Finance for Managers
Final Test Solutions
Course Introduction
Finance for Managers offers a comprehensive introduction to the fundamental concepts and tools of financial management, tailored specifically for current and aspiring managers. The course explores key topics such as financial statement analysis, budgeting, working capital management, investment decision-making, and the principles of value creation. Emphasis is placed on practical application, enabling participants to interpret financial data, assess business performance, and make informed financial decisions that support organizational objectives. No prior background in finance is required, making the course suitable for managers from diverse professional backgrounds.
Recommended Textbook Fundamentals of Corporate Finance Third Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Red Deer Plumbing Supply Co.earns $4.50 per share before taxes.The corporate tax rate is 30%,the personal tax rate on dividends is 15%,and the personal tax rate on non-dividend income is 40%.What is the total amount of taxes paid per share if the company pays a $2.00 dividend?
A)$0.30
B)$2.15
C)$1.35
D)$1.65
E)$0.80
Answer: D
Q2) Which of the stock markets listed below is the smallest,as judged by trading volume?
A)Japan Exchange Group
B)London Stock Exchange
C)NASDAQ
D)NYSE Euronext (US)
E)TMX Group
Answer: E
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Page 3
Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Which of the following is one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?
A)by reducing the penalties to firms for providing false information
B)by increasing the independence of auditors and clients
C)by increasing the non-audit fees that an auditor can receive from a client
D)by forcing CEOs and CFOs to certify the accuracy of their firm's financial statements
E)by removing the requirement that firms include outside directors on audit committees
Answer: D
Q2) Refer to the income statement above.Luther's earnings before interest,taxes,depreciation,and amortization (EBITDA)for the year ending December 31,2015 is closest to:
A)$10.6 million
B)$19.7 million
C)$37.6 million
D)$41.2 million
E)$44.8 million
Answer: E
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Sample Questions
Q1) Walgreen Company (NYSE: WAG)is currently trading at $48.75 on the NYSE.Walgreen Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50.Does an arbitrage opportunity exist and,if so,how would you exploit it and how much would you make on a block trade of 100 shares?
A)No,no arbitrage opportunity exists.
B)Yes,buy on NASDAQ and sell on NYSE,make $25.
C)Yes,buy on NYSE and sell on NASDAQ,make $25.
D)Yes,buy on NASDAQ and sell on NYSE,make $250.
E)Yes,buy on NYSE and sell on NASDAQ,make $250.
Answer: B
Q2) The State Bank offers an interest rate of 5.5% on savings and 6% on loans,while the Colonial Bank offers 6.5% on savings and 7% on loans.Which of the following is the likely outcome of such a situation?
A)The State Bank would experience a surge in demand for deposits.
B)The Colonial Bank would experience a surge in demand for deposits.
C)The Colonial Bank would experience a fall in demand for deposits.
D)The Colonial Bank would experience a surge in demand for loans.
E)The State bank would experience a fall in demand for loans.
Answer: B
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) The present value (PV)(at age 30)of your retirement savings is closest to:
A)$87,003
B)$108,000
C)$46,600
D)$75,230
E)$88,741
Q2) If the current rate of interest is 8%,then the present value (PV)of an investment that pays $1000 per year and lasts 20 years is closest to:
A)$18,519
B)$45,761
C)$9818
D)$20,000
E)$10,016
Q3) Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education?
Q4) Can we apply the annuity or perpetuity equations to cash flows that do NOT arrive at regular intervals?
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Chapter 5: Interest Rates
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Sample Questions
Q1) The present value (PV)of receiving $1000 per year with certainty at the end of the next three years is closest to:
A)$2737
B)$2723
C)$2733
D)$2744
E)$3000
Q2) You are purchasing a new home and need to borrow $325,000 from a mortgage lender.The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month).The mortgage lender also tells you that if you are willing to pay one point,they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage.One point is equal to 1% of the loan value.So if you take the lower rate and pay the points,you will need to borrow an additional $3250 to cover points you are paying the lender.Assuming that you do not intend to prepay your mortgage (pay off your mortgage early),are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Q3) What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV)of an annuity?
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Chapter 6: Bonds
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Sample Questions
Q1) Allan purchases a 10-year $100 coupon bond with 10% annual coupons.If its yield to maturity decreases from 7.5% to 6%,what is the percentage change in the price of the bond?
A)-9.49%
B)10.48%
C)1.5%
D)9.49%
E)-10.48%
Q2) Which of the following risk-free,zero-coupon bonds could be bought for the lowest price?
