Finance for Managers
Midterm Exam
Course Introduction
Finance for Managers provides a comprehensive overview of key financial concepts and tools essential for effective managerial decision-making. The course covers topics such as financial statement analysis, budgeting, working capital management, investment appraisal, cost of capital, and risk assessment. Students will learn how to interpret financial data, allocate resources efficiently, and evaluate the financial implications of strategic business decisions. Emphasis is placed on practical applications, enabling managers to leverage financial information for planning, controlling, and optimizing organizational performance.
Recommended Textbook Fundamentals of Corporate Finance 3rd Eition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) Based on the information shown above, what would it cost to buy 1,000 shares of the above stock?
A)$91,110
B)$91,300
C)$91,320
D)$91,650
Answer: D
Q2) A limited liability company is essentially ________.
A)a limited partnership without limited partners
B)a limited partnership without a general partner
C)just another name for a limited partnership
D)just another name for a corporation
Answer: B
Q3) Using the above information, how much would you pay for a share of BHP Billiton stock?
A)$41.91
B)$41.93
C)$41.65
D)$41.59
Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Why must care be taken when comparing a firm's share price to its operating income?
A)Both share price and operating income are related to the whole firm.
B)Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders.
C)Both share price and operating income are related solely to equity holders.
D)Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
Answer: D
Q2) Cash is a ________.
A)long-term asset
B)current asset
C)current liability
D)long-term liability
Answer: B
Q3) How can we cross check the statement of cash flows?
Answer: The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets.
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4
Chapter 3: Time Value of Money: an Introduction
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Q1) What is one of the prerequisite conditions for the Valuation Principle to work?
Answer: The availability of competitive market prices is a prerequisite for the Valuation Principle to be effective and efficient.
Q2) A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton?
A)3010 U.S. dollars per ton
B)3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD
C)5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL
D)105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
Answer: C
Q3) In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).
A)True
B)False
Q2) A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV)of her winnings at the time of her final payment, given that the interest rate is 8.6% per year?
A)$94.40 million
B)$118.00 million
C)$165.20 million
D)$188.80 million
Q3) You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?
A)$10,062.20
B)$20,124.40
C)$16,770.33
D)$23,478.46
Q4) Can we apply the growing perpetuity equation for negative growth as well?
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Chapter 5: Interest Rates
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Q1) A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22, over what term is this loan being paid?
A)8 years
B)9 years
C)10 years
D)11 years
Q2) A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?
A)$19,433
B)$15,546
C)$23,319
D)$27,206
Q3) What is the general relationship between the absolute values of APR and EAR for an investment?
Q4) Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
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Chapter 6: Bonds
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Q1) A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?
A)3%
B)5%
C)6%
D)7%
Q2) How much are each of the semiannual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for?
Q3) What is the dirty price of a bond?
A)the bond's price based only on the bond's yield
B)the bond's actual cash price
C)the bond's price based only on coupon payments
D)the bond's price less an adjustment for changes in interest rates
Q4) What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
Q5) How are the cash flows of a zero-coupon bond different from those of a coupon bond?
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Chapter 7: Stock Valuation
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Q1) What is a major assumption about growth rate in the dividend-discount model?
Q2) Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of Jumbo Transport?
A)$12.71
B)$14.83
C)$16.94
D)$21.18
Q3) Which of the following statements is FALSE?
A)As firms mature, their earnings exceed their investment needs and they begin to pay dividends.
B)Total return equals earnings multiplied by the dividend payout rate.
C)Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV).
D)We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.
Q4) What role do dividends play in stock investing?
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Page 9
Chapter 8: Investment Decision Rules
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Q1) A lawn maintenance company compares two ride-on mowers-the Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision?
A)Fuel prices are expected to rise and raise the annual running costs of all mowers.
B)The mower is only expected to be needed for three years.
C)The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate.
D)The number of customers requiring lawn-mowing services is expected to sharply increase in the near future.
Q2) Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.
