Finance for Managers
Midterm Exam
Course Introduction
Finance for Managers provides an essential foundation in financial principles and practices tailored for non-financial managers. This course covers key concepts such as financial statement analysis, budgeting, forecasting, capital investment decisions, and working capital management. Emphasizing practical applications, it equips students to interpret financial data, assess organizational performance, and make informed decisions that drive business value. Through real-world cases and problem-solving exercises, participants develop financial acumen necessary to collaborate effectively with financial professionals and contribute strategically to their organizations.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT?
A) Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the United States.
B) Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.
C) One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.
D) Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.
E) Bond covenants are an effective way to resolve conflicts between shareholders and managers.
Answer: C
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3
Chapter 2: Financial Statements, cash Flow, and Taxes
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Q1) The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends,and the riskiness of those cash flows.
A)True
B)False Answer: True
Q2) Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?
A) The company purchases a new piece of equipment.
B) The company repurchases common stock.
C) The company pays a dividend.
D) The company issues new common stock.
E) The company gives customers more time to pay their bills.
Answer: D
Q3) Net operating working capital is equal to operating current assets minus operating current liabilities.
A)True
B)False Answer: True
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Page 4
Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Last year Mason Inc.had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $195,000 and its net income was $10,549.The CFO believes that the company could have operated more efficiently,lowered its costs,and increased its net income by $5,250 without changing its sales,assets,or capital structure.Had it cut costs and increased its net income in this amount,by how much would the ROE have changed?
A) 5.66%
B) 5.95%
C) 6.27%
D) 6.58%
E) 6.91%
Answer: C
Q2) Refer to Exhibit 3.1.What is the firm's quick ratio?
A) 0.49
B) 0.61
C) 0.73
D) 0.87
E) 1.05
Answer: B
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5
Chapter 4: Time Value of Money
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Sample Questions
Q1) Your aunt wants to retire and has $375,000.She expects to live for another 25 years,and she also expects to earn 7.5% on her invested funds.How much could she withdraw at the beginning of each of the next 25 years and end up with zero in the account?
A) $28,243.21
B) $29,729.70
C) $31,294.42
D) $32,859.14
E) $34,502.10
Q2) The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.
A)True
B)False
Q3) As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).
A)True
B)False
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6
Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?
A) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
B) The prices of both bonds would increase by the same amount.
C) One bond's price would increase, while the other bond's price would decrease.
D) The prices of the two bonds would remain constant.
E) The prices of both bonds will decrease by the same amount.
Q2) McCurdy Co.'s Class Q bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months),and those bonds sell at their par value.McCurdy's Class P bonds have the same risk,maturity,and par value,but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?
A) $943.98
B) $968.18
C) $993.01
D) $1,017.83
E) $1,043.28
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Page 7
Chapter 6: Risk and Return
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Q1) The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r<sub>M</sub> - r<sub>RF</sub>,is positive.Which of the following statements is CORRECT?
A) Stock B's required rate of return is twice that of Stock A.
B) If Stock A's required return is 11%, then the market risk premium is 5%.
C) If Stock B's required return is 11%, then the market risk premium is 5%.
D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.
Q2) Shirley Paul's 2-stock portfolio has a total value of $100,000.$37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.What is her portfolio's beta?
A) 1.17
B) 1.23
C) 1.29
D) 1.35
E) 1.42
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Chapter 7: Valuation of Stocks and Corporations
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Q1) The corporate valuation model cannot be used unless a company doesn't pay dividends.
A)True
B)False
Q2) Which of the following statements is CORRECT,assuming stocks are in equilibrium?
A) Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
B) A stock's dividend yield can never exceed its expected growth rate.
C) A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.
D) Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.
E) The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
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9
Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
A) Put
B) Naked
C) Covered
D) Out-of-the-money
E) In-the-money
Q2) Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?
A) The options with the $25 strike price will sell for less than the options with the $35 strike price.
B) The options with the $25 strike price have an exercise value greater than $5.
C) The options with the $35 strike price have an exercise value greater than $0.
D) If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
E) The options with the $25 strike price will sell for $5.
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Chapter 9: The Cost of Capital
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Q1) The cost of external equity capital raised by issuing new common stock (r<sub>e</sub>)is defined as follows,in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r<sub>s</sub>),divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)."
A)True
B)False
Q2) 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%
Q3) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.
A)True
B)False
Q2) Hart Corp.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC or negative,in both cases it will be rejected. \(\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3 \\ \text { Cash flows } & -\$ 1.000 & \$ 425 & \$ 425 & \$ 425 \end{array}\)
A) 12.55%
B) 13.21%
C) 13.87%
D) 14.56%
E) 15.29%
Q3) A basic rule in capital budgeting is that if a project's NPV exceeds its IRR,then the project should be accepted.
