Finance for Managers
Chapter Exam Questions
Course Introduction
Finance for Managers introduces the essential concepts and tools of financial management as they apply to managerial decision-making. The course covers topics such as financial statement analysis, budgeting, capital budgeting, cost of capital, risk analysis, and working capital management. Emphasizing practical applications, it enables managers to interpret financial data, evaluate investment opportunities, and make informed financial decisions that align with organizational goals. Through real-world examples and case studies, students develop the skills needed to communicate effectively with financial professionals and contribute to the financial success of their organizations.
Recommended Textbook Principles of Corporate Finance 11th Edition by
Richard A Brealey
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which of the following is not a common function of the firm's chief financial officer?
A)Hiring the firm's CEO
B)Hiring the firm's controller
C)Capital investment decisions
D)Discussing earnings with investors
Answer: A
Q2) Generally,a corporation is owned by its: i.managers; II)board of directors; III)shareholders
A)I only
B)II and III
C)III only
D)I,II,and III
Answer: C
Q3) The board of directors is ultimately responsible for all large investment decisions.
A)True
B)False
Answer: True
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Chapter 2: How to Calculate Present Values
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Q1) The present value of a growing perpetuity,with cash flow C1 occurring one year from now,is given by:
[C<sub>1</sub>/(r - g)],where r > g.
A)True
B)False
Answer: True
Q2) You would like to have enough money saved to receive an $80,000 per year perpetuity after retirement.How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement.The annual interest rate is 10%.)
A)$1,500,000
B)$880,000
C)$800,000
D)$80,000
Answer: B
Q3) State the rate of return rule.
Answer: Invest as long as the rate of return on the investment exceeds the rate of return on equivalent-risk investments in the capital market.
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4
Chapter 3: Valuing Bonds
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Q1) A five-year treasury bond with a coupon rate of 8% has a face value of $1,000.What is the semiannual interest payment?
A)$80
B)$40
C)$100
D)$50
Answer: B
Q2) If a bond's volatility is 5% and its yield to maturity changes by 0.5% (points)then the price of the bond:
A)changes by 5%
B)changes by 2.5%
C)changes by 7.5%
D)will not change
Answer: B
Q3) The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Value of Common Stocks
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Q1) MJ Co.pays out 60% of its earnings as dividends.Its return on equity is 15%.What is the stable dividend growth rate for the firm?
A)9%
B)5%
C)6%
D)15%
Q2) A high proportion of the value of a growth stock typically comes from: A)past dividend payments.
B)past earnings.
C)PVGO (present value of growth opportunities).
D)both A and B.
Q3) An investor who uses a market order instructs her brokerage firm to buy a given quantity of shares at the best available price.
A)True
B)False
Q4) A stock's price is based on the expected present value,at the market capitalization rate,of all the stock's future earnings.
A)True
B)False
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Chapter 5: Net Present Value and Other Investment Criteria
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Q1) Mass Company is investing in a giant crane.It is expected to cost $6.0 million in initial investment,and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.At the end of the fourth year,there will be a $1.0 million disposal cost.Calculate the MIRR for the project if the cost of capital is 12%.
A)17.8%
B)15.3%
C)23.8%
Q2) The payback period rule accepts all projects for which the payback period is:
A)greater than the cut-off value.
B)less than the cut-off value.
C)positive.
D)an integer.
Q3) Which investment analysis technique is used the least by CFOs?
A)net present value
B)internal rate of return
C)payback
D)book rate of return
Q4) Briefly explain the value additivity property.
Q5) What are some of the advantages of using the IRR method?
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Chapter 6: Making Investment Decisions With the Net
Present Value Rule
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Q1) By undertaking an analysis in real terms,the financial manager avoids having to forecast inflation.
A)True
B)False
Q2) An analyst wishes to determine the value of resources used by a proposed project.Which values should the analyst use to approximate opportunity costs?
A)book values
B)market values
C)historical values
D)Accounting values plus an inflation adjustment
Q3) Important points to remember while estimating the cash flows of a project are:
I.Only cash flow is relevant.
II.Always estimate cash flows on an incremental basis.
III.Be consistent in the treatment of inflation.
