Finance for Managers Exam Practice Tests
Course Introduction
Finance for Managers introduces the fundamental concepts and tools of financial management essential for decision-making in a managerial context. The course covers key topics such as financial statement analysis, budgeting, capital structure, time value of money, risk assessment, and investment appraisal. Emphasizing practical application, students learn how to interpret financial reports, make informed resource allocation decisions, and understand the implications of financial choices on organizational strategy and performance. Designed for non-finance managers, this course enables leaders to communicate effectively with financial professionals and contribute to the financial success of their organizations.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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19 Chapters
3308 Verified Questions
3308 Flashcards
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Chapter 1: Foundations
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) Which of the following is true of financial assets?
A) Companies issue financial assets to earn revenue.
B) Investors purchase financial assets to earn a return.
C) The ownership of financial assets cannot be transferred.
D) Investors purchase financial assets because they are virtually risk free.
Answer: B
Q2) Financial theory stems primarily from:
A) mathematics.
B) finance.
C) economics.
D) accounting.
Answer: C
Q3) The agency problem is generally the most prevalent in companies where ownership is held by only a few people.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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153 Flashcards
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Sample Questions
Q1) What is UBUS Inc.'s tax liability?
A)$48
B)$60
C)$55
D)$40
E)$35 Answer: D
Q2) Although depreciation is a noncash expense, the government still allows the deduction on the firm's tax return.
A)True
B)False Answer: True
Q3) _____ stock is an equity security that has some of the characteristics of debt.
A) Common
B) Equity
C) Preferred
D) Capital Answer: C
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Chapter 3: Cash Flows and Financial Analysis
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191 Verified Questions
191 Flashcards
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Sample Questions
Q1) Average inventory is $25,000, sales is $250,000, gross margin is 40% of sales, and net income is $35,000. The most meaningful calculation of inventory turnover results in an inventory turns figure of:
A) 1 time.
B) 2 times.
C) 4 times.
D) 6 times.
Answer: D
Q2) Operating activities involve the income statement and current accounts of the balance sheet.
A)True
B)False
Answer: True
Q3) In theory, the Economic Value Added (EVA) is the amount by which the firm increases or decreases Market Value Added (MVA) in the current year.
A)True
B)False
Answer: True
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Chapter 4: Financial Planning
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155 Flashcards
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Sample Questions
Q1) A firm has the following balance sheet at the end of this year. Next year it expects sales to increase 50% over this year's level of $9,000, and anticipates retaining $2,000 of its earnings. \(\begin{array}{lclc}
\text { Cash } & \$ 4,000 & \text { Accountspayable } & \$ 2,500 \\
\text { Accountsreceivable } & 3,000 & \text { Accrued expenses payable } & 1,000 \\
\text { Inventories } & 2,000 & \text { Longterm debt } & 6,000 \\
\text { Net fixed assets } & 12,500 & \text { Common stock } & 8,500\\&&\text { Retained earnings } & 3,500\\\text { Total asssets }&\$21,500&\text { Total liabilities and capjital }&\$21,500
\end{array}\) According to the unmodified percentage of sales method, the amount of external funds needed next year will be:
A) $8,750.
B) $10,750.
C) $7,000.
D) None of the above
Q2) The financial plan is essentially a chapter or section of a business plan.
A)True
B)False
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Financial markets include money markets and capital markets.
A)True
B)False
Q2) In a(n) _____ loan, early payments are lower than the monthly interest charge.
A) zero-down loan
B) adjustable-rate mortgage
C) negative amortization
D) Alt-A loan
Q3) The main purpose of an economy's financial system is to facilitate the transfer of funds from:
A) financial middlemen to financial intermediaries.
B) consumer savers to business investors.
C) primary claimholders to secondary claimholders.
D) lenders to financial intermediaries.
Q4) An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all the following except:
A) long range financial planning.
B) the marketing of securities.
C) the timing of securities.
D) the firm's new product marketing decisions.
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Chapter 6: Time Value of Money
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Sample Questions
Q1) Preferred stock dividends are:
A) paid on demand.
B) amortized.
C) a perpetuity.
D) due at the end of an investment.
Q2) Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20-year period, the first payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually?
A) $16,000
B) $19,046
C) $1,120
D) $944.10
Q3) You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the annual rate of return on your investment?
A) 12%
B) 11%
C) 10%
D) 9%
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Page 8
Chapter 7: The Valuation and Characteristics of Bonds
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174 Verified Questions
174 Flashcards
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Sample Questions
Q1) The term "yield" relates only to investments whose holding period extends beyond one year, whereas "rate of return" typically relates to shorter-term investments.
A)True
B)False
Q2) Maturity risk exists because the prices of longer term bonds fluctuates more in response to interest rate changes than the prices of shorter term bonds.