A)True
B)False
Page 12
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
A) Shipping and installation costs.
B) Cannibalization effects.
C) Opportunity costs.
D) Sunk costs that have been expensed for tax purposes.
E) Changes in net working capital.
Q2) Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
A)True
B)False
Q3) Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.
A)True
B)False
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Chapter 12: Corporate Valuation and Financial Planning
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Q1) A firm's AFN must come from external sources.Typical sources include short-term bank loans,long-term bonds,preferred stock,and common stock.
A)True
B)False
Q2) The term "additional funds needed (AFN)" is generally defined as follows:
A) Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
B) The amount of assets required per dollar of sales.
C) The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
D) A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E) Funds that are obtained automatically from routine business transactions.
Q3) The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.
A)True
B)False
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Chapter 13: Agency Conflicts and Corporate Governance
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Q1) 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.
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True B)False
Q4) 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
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?
A) The company increases the percentage of equity in its target capital structure.
B) The number of profitable potential projects increases.
C) Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.
D) Earnings are unchanged, but the firm issues new shares of common stock.
E) The firm's net income increases.
Q2) If a firm adheres strictly to the residual dividend policy,the issuance of new common stock would suggest that
A) the dividend payout ratio is increasing.
B) no dividends were paid during the year.
C) the dividend payout ratio is decreasing.
D) the dollar amount of investments has decreased.
E) the dividend payout ratio has remained constant.
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Page 16
Chapter 15: Capital Structure Decisions
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Q1) Barette Consulting currently has no debt in its capital structure,has $500 million of total assets,and its basic earning power is 15%.The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock,paying book value.If the company proceeds with the recapitalization,its operating income,total assets,and tax rate will remain unchanged.Which of the following is most likely to occur as a result of the recapitalization?
A) The ROA would remain unchanged.
B) The basic earning power ratio would decline.
C) The basic earning power ratio would increase.
D) The ROE would increase.
E) The ROA would increase.
Q2) Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output,this will
A) normally lead to a decrease in its business risk.
B) normally lead to a decrease in the standard deviation of its expected EBIT.
C) normally lead to a decrease in the variability of its expected EPS.
D) normally lead to a reduction in its fixed assets turnover ratio.
E) normally lead to an increase in its fixed assets turnover ratio.
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Page 17
Chapter 16: Supply Chains and Working Capital Management
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Q1) Data on Mertz Co.for the most recent year are shown below,along with the payables deferral period (PDP)for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done,by how much would payables increase? Use a 365-day year. Cost of goods sold =\( \quad \)\( \quad \)\( \quad \)\( \quad \)\( \quad \) \( \quad \)\( \quad \)\( \quad \) \( \$ 75,000 \)
Payables \( = \)\( \quad \)\( \quad \)\( \quad \)\( \quad \)\( \quad \) \( \quad \)\( \quad \)\( \quad \) \( \quad \) \( \quad \) \( \quad \)\( \$ 5,000 \)
Payables deferral period \( (\mathrm{PDP})= \) \( \quad \)\( \quad \)\( \quad \) \( \quad \)\( 24.33 \)
Benchmark pavables deferral period = \( \quad \) \( \quad \) \( \quad \)\(30.00 \)
A) $764
B) $849
C) $943
D) $1,048
E) $1,164
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18
Chapter 17: Multinational Financial Management
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Q1) Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.
A)True B)False
Q2) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True B)False
Q3) If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar,then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.
A) premium of 8%
B) premium of 18%
C) discount of 18%
D) discount of 8%
E) premium of 16%
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Q1) Suppose a company issued 30-year bonds 4 years ago,when the yield curve was inverted.Since then long-term rates (10 years or longer)have remained constant,but the yield curve has resumed its normal upward slope.Under such conditions,a bond refunding would almost certainly be profitable.
A)True
B)False
Q2) Stanovich Enterprises has 10-year,12.0% semiannual coupon bonds outstanding.Each bond is now eligible to be called at a call price of $1,060.If the bonds are called,the company must replace them with new 10-year bonds.The flotation cost of issuing new bonds is estimated to be $45 per bond.How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today,i.e.,what is the nominal annual "breakeven rate"?
A) 9.29%
B) 9.78%
C) 10.29%
D) 10.81%
E) 11.35%
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) To finance the construction of a new plant,Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.If the firm wants its ex-rights price to be $50,what subscription price must it set on the new shares?