A)I only
B)I and II only
C)II and III only
D)I,II,and III
Q4) Define the term cash flow for a project.
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Chapter 7: Introduction to Risk and Return
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Q1) Assume the following data: risk-free rate = 4.0%,average risk premium = 7.7%.
Calculate the required rate of return.
A)5.6%
B)7.6%
C)11.7%
D)30.8%
Q2) The annual returns for three years for stock B were 0%,10%,and 26%.Annual returns for three years for the market portfolio were +6%,18%,and 24%.Calculate the beta for the stock.
A)0.75
B)1.36
C)1.00
D)0.74
Q3) Diversification can reduce portfolio risk even in the case when correlations across stock returns equal zero.
A)True
B)False
Q4) Briefly explain what the beta of a stock means.
Q5) Define the term risk premium.
Q6) Briefly explain how the beta of a stock is estimated.
Page 9
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Chapter 8: Portfolio Theory and the Capital Asset Pricing
Model
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Q1) Briefly explain the effect of introducing borrowing and lending at the risk-free rate on the efficient portfolios.
Q2) Where would underpriced and overpriced securities plot on the SML (security market line)?
Q3) Investors mainly worry about those risks that can be eliminated through diversification.
A)True
B)False
Q4) The correlation coefficient measures the:
A)rate of return of individual stocks.
B)direction of movement of the return of individual stocks.
C)degree to which the returns of two stocks move together.
D)degree of s unique risk present in the standard deviations of a pair of stocks.
Q5) According to the CAPM,the market portfolio is a tangency portfolio.
A)True B)False
Q6) According to the CAPM,all investments plot along the security market line.
A)True
B)False
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Chapter 9: Risk and the Cost of Capital
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Q1) Briefly discuss the certainty equivalent approach to estimating the NPV of a project.
Q2) Companies with high ratios of fixed costs to project values tend to have high betas.
A)True
B)False
Q3) The company cost of capital is the cost of debt of the firm.
A)True
B)False
Q4) The market value of Cable Company's equity is $60 million and the market value of its debt is $40 million.If the required rate of return on the equity is 15% and that on its debt is 5%,calculate the company's cost of capital.(Assume no taxes.)
A)15%
B)10%
C)11%
D)9%
Q5) Discuss why one might use an industry beta to estimate a company's cost of capital.
Q6) Briefly explain the difference between company and project cost of capital.
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Page 11
Chapter 10: Project Analysis
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Q1) The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant.Fixed costs are $3 million per year.A financial calculator costs $10 per unit to manufacture and sells for $30 per unit.If the plant lasts for four years and the cost of capital is 20%,what is the break-even level of annual sales? (Assume that revenues and costs occur at the end of each year.Assume no taxes.)Round to the nearest 1,000 units.
A)150,000 units
B)342,000 units
C)382,000 units
D)300,000 units
Q2) The NPV break-even point occurs when:
A)the present value of inflows line cuts the present value of outflows line.
B)the total revenue line cuts the fixed cost line.
C)the total revenue line cuts the total cost line.
D)the present value of inflows cuts the total cost line.
Q3) Briefly discuss various real options associated with capital budgeting projects.
Q4) Define the term abandonment value.
Q5) Projects with higher fixed costs have lower break-even points.
A)True
B)False
Page 12
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Chapter 11: Investment, Strategy, and Economic Rents
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Q1) A positive NPV forecast for a new project is reliable only if it is based on:
A)forecasts of cash flows.
B)Michael Porter's theories.
C)identifiable sources of economic rents.
D)results from Monte Carlo analysis.
Q2) What is the NPV of a project in a perfectly competitive environment?
A)positive
B)negative
C)zero
D)cannot be determined
Q3) The annual demand (in millions)for golf balls is given by the equation: Demand = 6 × (5 - price).If the price of a golf ball is $3,what is the annual demand for golf balls?
A)8 million
B)12 million
C)15 million
D)18 million
Q4) In a competitive market,most firms can earn high economic rents.
A)True
B)False
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Chapter 12: Agency Problems, Compensation, and Performance Measurement
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Q1) Boards of directors outside the U.S.are generally friendlier towards their own managers.
