Finance for Managers
Question Bank
Course Introduction
Finance for Managers provides a comprehensive introduction to the essential financial concepts and tools managers need to make informed business decisions. Covering topics such as financial statement analysis, budgeting, investment appraisal, capital structure, and working capital management, the course emphasizes the practical application of finance in real-world managerial contexts. Through case studies and problem-solving exercises, students develop the ability to interpret financial data and integrate financial thinking into strategic planning, enabling them to contribute effectively to the financial success of their organizations.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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1827 Verified Questions
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a corporation elects to be taxed as an S corporation,then both it and its stockholders can avoid all Federal taxes.This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.
B) The more capital a firm is likely to require,the smaller the probability that it will be organized as a corporation.
C) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
D) One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.This problem would be avoided if you formed a corporation to operate the business.
E) Corporate shareholders are exposed to unlimited liability,but this factor is offset by the tax advantages of incorporation.
Answer: D
Q2) The Chairman of the Board must also be the CEO.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Which of the following is an example of a capital market instrument?
A) Commercial paper.
B) Preferred stock.
C) U.S.Treasury bills.
D) Banker's acceptances.
E) Money market mutual funds.
Answer: B
Q2) Financial institutions are more diversified today than they were in the past,when federal laws kept investment banks,commercial banks,insurance companies,and similar organizations quite separate.Today the larger financial services corporations offer a variety of services,ranging from checking accounts,to insurance,to underwriting securities,to stock brokerage.
A)True
B)False
Answer: True
Q3) Primary markets are large and important,while secondary markets are smaller and less important.
A)True
B)False
Answer: False
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Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Corporations are allowed to exclude 70% of their interest income from corporate taxes.
B) Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
C) Individuals pay taxes on only 30% of the income realized from municipal bonds.
D) Individuals are allowed to exclude 70% of their interest income from their taxes.
E) Individuals are allowed to exclude 70% of their dividend income from their taxes.
Answer: B
Q2) If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,companies would be encouraged to use more debt financing than they presently do,other things held constant.
A)True
B)False
Answer: False
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Precision Aviation had a profit margin of 6.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?
A) 17.72%
B) 20.93%
C) 14.34%
D) 13.84%
E) 16.88%
Q2) The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year,depending on the time of year when the financial statements are constructed.
A)True
B)False
Q3) The days sales outstanding ratio tells us how long it takes,on average,to collect after a sale is made.The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
A)True
B)False
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6
Chapter 5: Time Value of Money
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Sample Questions
Q1) Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.
A)True
B)False
Q2) At a rate of 10.0%,what is the future value of the following cash flow stream? \[\begin{array} { l c c c c c }
\text { Years: } & 0 & 1 & 2 & 3 & 4 \\
\hline\text { CFs: } & \$ 0 & \$ 75 & \$ 225 & \$ 0 & \$ 300 \end{array}\]
?
A) $544
B) $820
C) $672
D) $746
E) $726
Q3) A time line is meaningful even if all cash flows do not occur annually. A)True
B)False
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Chapter 6: Interest Rates
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Sample Questions
Q1) 5-year Treasury bonds yield 4.4%.The inflation premium (IP)is 1.9%,and the maturity risk premium (MRP)on 5-year T-bonds is 0.4%.There is no liquidity premium on these bonds.What is the real risk-free rate,r*?
A) 2.10%
B) 2.39%
C) 2.21%
D) 2.58%
E) 1.91%
Q2) Which of the following statements is CORRECT?
A) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
B) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
C) The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond.
D) If inflation is expected to increase,then the yield on a 2-year bond should exceed that on a 3-year bond.
E) The real risk-free rate should increase if people expect inflation to increase.
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Page 8
Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) You are considering 2 bonds that will be issued tomorrow.Both are rated triple B (BBB,the lowest investment-grade rating),both mature in 20 years,both have a 10% coupon,neither can be called except for sinking fund purposes,and both are offered to you at their $1,000 par values.However,Bond SF has a sinking fund while Bond NSF does not.Under the sinking fund,the company must call and pay off 5% of the bonds at par each year.The yield curve at the time is upward sloping.The bond's prices,being equal,are probably not in equilibrium,as Bond SF,which has the sinking fund,would generally be expected to have a higher yield than Bond NSF.