A)$29.55
B)$33.78
C)$39.28
D)$41.80
E)$50.00
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21
Chapter 19: Lease Financing
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Q1) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
Q2) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
A)True
B)False
Q3) Under a sale and leaseback arrangement,the seller of the leased property is the lessee and the buyer is the lessor.
A)True
B)False
Q4) Operating leases often have terms that include
A) full amortization over the life of the lease.
B) very high penalties if the lease is canceled.
C) restrictions on how much the leased property can be used.
D) much longer lease periods than for most financial leases.
E) maintenance of the equipment by the lessor.
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Page 22
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Q1) Which of the following statements concerning warrants is correct?
A) Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
B) Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
C) A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
D) A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
E) Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.
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Chapter 21: Dynamic Capital Structures
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Q1) In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.
A)True B)False
Q2) In the MM extension with growth,the appropriate discount rate for the tax shield is the unlevered cost of equity.
A)True B)False
Q3) The MM model with corporate taxes is the same as the Miller model,but with zero personal taxes.
A)True
B)False
Q4) MM showed that in a world without taxes,a firm's value is not affected by its capital structure.
A)True B)False
Q5) The Miller model begins with the MM model with taxes and then adds personal 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 about valuing a firm using the APV approach is most CORRECT?
A) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
B) The horizon value is calculated by discounting the expected earnings at the WACC.
C) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
D) The horizon value must always be more than 20 years in the future.
E) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.
Q2) A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
Q2) 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%
Q3) The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.
A)True B)False
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) In the event of bankruptcy under the federal bankruptcy laws,debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders.Moreover,in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
Q2) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q3) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Security A has an expected return of 12.4% with a standard deviation of 15%,and a correlation with the market of 0.85.Security B has an expected return of -0.73% with a standard deviation of 20%,and a correlation with the market of -0.67.The standard deviation of r<sub>M</sub> is 12%.
A) To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)
B) What are the beta coefficients of A and B? Calculations are necessary.
C) If the risk-free rate is 6%, what is the value of r<sub>M</sub>?
Q2) A stock you are holding has a beta of 2.0 and the stock is currently in equilibrium.The required rate of return on the stock is 15% versus a required return on an average stock of 10%.Now the required return on an average stock increases by 30.0% (not percentage points).The risk-free rate is unchanged.By what percentage (not percentage points)would the required return on your stock increase as a result of this event?
A) 36.10%
B) 38.00%
C) 40.00%
D) 42.00%
E) 44.10%
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28
Chapter 26: Real Options
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Q1) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
Q2) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q3) Which of the following will NOT increase the value of a real option?
A) An increase in the volatility of the underlying source of risk.
B) An increase in the risk-free rate.
C) An increase in the cost of obtaining the real option.
D) A decrease in the probability that a competitor will enter the market of the project in question.
E) Lengthening the time in which a real option must be exercised.
Q4) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
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29
Chapter 27: Providing and Obtaining Credit
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29 Verified Questions
29 Flashcards
Source URL: https://quizplus.com/quiz/24949
Sample Questions
Q1) Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?
A) The quarterly uncollected balances schedule will be the same in each quarter.
B) The level of accounts receivable will be constant from month to month.
C) The ratio of accounts receivable to sales will vary from month to month.
D) The level of accounts receivable at the end of each quarter will be the same.
E) DSO will vary from month to month.
Q2) Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop.Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent.If Maxwell must actually receive $100,000 net proceeds to finance its crop,then what must be the face value of the note?
A) $111,000
B) $100,000
C) $112,360
D) $89,000
E) $108,840
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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17 Verified Questions
17 Flashcards
Source URL: https://quizplus.com/quiz/24950
Sample Questions
Q1) The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.
A)True
B)False
Q2) 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?
A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%
Q3) A just-in-time system is designed to stretch accounts payable as long as possible. A)True B)False
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Chapter 29: Pension Plan Management
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10 Verified Questions
10 Flashcards
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Sample Questions
Q1) Which of the following statements about pension plan portfolio performance is incorrect?
A) Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.
B) Peer comparison examines the relative performance of portfolio managers with similar investment objectives.
C) A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.
D) In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.
E) Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.
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) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True B)False
Q2) Not-for-profit firms have fund capital in place of equity capital.Since fund capital does not have to provide a return to stockholders,the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True B)False
Q3) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A) Fund capital is obtained by retaining earnings-if all earnings are paid out as dividends, no fund capital is created.
B) Preferred stock is never used by not-for-profit firms.
C) Not-for-profit firms are not allowed to raise capital by borrowing.
D) Not-for-profit firms usually have high dividend payouts.
E) Since not-for-profit firms are tax exempt, there is no tax advantage to debt capital.
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