A)one with a face value of $1000,a YTM of 4.8%,and 5 years to maturity
B)one with a face value of $1000,a YTM of 3.2%,and 8 years to maturity
C)one with a face value of $1000,a YTM of 6.8%,and 10 years to maturity
D)one with a face value of $1000,a YTM of 5.9%,and 20 years to maturity
E)one with a face value of $1000,a YTM of 6.2%,and 15 years to maturity
Q3) Treasury bills have original maturities from one to ten years,while Treasury notes have original maturities of more than ten years.
A)True
B)False
Q4) Why do bond prices fall as interest rates rise?
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) Gremlin Industries will pay a dividend of $1.80 per share at the end of this year.It is expected that this dividend will grow by 4% per year each year in the future.The current price of Gremlin's stock is $22.40 per share.What is Gremlin's equity cost of capital?
A)11%
B)12%
C)14%
D)16%
E)18%
Q2) Can the dividend-discount model handle negative growth rates?
Q3) Northern Railways has a current stock price of $56.75 and is expected to pay a dividend of $1.15 in one year.If Northern's equity cost of capital is 12%,what price would Northern's stock be expected to sell for immediately after it pays the dividend?
A)$57.65
B)$63.56
C)$62.41
D)$57.78
E)$55.60
Q4) What are the major limitations of valuation using multiples?
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Page 9
Chapter 8: Investment Decision Rules
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Sample Questions
Q1) If your new strip mall will have 15,000 square feet of retail space available to be leased,to which businesses should you lease and why?
Q2) The net present value (NPV)for project alpha is closest to:
A)$20.96
B)$16.92
C)$24.01
D)$14.41
E)$12.06
Q3) Why is the internal rate of return (IRR)inadequate when comparing mutually exclusive investments with different timing of the cash flows?
Q4) Which of the following is TRUE regarding the profitability index?
A)It does not use the net present value (NPV)to assess benefits.
B)It is very simple to compute.
C)Attention must be taken when using it to make sure that all of the constrained resource is utilized.
D)It is unreliable when used for choosing between different projects.
E)It ignores cash flows after the cutoff
Q5) What is a safe method to use when confronted with mutually exclusive projects?
Q6) What is the general shape of the net present value (NPV)profile?
Page 10
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The level of incremental sales associated with introducing the new one hour photo service is closest to:
A)$90,000
B)$150,000
C)$60,000
D)$120,000
E)$0
Q2) Cameron Industries is purchasing a new chemical vapour depositor in order to make silicon chips.It will cost $6 million to buy the machine and $10,000 to have it delivered and installed.Building a clean room in the plant for the machine will cost an additional $3 million.The machine is expected to have a working life of six years.Which of these activities will be reported as an operating expense?
A)the delivery and install cost only
B)the cost of the depositor only
C)the redesign of the plant only
D)the delivery and install cost and the cost of the depositor
E)the install cost only
Q3) What do you understand by break-even analysis?
Q4) Why does the option to abandon a project have value?
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Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) Historically,stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.
A)higher,higher
B)higher,lower
C)lower,higher
D)lower,lower
E)higher,similar
Q2) The standard deviation for the return on an individual firm is closest to:
A)23.0%
B)5.25%
C)15.0%
D)10.0%
E)25.0%
Q3) Which of the following is a diversifiable risk?
A)the risk that oil prices rise,increasing production costs
B)the risk that the economy slows,reducing demand for your firm's products
C)the risk that your new product will not receive regulatory approval
D)the risk that the Bank of Canada raises interest rates
E)the risk that a new government is elected and raises corporate taxes
Q4) Which type of investment has historically had the lowest volatility?
Page 12
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What proportion of the market portfolio is comprised of each stock?
A)Stock A is 66.7% and Stock B is 33.3%
B)Stock A is 33.3% and Stock B is 66.7%
C)Stock A is $40,000 and Stock B is $20,000
D)Stock A is 200% and Stock B is 100%
E)Stock A is 50% and Stock B is 50%
Q2) When we combine stocks in a portfolio,the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.
A)True
B)False
Q3) The volatility on Home Depot's returns is closest to:
A)35%
B)31%
C)42%
D)18%
E)22%
Q4) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 12: Determining the Cost of Capital
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Sample Questions
Q1) Epiphany is an all-equity firm with an estimated market value of $500,000.The firm sells $200,000 of debt and uses the proceeds to purchase outstanding equity.Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.