A)True
B)False
Q2) CEO compensation is generally highest in (the):
A)U.S.
B)India.
C)U.K.
D)Germany.
Q3) Briefly explain how a plant manager can improve EVA (economic value added)?
Q4) An example of an entrenching investment is a manager that expands the scope of his or her operation.
A)True
B)False
Q5) In large public companies monitoring is the primary responsibility of the: i.shareholders; II)board of directors; III)independent accountants; IV)lenders
A)I only
B)II only
C)I,II,and III only
D)I,II,III,and IV
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Chapter 13: Efficient Markets and Behavioral Finance
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Q1) State the strong form of market efficiency.
Q2) The different forms of market efficiency are: i.weak form; II)semistrong form; III)strong form
A)I only
B)I and II only
C)I and III only
D)I,II,and III
Q3) The following are anomalies countering the efficient market hypothesis EXCEPT: i.the small-firm effect; II)the earnings announcement puzzle; III)the new-issue puzzle; IV)trading rules based on patterns
A)I only
B)I and II only
C)I,II,and III only
D)IV only
Q4) For a corporation,financing decisions are typically harder to reverse than investment decisions.
A)True
B)False
Q5) What are puzzles and anomalies?
Q6) List the six lessons of market efficiency.
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Chapter 14: An Overview of Corporate Financing
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Q1) The maximum number of shares that can be issued by a firm is called:
A)Treasury stock.
B)outstanding shares.
C)authorized shares.
D)none of the options.
Q2) Briefly discuss some of the features that would increase the value of a corporate bond.
Q3) Shares held by investors are known as:
A)issued but not outstanding
B)issued and outstanding
C)authorized shares
D)treasury stock
Q4) Which type of voting allows minority shareholders to allocate their votes in a manner to increase the chance of electing a director?
A)majority voting
B)cumulative voting
C)representative voting
D)executive voting
Q5) Indicate the major sources of finance available to corporations.
Q6) Briefly explain the voting rights of shareholders.
Page 16
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Chapter 15: How Corporations Issue Securities
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Q1) Equity investment in start-up private companies is called:
A)venture capital.
B)mezzanine financing.
C)initial public offering (IPO).
D)seasoned equity offering (SEO).
Q2) When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies,pension funds,etc.,it is called a(an):
A)rights offering.
B)general art offering.
C)private placement.
D)unseasoned issue.
Q3) The possibility that the winner (highest bidder)in an auction process may have bid a price that is very high (far above the value)is called:
A)winner's curse.
B)seniority.
C)English auction.
D)uniform-price auction.
Q4) Briefly explain the term venture capital.
Q5) Briefly explain the term initial public offering (IPO).
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Chapter 16: Payout Policy
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Q1) Generally,investors interpret the announcement of an increase in dividends as:
A)bad news and the stock price drops.
B)good news and the stock price increases.
C)a nonevent and does not affect the stock price.
D)very bad news and the stock price plunges.
Q2) Firms can repurchase shares in the following ways:
i.open market repurchase; II)tender offer; III)Dutch auction; IV)direct negotiation with a major shareholder
A)I only
B)II only
C)III only
D)I,II,III,and IV
Q3) Healy and Palepu found that the stock price of firms that stopped paying a dividend declined by 9.5% on average upon announcement.
A)True
B)False
Q4) Most firms have long-run target dividend payout ratios.
A)True
B)False
Q5) What is SEC Rule 10b-18?
Page 18
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Chapter 17: Does Debt Policy Matter
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Q1) An EPS-operating income graph,for different debt ratios,shows the: I.greater risk associated with debt financing,which is evidenced by a greater slope; II.the break-even point where EPS of two different debt ratios are equal; III.the minimum earnings needed to pay the debt financing for a given level of debt
A)I only
B)II only
C)III only
D)I,II,and III only
Q2) A firm is unlevered and has a cost of equity capital of 9%.What is the cost of equity if the firm becomes levered at a debt-equity ratio of 2? The expected cost of debt is 7%.(Assume no taxes.)
A)15.0%
B)16.0%
C)14.5%
D)13.0%
Q3) State and explain MM's Proposition II.