A)True
B)False
Q2) A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 17.50%,the risk-free rate is 3.00%,and the Fund's assets are as follows (Do not round your intermediate calculations. ): \(\begin{array}{rrr}\text { Stock }&\text { Investment }&\text { Beta }\\
A & \$ 200,000 & 1.50 \\ \mathrm{~B} & 300,000 & -0.50 \\ \mathrm{C} & 500,000 & 1.25 \\ \mathrm{D} & \$ 1,000,000 & 0.75 \end{array}\) ?
A) 14.06%
B) 15.46%
C) 14.76%
D) 15.18%
E) 13.35%
Q2) A stock with a beta equal to -1.0 has zero systematic (or market)risk. A)True B)False
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Page 10
Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) The preemptive right is important to shareholders because it A) allows managers to buy additional shares below the current market price. B) will result in higher dividends per share.
C) is included in every corporate charter.
D) protects the current shareholders against a dilution of their ownership interests. E) protects bondholders and thus enables the firm to issue debt with a relatively low interest rate.
Q2) Based on the corporate valuation model,Morgan Inc.'s total corporate value is $200 million.The balance sheet shows $90 million of notes payable,$30 million of long-term debt,$40 million of preferred stock,and $100 million of common equity.The company has 10 million shares of stock outstanding.What is the best estimate of the stock's price per share?
A) $3.80
B) $3.36
C) $3.88
D) $4.00
E) $4.12
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Chapter 10: The Cost of Capital
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Sample Questions
Q1) The MacMillen Company has equal amounts of low-risk,average-risk,and high-risk projects.The firm's overall WACC is 12%.The CFO believes that this is the correct WACC for the company's average-risk projects,but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.The CEO disagrees,on the grounds that even though projects have different risks,the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.If the CEO's position is accepted,what is likely to happen over time?
A) The company will take on too many high-risk projects and reject too many low-risk projects.
B) The company will take on too many low-risk projects and reject too many high-risk projects.
C) Things will generally even out over time,and,therefore,the firm's risk should remain constant over time.
D) The company's overall WACC should decrease over time because its stock price should be increasing.
E) The CEO's recommendation would maximize the firm's intrinsic value.
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Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) Ehrmann Data Systems is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative),in which case it will be rejected. \[\begin{array} { l c c c c }
\text { WACC: } & 9.00 \% & & & \\
\text { Year } & 0 & 1 & 2 & 3 \\
\hline \text { Cash flows } & - \$ 1,000 & \$ 450 & \$ 450 & \$ 450 \end{array}\]
A) 13.84%
B) 14.53%
C) 17.29%
D) 13.28%
E) 13.70%
Q2) When evaluating mutually exclusive projects,the modified IRR (MIRR)always leads to the same capital budgeting decisions as the NPV method,regardless of the relative lives or sizes of the projects being evaluated.
A)True
B)False
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Page 13
Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books.The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book.
A)True
B)False
Q2) Carlyle Inc.is considering two mutually exclusive projects.Both require an initial investment of $14,200 at t = 0.Project S has an expected life of 2 years with after-tax cash inflows of $7,400 and $13,600 at the end of Years 1 and 2,respectively.In addition,Project S can be repeated at the end of Year 2 with no changes in its cash flows.Project L has an expected life of 4 years with after-tax cash inflows of $6,000 at the end of each of the next 4 years.Each project has a WACC of 9%.What is the equivalent annual annuity of the most profitable project? Do not round your intermediate calculations.
A) $2,294.25
B) $2,156.59
C) $1,358.20
D) $2,454.85
E) $1,616.90
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Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
Q2) Traditionally,an NPV analysis assumes that projects will be accepted or rejected,which implies that they will be undertaken now or never.However,in practice,companies sometimes have a third choice--delay the decision until later,when more information will be available.Because the analysis extends out at least one additional year from the original analysis,it is unlikely that the firm would ever delay a project--particularly given the loss of the "first mover advantage."
A)True
B)False
Q3) Which one of the following will NOT increase the value of a real option?
A) Lengthening the time during which a real option must be exercised.
B) An increase in the volatility of the underlying source of risk.
C) An increase in the risk-free rate.
D) An increase in the cost of obtaining the real option.
E) A decrease in the probability that a competitor will enter the market of the project in question.