A)0.2,0.8
B)0.25,0.75
C)0.4,0.6
D)0.6,0.4
E)0.5,0.5
Q2) The WACC does not depend on the risk of a company's line of business. A)True
B)False
Q3) The outstanding debt of Berstin Corp.has eight years to maturity,a current yield of 8%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?
A)5.6%
B)6.5%
C)8.5%
D)7.2%
E)7.9%
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Chapter 13: Risk and the Pricing of Options
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Sample Questions
Q1) What is the short position of an options contract?
Q2) What effect does volatility of the underlying asset have on the price of the option?
Q3) American options allow their holders to exercise the option only on the expiration date.
A)True
B)False
Q4) A share of stock can be thought of as a put option on the firm's assets with a strike price equal to the face value of debt.
A)True
B)False
Q5) This graph depicts the payoffs of a:
A)long position in a put option at expiration.
B)short position in a call option at expiration.
C)short position in a put option at expiration.
D)long position in a call option at expiration.
E)long position in a call option before expiration.
Q6) The Black-Scholes formula gives the price of an American call option.
A)True
B)False
15
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) Melissa founded her company using $100,000 of her own money,issuing herself 50,000 shares of stock.An angel investor bought an additional 30,000 shares for $75,000.She now sells another 30,000 shares to a venture capitalist for $450,000.What is the post-money valuation for the company?
A)$1.65 million
B)$625,000
C)$1 million
D)$450,000
E)$850,000
Q2) An equity issue that raises new funds for a publicly traded company is called:
A)an initial public offering.
B)an underpriced offering.
C)a secondary offering.
D)a firm commitment offering.
E)a seasoned equity offering.
Q3) Stock issued in an IPO usually trades significantly higher at the end of the first day of trading than the original IPO price.
A)True
B)False
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Page 16
Chapter 15: Debt Financing
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Sample Questions
Q1) Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?
A)a debenture
B)a mortgage bond
C)an asset-backed bond
D)a foreign bond
E)a Eurobond
Q2) The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.
A)True
B)False
Q3) Bond covenants tend to increase a bond issuer's borrowing costs.
A)True
B)False
Q4) A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.
A)True
B)False
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Chapter 16: Capital Structure
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Sample Questions
Q1) Aside from direct costs of bankruptcy,a firm may also incur other indirect costs such as:
A)loss of customers and loss of suppliers.
B)loss of interest receipts.
C)loss of dividend receipts.
D)increase in raw material costs.
E)increase in salvage costs.
Q2) A new business requires a $20,000 investment today,and will generate a one-time cash flow of $25,000 after one year.The business will be financed with 20% equity and 80% debt.If the firm can borrow at 4%,what is the return on levered equity?
A)25%
B)21%
C)109%
D)125%
E)33%
Q3) Differences in the magnitude of financial distress costs and volatility of cash flows across industries do not impact the choice of leverage.
A)True
B)False
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Page 18
Chapter 17: Payout Policy
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Q1) When a firm retains cash,it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed:
A)once.
B)at a rate of zero.
C)twice.
D)only at the corporate level.
E)only at the investor level.
Q2) Suppose a firm does not pay a dividend but repurchases stock using $20 million of cash.The market value of the firm decreases by:
A)$20 million.
B)-$20 million.
C)0.
D)$40 million.
E)-$40 million.
Q3) With perfect capital markets,an open market repurchase increases the stock price as the number of outstanding shares is decreased.
A)True
B)False
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Page 19
Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) The ________ method assumes that as sales grow,many income statement and balance sheet items will grow,remaining the same percent of sales.
A)percent of income
B)percent of liabilities
C)percent of sales
D)percent of assets
E)percent of earnings
Q2) What is the free cash flow to equity holders for a firm with free cash flow of $7000,after-tax interest expense of $1000,and an increase in debt of $3000?
A)$6000
B)$7000
C)$8000
D)$9000
E)$10,000
Q3) Internal growth rate assumes that the firm can finance investments via sale of debt.
A)True
B)False
Q4) Why is EBITDA multiple used for valuation rather than sales or earnings?
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Chapter 19: Working Capital Management
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Q1) What is the effective annual cost of credit terms of 1/10 net 30,if the firm stretches the accounts payable to 45 days?
A)8.49 %
B)10.91%
C)11.05%
D)18.03%
E)9.64%
Q2) Which of the following best describes the availability float?