Q4) What circumstances violate MM's Proposition I? Briefly discuss.
Q5) Briefly discuss some of the applications of the law of conservation of value.
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Chapter 18: How Much Should a Corporation Borrow
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Q1) Suppose that a company can direct $1 to either debt interest or capital gains for equity investors.If there were no personal taxes on capital gains,which of the following investors would not care how the money was channeled? (The marginal corporate tax rate is 35%.)
A)investors paying personal tax of 17.5%
B)investors paying personal tax of 35%
C)investors paying personal tax of 53%
D)tax-exempt personal investors
Q2) Risk shifting,refusing to contribute equity,and playing for time,are some of the consequences of firms facing bankruptcy.
A)True
B)False
Q3) The value of a levered firm,given permanent debt level D,is: Value of levered firm = value of unlevered firm + (T<sub>C</sub>)× (D).This assumes zero costs of financial distress.
A)True
B)False
Q4) Discuss some examples of conflicts of interest that may arise between bondholders and stockholders when a firm is in financial distress.
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Chapter 19: Financing and Valuation
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Q1) Which of the following is an important assumption required if using the WACC formula?
A)Companies rebalance their capital structure to maintain a constant debt ratio.
B)WACC must be used on public companies with actively traded securities.
C)Management bonuses must be added back to free cash flows.
D)The firm cannot issue any further debt without adjusting its WACC.
Q2) The Miles-Ezzell formula for the adjusted cost of capital assumes that:
A)the firm rebalances its debt ratio only once per year.
B)the project cash flow is a perpetuity.
C)the project's risk is a carbon copy of the firm's risk.
D)MM's Proposition I corrected for taxes holds .
Q3) A firm has issued $5 par value preferred stock that pays a $0.80 annual dividend.The stock currently sells for $9.50.In calculating WACC,what should one use for the value of the firm's preferred stock?
A)$0.80
B)$4.20
C)$5.00
D)$9.50
Q4) Under which circumstances would it be better to use the adjusted present value approach versus the WACC approach?
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Chapter 20: Understanding Options
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Q1) All else equal,as the underlying stock price increases:
A)the call price decreases.
B)the call price increases.
C)there is no effect on call price.
D)the call price can either increase,decrease,or remain the same.
Q2) Suppose an investor buys one share of stock and a put option on the stock.What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs.)
A)The value of two shares of stock.
B)The value of one share of stock plus the exercise price.
C)The exercise price.
D)The value of one share of stock minus the exercise price.
Q3) The owner of a regular exchange-listed put-option on a stock:
A)has the right to buy 100 shares of the underlying stock at the exercise price.
B)has the right to sell 100 shares of the underlying stock at the exercise price.
C)has the obligation to buy 100 shares of the underlying stock at the exercise price.
D)has the obligation to sell 100 shares of the underlying stock at the exercise price.
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Chapter 21: Valuing Options
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Q1) Considering the standard deviation of returns in option pricing: 1 + upside change = u = e^( )( h).
A)True
B)False
Q2) For lookback options:
A)the option holder must decide before maturity whether the option is a call or a put.
B)the option holder chooses as the exercise price any of the asset prices that occurred before the final date.
C)the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum.
D)the exercise price is equal to the average of the asset's price during the life of the option.
Q3) Calculate d<sub>2</sub>.
A)-0.02766
B)+0.02766
C)+0.2027
D)-0.2027
Q4) Briefly explain how to choose the up and down values for the binomial method.
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Chapter 22: Real Options
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Q1) Production facilities that are flexible,in terms of the potential to use different combinations of raw material inputs,are most valuable when:
A)the product's demand is highly volatile.
B)the product's price is highly volatile.
C)raw material prices are highly volatile.
D)labor costs are highly volatile.
Q2) The option to expand is a type of financial option.
A)True
B)False
Q3) The option to make a follow-on investment is a put option.
A)True
B)False
Q4) If an oil well allows the investor the option to drill later,what must happen for the option to be exercised?
A)Interest rates must increase.
B)The probability of oil prices increasing must be less than the probability of oil prices decreasing.
C)Oil prices must exceed the present value of future expected oil prices.