Page 15
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Your company plans to produce a new product,a wireless computer mouse.Two machines can be used to make the mouse,Machines A and B.The price per mouse will be $25.00 regardless of which machine is used.The fixed and variable costs associated with the two machines are shown below.At the expected sales level of 30,000 units,how much higher or lower will the firm's expected EBIT be if it uses Machine B with high fixed costs rather than Machine A with low fixed costs,i.e. ,what is EBIT<sub>B</sub>EBIT<sub>A</sub> ? \(\begin{array}{lrr}
& \text { Machine A } & \text { Machine B } \\
\text { Price per mouse (P) } & \$ 25.00 & \$ 25.00 \\
\text { Fixed costs (F) } & \$ 100,000 & \$ 400,000 \\
\text { Variable costinit (V) } & \$ 17.00 & \$ 11.00 \\
\text { Exp. unit sales (Q) } & 30,000 & 30,000 \end{array}\)
?
A) -$102,000
B) -$129,600
C) -$93,600
D) -$118,800
E) -$120,000
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.
A)True
B)False
Q2) If a firm declares a 20:1 stock split,and the pre-split price was $500,then we might expect the post-split price to be $25.However,it often turns out that the post-split price will be higher than $25.This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future.The higher price could also be because investors like lower-priced shares.
A)True
B)False
Q3) Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.
A)True
B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Changes in a firm's collection policy can affect sales,working capital,and profits.
A)True
B)False
Q2) Kirk Development buys on terms of 2/15,net 60 days.It does not take discounts,and it typically pays on time,60 days after the invoice date.Net purchases amount to $650,000 per year.On average,what is the dollar amount of total trade credit (costly + free)the firm receives during the year,i.e. ,what are its average accounts payable? (Assume a 365-day year,and note that purchases are net of discounts. )
A) $106,849
B) $125,014
C) $117,534
D) $123,945
E) $107,918
Q3) If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.
A)True
B)False
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Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) The term "additional funds needed (AFN)" is generally defined as follows:
A) Funds that are obtained automatically from routine business transactions.
B) Funds that a firm must raise externally from non-spontaneous sources,i.e. ,by borrowing or by selling new stock,to support operations.
C) The amount of assets required per dollar of sales.
D) 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.
E) A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
Q2) Which of the following assumptions is embodied in the AFN equation?
A) All balance sheet accounts are tied directly to sales.
B) Accounts payable and accruals are tied directly to sales.
C) Common stock and long-term debt are tied directly to sales.
D) Fixed assets,but not current assets,are tied directly to sales.
E) Last year's total assets were not optimal for last year's sales.
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19
Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Warnes Motors' stock is trading at $20 a share.Three-month call options with an exercise price of $20 have a price of $1.50.Which of the following will occur if the stock price increases 10% to $22 a share?
A) The price of the call option will increase by $2.
B) The price of the call option will increase by less than $2,but the percentage increase in price will be more than 10%.
C) The price of the call option will increase by less than $2,and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by more than $2.
E) The price of the call option will increase by more than $2,but the percentage increase in price will be less than 10%.
Q2) A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)
A) Straddle option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
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Page 20
Chapter 19: Multinational Financial Management
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Sample Questions
Q1) One year ago,a U.S.investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share.The stock's total purchase cost was 315,000 yen.At the time of purchase,in the currency market 1 yen equaled $0.00952.Today,the stock is selling at a price of 3,465 yen per share,and in the currency market $1 equals 145 yen.The stock does not pay a dividend.If the investor were to sell the stock today and convert the proceeds back to dollars,what would be his realized return on his initial dollar investment from holding the stock?
A) -22.14%
B) -20.31%
C) -18.08%
D) -23.77%
E) -22.55%
Q2) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing: Preferred
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Sample Questions
Q1) A sale and leaseback arrangement is a type of financial,or capital,lease. A)True
B)False
Q2) The owner of a convertible bond owns,in effect,both a bond and a call option.
A)True
B)False
Q3) A warrant is an option,and as such it cannot be used as a "sweetener."
A)True
B)False
Q4) A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning,assuming that the asset purchased
A) is financed with short-term debt.
B) is financed with long-term debt.
C) is financed with debt whose maturity matches the term of the lease.
D) is financed with a mix of debt and equity based on the firm's target capital structure,i.e. ,at the WACC.
E) is financed with retained earnings.
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Chapter 21: Mergers and Acquisitions
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Sample Questions
Q1) Leveraged buyouts (LBOs)occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.
A)True
B)False
Q2) Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.
A)True
B)False
Q3) Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.
A)True
B)False
Q4) Since a manager's central goal is to maximize the firm's stock price,any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.
A)True
B)False
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23