A)True
B)False
Q3) Call penalties and call premiums are essentially interchangeable terms.
A)True
B)False
Q4) A security's value is equal to:
A) the book value of the firm.
B) the book value of the firm divided by number of shares.
C) the future value of its expected cash flows.
D) the present value of its expected cash flows.
Q5) The call premium is also known as call protection.
A)True
B)False
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Rapid City Motors Co. expects to grow at 20% for two years. After that it expects 8% growth indefinitely. The firm recently declared a $4.00 annual dividend. Similar stocks return about 12%. How much should a share of Rapid City be worth today?
A) $ 98.36
B) $155.50
C) $132.84
D) $147.89
Q2) If a call option has zero intrinsic value then:
A) the call option is in the money.
B) the call option is out of the money.
C) the call option has a zero time premium.
D) a put option with the same strike price also has zero intrinsic value.
Q3) The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.
Q4) The executive stock option system sets up a conflict of interest that may lead to dishonest financial reporting.
A)True
B)False
Q5) Are growth rate models such oversimplifications of reality that they're useless?
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Chapter 9: Risk and Return
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Sample Questions
Q1) Stock A has a required return of 18% and a beta of 1.4. The expected market return is 14%. What is the risk-free rate?
A) 0.6%
B) 1.2%
C) 3.0%
D) 4.0%
E) 6.0%
Q2) A rational investor will make an investment only if he or she believes the required return is equal to or higher than expected return.
A)True
B)False
Q3) The underlying principles of portfolio theory include:
A) diversifying business-specific risk away.
B) basing decisions on stocks' risk/return characteristics in a portfolio context rather than on a stand-alone basis.
C) getting the highest available return for the amount of risk the investor is comfortable with.
D) All of the above
Q4) How can a stock have different risk characteristics in and out of a portfolio?
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Chapter 10: Capital Budgeting
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) Assume the following facts about a firm's financing in the next year: \(\begin{array}{l}
\text { Proportion of capital projects funded by debt}&=45 \% \\
\text {Proportion of capital projects funded by equity }&=55 \% \\
\text {Return re ceived by bondholders }&=8.0 \% \\
\text {Return received by stockholders }&=14.0 \%
\end{array}\) The weighted cost of capital of this project is:
A) 11.0%.
B) $113,000.
C) 11.3%.
D) 10.7%.
Q2) Which of the following can be used to make a comparison of projects with unequal lives?
A) Replacement Chain Method
B) Equivalent Annual Annuity Approach
C) Profitability Index
D) Both a & b
E) All of the above
Q3) What are some of the practical reasons for capital rationing?
Q4) When can IRR and NPV give different results? Explain how this can happen.
Page 12
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Chapter 11: Cash Flow Estimation
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201 Verified Questions
201 Flashcards
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Sample Questions
Q1) As a financial person you would be concerned because marketing analyses frequently: I. Overstate NPV by using the wrong interest rate.
II) Are biased in favor of the projects they propose and estimate unrealistic cash flows.
III) Choose projects in areas that the firm knows nothing about.
A) I, II, and III
B) II and III
C) I and III
D) I and II
Q2) Which of the following is not considered a relevant factor in estimating the incremental cash flows of a proposed capital project?
A) Pre-startup expenditures
B) Financing costs
C) Incremental working capital requirements
D) Taxes on incremental expenses and earnings
Q3) Define opportunity costs and explain their role in capital budgeting.
Q4) Sunk costs are also called opportunity or alternative costs.
A)True
B)False
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) The value of a real option is at least the increase in the project's estimated NPV arising from the option's inclusion.
A)True
B)False
Q2) The ____ makes risky projects less acceptable by simply lowering the cash flow estimates themselves.
A) overlay approach
B) pure play method
C) certainty equivalent approach
D) accounting beta method
Q3) Because NPV is calculated using expected cash flows, NPV is ____.
A) generally a correct representation of the future for very risky projects
B) a random variable
C) not subject to the riskiness of the cash flows
D) not subject to the variance of the cash flows
Q4) Why may an analysis that makes even a rough estimate of the probability distribution of project NPV or IRR be infinitely more valuable to management than a point estimate? Why are scenario and especially decision tree analysis particularly valuable with regard to this issue?
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Chapter 13: Cost of Capital
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Sample Questions
Q1) The CAPM's estimate of the component cost of common equity would be increased by an increase in:
A) the risk-free interest rate.
B) a firm's beta.
C) the return on the market.
D) b and c
E) All of the above
Q2) The cost of retained earnings differs from the cost of new equity due to:
A) flotation costs.
B) dividends.
C) capital gains yields.
D) Both a & c
E) All of the above
Q3) Which is not considered a part of the firm's capital structure?