D)The present value of oil must be higher than the future value of oil.
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Chapter 23: Credit Risk and the Value of Corporate Debt
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Q1) If the bond has a 15% probability of default and payment under default is $400,calculate the expected payment from the bond.
A)$1,050.00
B)$400.00
C)$952.50
D)$892.50
Q2) Beaver,McNichols and Rhie have developed the following model to predict the chance of failing during the next year relative to the chance of not failing for firms: log(relative chance of failure)= -6.445 - 1.192 ROA + 2.307 (liabilities/assets)-
0.346(EBITDA/liabilities)using:
A)multiple discriminant analyses.
B)real options analysis.
C)hazard analysis.
D)none of the options.
Q3) Which of the following rated bonds has the most risk?
A)Aaa
B)Aa
C)Baa
D)Ba
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Chapter 24: The Many Different Kinds of Debt
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Q1) Even though many bonds have deferred sinking funds,the sinking fund has the following effects on bondholders:
I.provides extra protection to bondholders as both an early warning system and perhaps some collateral cash;
II.provides an option to the firm to buy bonds at the lower of market or face value;
III.puts the bondholders at added risk due to potential inability to meet sinking fund payments
A)I and II only
B)III only
C)II only
D)II and III only
Q2) Generally,convertible bonds are issued by:
A)smaller and more speculative firms.
B)mature and profitable firms.
C)very large firms.
D)the U.S.government.
Q3) The term Yankee bond refers to any bond sold in the United States.
A)True
B)False
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Chapter 25: Leasing
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Q1) One of the sensible reasons for leasing is that short-term leases are convenient.
A)True
B)False
Q2) If the depreciation is $20,000 and the marginal tax rate is 35%,calculate the depreciation tax shield.
A)$20,000
B)$13,000
C)$7,000
D)$3,500
Q3) If the lessor borrows most of the purchase price of a leased asset,the lease is called a:
A)leveraged lease.
B)sale and lease-back.
C)capital lease.
D)nonrecourse lease.
Q4) What is the discount rate used for lease or buy analysis?
Q5) Briefly explain how the lessor's position changes as the lessee undergoes financial distress.
Q6) What happens to the NPV of leasing if the tax rate increases?
Page 27
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Chapter 26: Managing Risk
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Q1) Suppose that you sold a futures contract for $3.75 per bushel and the contract ended at $3.60 after several days of closing prices of $3.80,$3.70,$3.65,$3.70,$3.65,and $3.60.What would the mark to market sequence be? (Cash flow per bushel,in $.)
A)-0.05,0.10,0.05,-0.05,0.05,0.05
B)0.05,-0.10,-0.05,0.05,-0.05,-0.05
C)-0.05,0.05,0.10,0.05,-0.09,-0.15
D)0.05,-0.05,-0.10,-0.05,-0.09,-0.015
Q2) In addition to bearing risk,insurance companies also bear: i.administrative costs; II)moral hazard costs; III)adverse selection costs
A)I only
B)II only
C)III only
D)I,II,and III
Q3) For commodity futures: Net convenience yield = (convenience yield - storage costs).
A)True
B)False
Q4) Briefly describe a swap contract.
Q5) Why are derivatives necessary for a thriving economy?
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Chapter 27: Managing International Risks
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Q1) Purchasing power parity provides a better long-run indicator for future price changes than short-run indicator.
A)True
B)False
Q2) Important aspects of international finance include:
I.that the basic principles of corporate finance do not apply; II.the process of foreign exchange valuation of different currencies; III.that the NPV principle cannot be applied to foreign operations
A)I only
B)I and III only
C)II only
D)III only
Q3) If a Big Mac costs $2.31 in the U.S.,and in Japan 250 Yen,according to PPP,what is the implied exchange rate in Yen/$US?
A)0.00924
B)108.225
C)119.795
D)250.000
Q4) Briefly describe the different types of currency markets.
Q5) Briefly explain the expectations theory of forward exchange rates.
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Chapter 28: Financial Analysis
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Q1) Assume the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10.Calculate the times interest earned (TIE)ratio.(Account for depreciation.)
