value.Right now,Cartwright has a capital structure that consists of 20% debt and 80% equity,based on market values.(Its D/S ratio is 0.25.)The risk-free rate is 6% and the market risk premium,r<sub>M</sub> -r<sub>RF</sub>,is 5%.Currently the company's cost of equity,which is based on the CAPM,is 12% and its tax rate is 40%.What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
A) 13.00%
B) 13.64%
C) 14.35%
D) 14.72%
E) 15.60%
Q2) The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.
A)True
B)False
Q3) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Q1) An increase in any current asset must be accompanied by an equal increase in some current liability.
A)True
B)False
Q2) A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.
A)True
B)False
Q3) A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.
A)True
B)False
Q4) Accruals are "spontaneous," but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.
A)True
B)False
18
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Chapter 17: Multinational Financial Management
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Q1) Tashakori Trucking,a U.S.-based company,is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years,$6 million for the next 2 years,and then a possible terminal value of $8 million.In addition,due to political risk factors,Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However,the government of the host country will block 20% of all cash flows.Thus,cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%,but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions,what is the project's NPV?
A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million
Q2) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
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Q1) When a firm refunds a debt issue,the firm's stockholders gain and its bondholders lose.This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.
A)True
B)False
Q2) 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.
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Chapter 18: Extension 18 A: Rights Offerings
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Q1) Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. \(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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Chapter 19: Lease Financing
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Q1) In a synthetic lease a special purpose entity (SPE)is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
Q2) Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and,under certain conditions,leased assets and associated liabilities do not appear on the firm's balance sheet.
A)True
B)False
Q3) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
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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) McGovern Enterprises is interested in issuing bonds with warrants attached.The bonds will have a 30-year maturity and annual interest payments.Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant.The investment bankers estimate that each warrant will have a value of $10.00.A similar straight-debt issue would require a 10% coupon.What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?
A) 6.75%
B) 7.11%
C) 7.48%
D) 7.88%
E) 8.27%
Q3) The owner of a convertible bond owns,in effect,both a bond and a call option.
A)True
B)False
Page 23
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Chapter 21: Dynamic Capital Structures
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Q1) Which of the following statements concerning the MM extension with growth is NOT CORRECT?
A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
C) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
D) The total value of the firm increases with the amount of debt.
E) The tax shields should be discounted at the cost of debt.
Q2) MM showed that in a world without taxes,a firm's value is not affected by its capital structure.
A)True
B)False
Q3) The MM model is the same as the Miller model,but with zero corporate taxes.
A)True
B)False
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Chapter 22: Mergers and Corporate Control
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Q1) Which of the following statements is most CORRECT?
A) A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
B) Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
C) Cash payments are used in takeovers but never in mergers.
D) Managers often are fired in takeovers, but never in mergers.
E) If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.
Q2) The three main advantages of holding companies are (1)control with fractional ownership, (2)taxation benefits,and (3)isolation of operating risks.
A)True
B)False
Q3) Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.
A)True
B)False
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Page 25
Chapter 23: Enterprise Risk Management
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Q1) 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%
Q2) 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.
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Page 26
Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) Bankruptcy laws have been used to help reach settlements in major product liability lawsuits.By using financial projections to show that contingent claims against the company jeopardize its existence,agreements are reached,partially satisfying claimants,and allowing the firm to continue operating.
A)True
B)False
Q2) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
Q3) 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
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Which of the following statements is CORRECT?
A) The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B) The slope of the characteristic line is the stock's standard deviation.
C) The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D) The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E) "Characteristic line" is another name for the Security Market Line.
Q2) Which is the best measure of risk for an asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?
A) Standard deviation; correlation coefficient.
B) Beta; variance.
C) Coefficient of variation; beta.
D) Beta; beta.
E) Variance; correlation coefficient.
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Chapter 26: Real Options
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Q1) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q2) Which of the following is NOT a real option?
A) The option to buy shares of stock if its price goes up.
B) The option to expand into a new geographic region.
C) The option to abandon a project.
D) The option to switch the type of fuel used in an industrial furnace.
E) The option to expand production if the product is successful.
Q3) 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
Q4) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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29 Verified Questions
29 Flashcards
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Sample Questions
Q1) 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%
Q2) Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?
A) Competitive cost of services provided.
B) Size of the bank's deposits.
C) Experience of personnel.
D) Loyalty and willingness to assume lending risks.
E) Convenience of location.
Q3) Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.
A)True
B)False
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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17 Verified Questions
17 Flashcards
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Sample Questions
Q1) Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180,and the total cash needed for transactions annually is $960,000.On what opportunity cost of holding cash was this analysis based?
Q2) If a company increases its safety stock,then its EOQ 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 average inventory will go up. A)True B)False
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Chapter 29: Pension Plan Management
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10 Verified Questions
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Sample Questions
Q1) Ms.Lloyd,who is 25 and expects to retire at age 60,has just been hired by the Chambers Corporation.Ms.Lloyd's current salary is $30,000 per year,but her wages are expected to increase by 5 percent annually over the next 35 years.Chambers has a defined benefit pension plan in which workers receive 2 percent of their final year's wages for each year of employment.Assume a world of certainty.Further,assume that all payments occur at year-end.What is Ms.Lloyd's expected annual retirement benefit,rounded to the nearest thousands of dollars?
A) $35,000
B) $57,000
C) $89,000
D) $116,000
E) $132,000
Q2) 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
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Chapter 30: Financial Management in Not For Profit
Businesses
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Sample Questions
Q1) Which of the following statements about a not-for-profit firm's cost of capital estimate is most correct?
A) The capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
B) The cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 - T in the WACC estimate to reflect the fact that such firms do not pay taxes.
C) Equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
D) Not-for-profit firms have a zero cost of capital.
E) Since a not-for-profit firm has no shareholders, its WACC estimate does not include a cost of equity (fund capital) estimate.
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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