Finance for Managers
Exam Answer Key
Course Introduction
Finance for Managers provides a comprehensive introduction to the key financial concepts and tools essential for effective managerial decision-making. The course covers topics such as financial statement analysis, budgeting, cost control, investment appraisal, risk assessment, and the principles of corporate finance. Emphasizing practical application, it equips managers with the knowledge to interpret financial data, allocate resources efficiently, and align financial strategies with organizational goals. Through real-world case studies and problem-solving exercises, students will gain the confidence to make informed financial decisions that drive business success.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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16 Chapters
1341 Verified Questions
1341 Flashcards
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) With which of the following statements would most people in business agree?
A) The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.
B) Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C) Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
D) Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
E) Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.
Answer: C
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3
Chapter 3: Analysis of Financial Statements
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104 Flashcards
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Sample Questions
Q1) The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.
A)True
B)False
Answer: True
Q2) Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?
A) The total assets turnover decreases.
B) The TIE declines.
C) The DSO increases.
D) The EBITDA coverage ratio increases.
E) The current and quick ratios both decline.
Answer: D
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4
Chapter 4: Time Value of Money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?
A) 12.31%
B) 12.96%
C) 13.64%
D) 14.36%
E) 15.08%
Q2) Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?
A) $7,531
B) $7,927
C) $8,323
D) $8,740
E) $9,177
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Page 5
Chapter 5: Bonds, Bond Valuation, and Interest Rates
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) Assuming all else is constant, which of the following statements is CORRECT?
A) For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
B) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
C) Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
D) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (r<sub>d</sub>) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
E) A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
Q2) If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.
A)True B)False
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Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.
A)True
B)False
Q2) The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
A)True
B)False
Q3) Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Barker's required rate of return?
A) 9.43%
B) 9.67%
C) 9.92%
D) 10.17%
E) 10.42%
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.
A)True
B)False
Q2) Huxley Building Supplies' last free cash flow was $1.75 million. Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever. Its weighted average cost of capital WACC is 12%. Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding. What is the best estimate of the current intrinsic stock price?
A) $39.58
B) $40.64
C) $41.71
D) $42.80
E) $44.92
Q3) The free cash flow valuation model cannot be used unless a company doesn't pay dividends.
A)True
B)False
Page 8
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Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) 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.
B) 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.
C) 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.
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E) 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.
Q2) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
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Page 9
Chapter 9: The Cost of Capital
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Sample Questions
Q1) Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
A) 4.35%
B) 4.58%
C) 4.83%
D) 5.08%
E) 5.33%
Q2) The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
A)True
B)False
Q3) The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) One defect of the IRR method is that it does not take account of the time value of money.
B) One defect of the IRR method is that it does not take account of the cost of capital.
C) One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
D) One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
E) One defect of the IRR method is that it does not take account of cash flows over a project's full life.
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
A) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.
B) The company has spent and expensed $1 million on R&D associated with the new project.
C) The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project.
D) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.
E) The new project is expected to reduce sales of one of the company's existing products by 5%.
Q2) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
A)True B)False
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Page 12
Chapter 12: Financial Planning and Forecasting Financial Statements
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Sample Questions
Q1) The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.
A)True
B)False
Q2) As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.
A)True
B)False
Q3) The capital intensity ratio is generally defined as follows:
A) The percentage of liabilities that increase spontaneously as a percentage of sales.
B) The ratio of sales to current assets.
C) The ratio of current assets to sales.
D) The amount of assets required per dollar of sales, or A<sub>0</sub>*/S<sub>0</sub>.
E) Sales divided by total assets, i.e., the total assets turnover ratio.
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Page 13
Chapter 13: Corporate Valuation, Value-Based Management
and Corporate Governance
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) 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
Q4) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity. Its capital budget this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its capital requirements, pay the dividend, and keep the capital structure in balance?
A) $584,250
B) $615,000
C) $645,750
D) $678,038
E) $711,939
Q2) The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
A) $100,000
B) $200,000
C) $300,000
D) $400,000
E) $500,000
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) If debt financing is used, which of the following is CORRECT?
A) The percentage change in net operating income will be equal to a given percentage change in net income.
B) The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.
C) The percentage change in net income will be greater than the percentage change in net operating income.
D) The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.
E) The percentage change in net operating income will be greater than a given percentage change in net income.
Q2) Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.
A)True
B)False
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16
Chapter 16: Working Capital Management
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Sample Questions
Q1) A lockbox plan is most beneficial to firms that A) have widely dispersed manufacturing facilities.
B) have a large marketable securities portfolio and cash to protect.
C) receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
D) have customers who operate in many different parts of the country.
E) have suppliers who operate in many different parts of the country.
Q2) The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.
A)True
B)False
Q3) Shorter-term cash budgets say a daily cash budget for the next month are generally used for actual cash control while longer-term cash budgets say monthly cash budgets for the next year are generally used for planning purposes.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Sample Questions
Q1) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
Q2) Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.
A)True
B)False
Q3) If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S. dollar.
A)True
B)False
Q4) Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.
A)True
B)False
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Page 18