A)how long it takes the firm to process the cheque and deposit it in the bank
B)how long it takes before the bank gives the firm credit for the funds
C)how long it takes before payments to suppliers actually result in a cash outflow for the firm
D)how long it takes for a firm to be able to use funds after a customer has paid for its goods
E)how long it takes before payments to suppliers actually result in cash outflow for the firm
Q3) What is a firm's operating cycle?
Q4) What are the advantages of holding inventory?
Q5) What is the collection float?
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Chapter 20: Short-Term Financial Planning
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Q1) Bandolier Bicycles has a committed line of credit with a maximum of $450,000 and interest rate of 4% (EAR).The loan has a commitment fee of 0.3% (EAR).If the firm borrows $375,000 at the start of the year and repays it at the end of the year,what is the total cost of the loan?
A)$15,225
B)$15,000
C)$18,225
D)$18,000
E)$16,125
Q2) In which quarter(s)are Fancy's seasonal working capital needs the greatest?
A)1
B)2
C)3
D)4
E)1 and 2
Q3) Why should permanent working capital be financed with long-term sources of funds?
Q4) How can a conservative financing policy reduce firm value?
Q5) What are commitment fees and what effect does it have on the loan?
Q6) How can the application of the matching principle increase firm value?
Page 22
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Chapter 21: Risk Management
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Q1) A firm can borrow at a floating rate of LIBOR - 1% on short-term loans.It swaps its short-term payments so that it receives LIBOR + 1.5% and pays a fixed rate of 5%.If the notional principal is $25 million,what is the amount the firm pays under the swap?
A)$125,000
B)$31,250
C)$62,500
D)$93,750
E)$125,500
Q2) Vertical integration can increase firm value only if a merger provides gains from ________ and cost savings.
A)synergies
B)debt repayments
C)equity swaps
D)shareholders
E)bondholders
Q3) What is moral hazard?
Q4) What is business interruption insurance?
Q5) What is the purpose of a deductible?
Q6) How does insurance allow firms to reduce issuance costs?
23
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Chapter 22: International Corporate Finance
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Q1) A Canadian exporter will receive $1 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.225 USD/CADtrades for 0.0225 CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.275 USD/CAD,how much did the firm gain (in CAD)from hedging with the option,compared to remaining unhedged?
A)$11,833
B)$50,000
C)$9,513
D)$32,013
E)$22,500
Q2) The one-year forward exchange rate is 40 INR/USD.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?
A)38.88
B)39.01
C)39.23
D)39.32
E)39.46
Q3) Why do firms prefer forward contracts rather than the cash-can-carry strategy?
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Chapter 23: Leasing
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Q1) Harrowfield Deliveries has decided to lease a delivery van for the next 5 years using a fixed price lease that allows them to buy the van for $18,000.The purchase price of the van is $67,000,and there is no risk that Harrowfield will default on the lease.If the risk-free rate is a 8% APR with monthly compounding,what would be the monthly lease payment for a 5-year lease in a perfect capital market?
A)$1,106
B)$1,114
C)$1,059
D)$1,041
E)$1,052
Q2) A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a:
A)fair market value cap lease.
B)fair market value lease.
C)$1.00 out lease.
D)fixed price lease.
E)synthetic lease.
Q3) Explain the reduced resale costs argument for leasing.
Q4) What is a lease-equivalent loan?
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Chapter 24: Mergers and Acquisitions
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Q1) A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a:
A)white knight.
B)classified board.
C)poison pill.
D)golden parachute.
E)recapitalization.
Q2) A rights offering that gives existing target shareholders the right to buy shares in either the target or the acquirer at a deeply discounted price once certain conditions are met is called a:
A)golden parachute.
B)poison pill.
C)classified board.
D)white knight.
E)recapitalization.
Q3) In addition to the presence of takeover defences,what is the most likely explanation for the large premiums that acquirers pay to the target company's shareholders?
Q4) Why have conglomerate mergers fallen out of favour?
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Chapter 25: Corporate Governance
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Q1) Activist investors can only achieve their goals by putting their issues to a shareholder vote.
A)True
B)False
Q2) The costs and benefits of a corporate governance structure:
A)are the same in all countries.
B)are the same for all companies within a country.
C)depend on cultural norms.
D)are not important in maximizing shareholder wealth.
E)are easily quantified.
Q3) Billy,the CEO of Movin On Up Company,was granted stock options with an exercise price of $62.04 per share.Refer to the week-ending stock prices that occurred during the quarter.What is the most likely date on which the stock options were awarded?
A)13-Sep-15
B)11-Oct-15
C)13-Dec-15
D)25-Oct-15
E)7-Sep-15
Q4) What is backdating?
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