A)7.0
B)5.0
C)4.7
D)14.0
Q2) Which of the following factors would be influential in a typical financial plan?
I.how a firm can generate superior long-term returns; II.choice of industry;
III.position within the industry
A)I only
B)I and II only
C)II and III only
D)I,II,and III
Q3) Briefly describe the different categories of financial ratios.
Q4) Financial ratios can help you to ask the right questions but they rarely answer these questions on their own.
A)True
B)False
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Chapter 29: Financial Planning
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Q1) Two common sources of short-term financing are borrowing from a bank and stretching payables.
A)True
B)False
Q2) The firm's internal growth rate is defined as:
A)retained earnings/net income.
B)retained earnings/net assets.
C)retained earnings/total assets.
D)net income/net assets.
Q3) Net working capital is defined as:
A)the current assets in a business.
B)the difference between current assets and current liabilities.
C)the present value of all short-term cash flows.
D)the difference between total assets and total liabilities.
Q4) The sustainable growth rate equals:
A)plowback ratio × return on equity.
B)return on equity/plowback ratio.
C)return on assets × plowback ratio.
D)plowback ratio × return on equity × (equity/net assets).
Q5) Discuss the process of preparing a short-term financial plan.
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Chapter 30: Working Capital Management
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Questions
Q1) Terry's Place is currently experiencing a bad debt ratio of 4%.Terry is convinced that,with looser credit controls,this ratio will increase to 8%; however,she expects sales to increase by 10% as a result.The cost of goods sold is 80% of the selling price.Per $100 of current sales,what is Terry's expected profit under the proposed credit standards?
A)$26.00
B)$15.40
C)$13.20
D)$25.60
Q2) In the U.S.,large-value electronic payments are made through: I.Fedwire; II.ACH; III.CHIPS
A)I only
B)II only
C)III only
D)I and III only
Q3) List some of the different money market instruments available for short-term investments.
Q4) Briefly describe the basic electronic funds transfer systems.
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Chapter 31: Mergers
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Q1) Antitrust law can be enforced by the U.S.federal government by:
I.a civil suit brought by the Justice Department;
II.proceedings initiated by the Federal Trade Commission (FTC);
III.proceedings initiated by the Securities and Exchange Commission (SEC)
A)I only
B)I and II only
C)I,II,and III
D)II only
Q2) A conglomerate merger is one in which an acquiring firm buys a closely related firm.
A)True
B)False
Q3) Who gains the most in mergers?
Q4) Briefly describe the different types of mergers.
Q5) Two companies can sensibly consider a merger if they have complementary resources.
A)True
B)False
Q6) Briefly explain the term economies of scale.
Q7) Briefly discuss the different forms of acquisition.
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Chapter 32: Corporate Restructuring
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Q1) Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new company.
A)True
B)False
Q2) Which class of creditor suffered the most during the Chrysler reorganization?
A)Dealer and warranty obligations
B)Trade creditors
C)Pension liabilities
D)Secured creditors
Q3) Private-equity partnerships are designed to run portfolio companies indefinitely.
A)True
B)False
Q4) What are some of the benefits of privatization?
Q5) The following are examples of spin-offs except:
A)Motorola and Motorola Mobility.
B)AT&T and Lucent.
C)3Com and Palm.
D)Exxon and Mobil.
Q6) Briefly explain the difference between a spin-off and a carve-out.
Page 34
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Chapter 33: Governance and Corporate Control Around the World
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Q1) What are some of the advantages of market-based systems?
I.successful in developing new industries;
II.more effective in shrinking capital in declining industries;
III.more reliant on transparent financial reporting;
IV.more diverse as sources of corporate financing
A)I,II,and IV
B)II,III,and IV
C)I,III,and IV
D)I,II,and III
Q2) The United States is considered to have a market-based financial system because:
I.stock market capitalization,as a percentage of GDP,is relatively high; II.bank loans,as a percentage of GDP,are relatively low;
III.the U.S.has thousands of banks and insurance companies
A)I only
B)II only
C)II and III only
D)I and II only
Q3) Name Germany's two boards of directors,and briefly explain why large firms in Germany have two boards of directors.
Q4) Briefly explain the term pyramid in the context of corporate control.
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