A)True
B)False
Q3) What is the Net Present Value rule?
Q4) What is the general shape of the net present value (NPV)profile?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) Temporary Housing Services Incorporated (THSI)is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $21 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35% Assume that THSI's cost of capital for this project is 15%. The net present value (NPV)of this temporary housing project is closest to
A)$2,956,522
B)-$9.15
C)$5,913,044
D)-$2,956,522
Q2) What is the correct tax rate that should be used for capital budgeting decisions?
Q3) How are the taxes paid under MACRS different from that paid under straight-line depreciation?
Q4) What are the most difficult parts of capital budgeting?
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Chapter 10: Stock Valuation: a Second Look
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Q1) Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelon's shares be expected to fall in price as a result of this accident?
A)$0.93
B)$1.03
C)$1.14
D)$1.34
Q2) On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11. Its competitor, UPS, had an EPS of $0.38. What would be the expected price of UPS stock on this date, if estimated using the method of comparables?
A)$4.77
B)$7.16
C)$9.54
D)$10.50
Q3) What additional adjustments are required to find the share price, in case we are using the discounted cash flow model?
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Page 12
Chapter 11: Risk and Return in Capital Markets
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Q1) Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?
A)60.57%
B)67.30%
C)53.84%
D)74.03%
Q2) The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007's returns?
A)-12.5%, 17.5%
B)-15%, 25%
C)-25%, 35%
D)-25%, 25%
Q3) Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated to zero.
Q4) What are the two components of realized return from a stock investment?
Q5) What care, if any, should be taken when selecting stocks for an investment portfolio?
Q6) Which type of investment has historically had the highest volatility?
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________.
A)more than 15%
B)less than 30%
C)unchanged at 30%
D)equal to 15%
Q2) A linear regression to estimate the relation between General Motors' stock returns and the market's return gives the best fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________.
A)alpha
B)beta
C)risk-free rate
D)volatility
Q3) Since total risk is greater than systematic risk, should standard deviation be always greater than beta?
Q4) In a two asset portfolio, what happens to the portfolio weight of the better performing asset?
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14
Chapter 13: The Cost of Capital
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Q1) A firm has outstanding debt with a coupon rate of 8%, seven years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%?
A)5.2%
B)5.5%
C)5.7%
D)6.0%
Q2) A firm has $2 million market value and it sells preferred stock with a par value of $100. If the coupon rate on the preferred stock is 6% and the preferred stock trades at $98, what is the cost of preferred stock capital?
A)5.82%
B)6.12%
C)6.43%
D)6.73%
Q3) Is it incorrect to use the coupon rate of debt toward cost of debt?
Q4) What type of adjustment to debt is in practice?
Q5) What is the difference between the effective cost of debt and the cost of debt?
Q6) Should a firm with high retained earnings have a lower cost of equity?
Q7) What is the assumption about risk when using WACC to evaluate a project?
Q8) Why do we use leverage if it increases the risk of a firm?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements regarding best efforts IPOs is FALSE?
A)For smaller IPOs, the underwriter commonly accepts the deal on this basis.
B)The underwriter does not guarantee that the stock will be sold, but instead tries to sell the stock for the best possible price.
C)Often these arrangements have an all-or-none clause: either all of the shares are sold in the IPO, or the deal is called off.
D)If the entire issue does not sell out, the underwriter is on the hook.
Q2) An entrepreneur founded his company using $200,000 of his own money, issuing himself 200,000 shares of stock. An angel investor bought an additional 100,000 shares for $150,000. The entrepreneur now sells another 400,000 shares of stock to a venture capitalist for$2 million. What is the post-money valuation of the company?
A)$1,750,000
B)$1,925,000
C)$3,500,000
D)$4,025,000
Q3) What are venture capital firms?
Q4) How many types of seasoned equity offerings are there?
Q5) What are some of the advantages of going public?
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Chapter 15: Debt Financing
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Q1) Which of the following would be most likely to have the lowest price?