A) Retained earnings
B) Preferred stock
C) Bank loan
D) Depreciation expense
Q4) The money paid to investors is a cost to the company and a return to the investor. Why then aren't component costs equal to investor returns?
Page 15
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) If a firm's sales change by 15% and it has a degree of operating leverage (DOL) of 2.0, what is the expected change in earnings before interest and taxes (EBIT)?
A) 30%
B) 40%
C) 50%
D) 60%
Q2) EBIT, earnings before interest and taxes, is also called:
A) operating income.
B) net income.
C) financial income.
D) revenue.
Q3) A firm performs capital restructuring in order to ____.
A) decrease its risk by adding more leverage
B) increase its risk by increasing equity
C) get to an optimal capital structure
D) increase the return on equity by eliminating all debt
Q4) Financial leverage affects a firm's EBIT.
A)True
B)False
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Chapter 15: Dividends
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Sample Questions
Q1) Which of the following are realistic motives for a stock split?
A) To increase the number of shares because successful companies have large numbers of shares outstanding.
B) To reduce the stock's price to keep it in a desirable trading range.
C) To immediately increase the market value of the firm's stock.
D) a and b
Q2) Companies generally repurchase their stocks when the market price is high.
A)True
B)False
Q3) In general, the options available to management for the disposition of the firm's earnings are:
A) retention for investment in business projects.
B) an immediate cash payment to shareholders in the form of a dividend.
C) prepaying taxes for as many as ten years.
D) both a and b
Q4) The dividend controversy is whether paying or not paying dividends affects:
A) retired stockholders.
B) stock price.
C) young, affluent stockholders.
D) dividend reinvestment.
Page 17
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Chapter 16: The Management of Working Capital Multiple
Choice Questions
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Sample Questions
Q1) Which of the following changes would result in higher receivables?
A) Tightening credit policy
B) An increase in the net period of the terms of sale
C) An increase in the prompt payment discount offered
D) All of the above
Q2) Calculate the effective interest rate of a 2/5, net 25 terms of sale, using a 365-day year.
A) 24.5%
B) 36.5%
C) 42.5%
D) 55.5%
Q3) Jensen Corporation uses the ABC system of inventory management. It has placed common bolts in a bin that is accessible to any employees needing these parts. When the bin gets low, an order is placed with the local hardware distributor to replace this item. The bolts would be a categorized as a(an) ____ item.
A) A
B) B
C) C
D) JIT
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Chapter 17: The Management of Working Capital
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Sample Questions
Q1) A firm's credit policy affects both its credit sales and its ACP.
A)True
B)False
Q2) The cash conversion cycle is shorter than the operating cycle by the time it takes for the firm to pay its own bills.
A)True
B)False
Q3) Cash held for precautionary demand is to take advantage of unexpected opportunities.
A)True
B)False
Q4) Explain the idea of spontaneous financing and explain why, in spite of it, we still have to fund working capital from outside sources.
Q5) When a factor does not assume the bad debt risk on accounts it purchases, the factoring relationship is said to be "without recourse."
A)True
B)False
Q6) Explain marketable securities. How are they useful to companies?
Q7) Explain the economic reasons for holding cash.
Page 19
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) Two companies are competitors. The following facts about the companies and their industry are significant.
a. Both firms use similar production, distribution, and sales techniques.
b. One firm is losing money, while the other is profitable.
c. There is a great deal of overhead in the business.
d. The industry is dominated by a single firm that's about as big as these two combined. The two companies are considering a merger. State several arguments in favor of the combination.
Q2) A junk bond is:
A) a low risk bond that pays high yields.
B) a high-risk bond that pays low yields.
C) a high-risk bond that pays high yields.
D) a low risk bond that pays low yields.
Q3) Mergers are accomplished only with the approval of the acquired firm's management.
A)True
B)False
Q4) Contrast the merger negotiations in a friendly merger and a hostile merger.
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Page 20
Chapter 19: International Finance
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Sample Questions
Q1) Assume a U.S. law is passed that prohibits the importation of sugar from China. This protectionism law has been adopted because of which of the following reasons?
A) The U.S.'s sugar industry has been underpriced by Chinese sugar imports.
B) The sugar industry in China is deteriorating.
C) The price of sugar has increased in both countries.
D) There has been a reduction in the standard of living in the U.S.
Q2) Both fluctuating exchange rates and deferred payment terms are necessary for foreign exchange risk to exist.
A)True
B)False
Q3) The indirect quote for British pounds is .60 pounds. If you tried to convert $3,000 into pounds, how many pounds would you obtain?
A) 1,800 pounds
B) 0.0002 pounds
C) 5,000 pounds
D) None of the above
Q4) Companies that have divisions and branches in other countries are referred to as multinational corporations, or MNCs.
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Page 21