A)a straight senior bond
B)a convertible senior bond
C)a callable subordinated bond
D)a straight subordinated bond
Q2) Which of the following statements is FALSE?
A)In the event of default, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.
B)Because more than one debenture might be outstanding, the bondholder's priority in claiming assets in the event of default, known as the bond's seniority, is important.
C)When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as a subordinated debenture.
D)Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.
Q3) What is an original issue discount bond?
Q4) What is yield to maturity?
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17
Chapter 16: Capital Structure
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Q1) What effect does debt have on a firm's weighted average cost of capital?
Q2) With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm.
A)True
B)False
Q3) One of the factors that determine the present value (PV)of financial distress costs is
A)costs of unpaid interest arrears
B)loss of dividend payments
C)probability of financial distress
D)employee compensation
Q4) A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $6000 at 7%, what is the return on levered equity?
A)35%
B)52%
C)43%
D)61%
Q5) How does the interest paid by a firm affect its value to investors?
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Chapter 17: Payout Policy
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Q1) Homemade dividend refers to the process by which an investor ________.
A)can take on more debt
B)chooses between equity and debt
C)can sell shares to create a dividend policy to suit his preferences
D)reinvests dividend payments
Q2) The date two business days prior to the date on which all shareholders of record receive a payment is called the ________ date.
A)declaration
B)record
C)ex-dividend
D)distribution
Q3) Another method to repurchase shares is the ________, in which the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price.
A)tender offer
B)Dutch auction share repurchase
C)targeted repurchase
D)open market share repurchase
Q4) What are the characteristics of special dividend?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) A firm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net income, and has a net income of $10 million. What is the firm's sustainable growth rate?
A)12%
B)13%
C)14%
D)15%
Q2) What is net new financing?
Q3) Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $10,000
After-tax Interest Expense = $1,000
Depreciation = $1,000
Increase in NWC = $1,000
Capital Expenditures = $2,000
A)$9,000
B)$9,500
C)$9,700
D)$9,900
Q4) Why is EBITDA multiple used for valuation rather than sales or earnings?
Q5) What is common starting point for forecasting?
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Chapter 19: Working Capital Management
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Q1) Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?
A)Delaying payment can increase the effective cost of credit in some circumstances.
B)The supplier may demand COD or CBD in the future.
C)The supplier may choose to discontinue business with delinquent customers.
D)The firm's credit rating may be damaged.
Q2) A firm offers its customers 1/10 net 40. What is the cost of trade credit to a customer who chooses to pay on day 40?
A)12.8%
B)13.0%
C)65.5%
D)96.0%
Q3) A financial manager who wants her investment to have a higher return would choose to invest some of her firm's excess cash in commercial paper over Treasury bonds.
A)True
B)False
Q4) What are the five C's of Credit?
Q5) What is collection float?
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Chapter 20: Short-Term Financial Planning
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Q1) A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.
A)True
B)False
Q2) What do we understand by seasonality?
Q3) What is the average and maximum maturity of commercial paper?
Q4) A written, legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum, regardless of the financial condition of the firm (unless the firm is bankrupt)as long as the firm satisfies any restrictions in the agreement is called ________.
A)a bridge loan
B)a single, end-of-period-payment loan
C)a short-term mortgage loan
D)a committed line of credit
Q5) Which of the following is NOT a reason why a firm would choose to follow an aggressive financing policy?
A)to reduce sensitivity to the firm's credit quality
B)to reduce agency costs
C)to take advantage of lower interest rates
D)to reduce exposure to funding risk
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Chapter 21: Option Applications and Corporate Finance
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Q1) What is the short position of an options contract?
Q2) A call option gives the owner the right to ________ an asset at a fixed price at some future date.
A)sell
B)buy
C)hold
D)none of the above
Q3) This graph depicts the payoffs of a ________.
A)short position in a put option at expiration
B)short position in a call option at expiration
C)long position in a put option at expiration
D)long position in a call option at expiration
Q4) When the exercise price of a call option is lower than the current price of the stock, the option is said to be ________.
A)at-the-money
B)in-the-money
C)out-of-the-money
D)none of the above
Q5) What are European options?
Q6) What is the long position of an options contract?
23
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Chapter 22: Mergers and Acquisitions
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Q1) Which of the following statements regarding poison pills is FALSE?
A)Companies with poison pills are harder to take over, and when they are taken over, the premium that existing shareholders receive for their stock is higher.
B)Because a poison pill increases the cost of a takeover, all else equal, a target company must be in better shape to justify the expense of waging a takeover battle.
C)Poison pills also increase the bargaining power of the target firm when negotiating with the acquirer because poison pills make it difficult to complete the takeover without the cooperation of the target board.
D)By adopting a poison pill, a company effectively entrenches its management by making it much more difficult for shareholders to replace bad managers, thereby potentially destroying value.
Q2) The period of the ________ is known as the conglomerate wave because firms typically acquired firms in unrelated businesses.
A)1960s
B)1970s
C)1980s
D)1990s
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Chapter 23: International Corporate Finance
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Q1) Which of the following statements is FALSE?
A)U.S. tax policy requires U.S. corporations to pay taxes on their foreign income at the same rate as profits earned in the United States.
B)The home government gets an opportunity to tax the income from a foreign project to the domestic firm.
C)The general international arrangement prevailing with respect to taxation of corporate profits is that the home country gets the first opportunity to tax income.
D)The home government must establish a tax policy specifying its treatment of foreign income and foreign taxes paid on that income.
Q2) If a foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.
A)True
B)False
Q3) The spot exchange rate is the current rate at which one currency can be converted into another today.
A)True
B)False
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25
Chapter 24: Leasing
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Q1) Suppose that the bulldozer can be leased with a fixed price lease that allows the lessee to buy the asset at the end of the lease for $12,000. The lease payments will be closest to ________.
A)2,114
B)1,825
C)1,882
D)2,324
Q2) What is the amount of the lease-equivalent loan for the CT Scanner?
A)$74,890.28
B)$1,749,890.28
C)$3,487,027.19
D)$2,367,559.51
Q3) In the chapter, the lease versus buy decision was called an unfair comparison. Why? What is the correct comparison?
Q4) If St. Martin purchases the CT scanner, what is the amount of the lease-equivalent loan?
Q5) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?
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Chapter 25: Insurance and Risk Management
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Q1) Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called ________.
A)key personnel insurance
B)business liability insurance
C)property insurance
D)business interruption insurance
Q2) The risk that arises because the value of a futures contract will not be perfectly correlated with the firm's exposure is called ________.
A)commodity price risk
B)basis risk
C)liquidity risk
D)speculation risk
Q3) To protect the firm against the loss of earnings if the business operations are disrupted due to fire, accident, or some other insured peril a firm would purchase
A)property insurance
B)key personnel insurance
C)business liability insurance
D)business interruption insurance
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Chapter 26: Corporate Governance
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Q1) While the Sarbanes-Oxley Act (SOX)contains many provisions, the overall intent of the legislation was to improve the accuracy of information given to both boards and to shareholders. SOX attempted to achieve this goal in all of the following ways EXCEPT
A)overhauling incentives and independence in the auditing process
B)mandating the separation of the positions of CEO and Chairman of the Board
C)stiffening penalties for providing false information
D)forcing companies to validate their internal financial control processes
Q2) Having a founder and top executive also be a major shareholder ________.
A)always results in agency conflicts that are bad for minority shareholders
B)can sometimes have benefits that outweigh the costs
C)is illegal in the U.S. and most other industrialized countries
D)is never beneficial to employees
Q3) Tammy is a member of the Board of Directors of Moon Corporation. Her husband is the manager of a large division. What type of director is Tammy?
A)inside director
B)outside director
C)gray director
D)resident director
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