Finance for Managers
Test Preparation
Course Introduction
Finance for Managers provides a comprehensive overview of essential financial principles and practices tailored for managerial decision-making. The course covers fundamental topics such as financial statement analysis, budgeting, capital investment appraisal, and working capital management. Emphasizing the interpretation and use of financial data, students will learn how to apply financial concepts to real-world business scenarios, evaluate financial performance, manage risk, and make informed strategic decisions. By integrating financial knowledge with management strategies, the course equips non-finance managers with the tools needed to effectively contribute to their organizations financial health and success.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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16 Chapters
1341 Verified Questions
1341 Flashcards
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Chapter 1: An Overview of Financial Management and the Financial Environment
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41 Verified Questions
41 Flashcards
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Sample Questions
Q1) Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
A) Corporations generally find it relatively difficult to raise large amounts of capital.
B) Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
C) Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally face relatively few regulations.
Answer: C
Q2) Money markets are markets for A) Foreign stocks.
B) Consumer automobile loans.
C) U.S. stocks.
D) Short-term debt securities.
E) Long-term bonds.
Answer: D
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3
Chapter 3: Analysis of Financial Statements
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?
A) Its total assets turnover must equal the industry average.
B) Its total assets turnover must be above the industry average.
C) Its return on assets must equal the industry average.
D) Its TIE ratio must be below the industry average.
E) Its total assets turnover must be below the industry average.
Answer: B
Q2) Refer to the data for Pettijohn Inc. What is the firm's equity multiplier?
A) 3.33
B) 3.50
C) 3.68
D) 3.86
E) 4.05
Answer: A
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4
Chapter 4: Time Value of Money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.
A)True
B)False
Q2) Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
A)True
B)False
Q3) JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?
A) $1,781.53
B) $1,870.61
C) $1,964.14
D) $2,062.34
E) $2,165.46
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Page 5
Chapter 5: Bonds, Bond Valuation, and Interest Rates
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that
A) The economy is not in a recession.
B) Long-term bonds are a better buy than short-term bonds.
C) Maturity risk premiums could help to explain the yield curve's upward slope.
D) Long-term interest rates are more volatile than short-term rates.
E) Inflation is expected to decline in the future.
Q2) A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?
A) If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
B) The bond's coupon rate is less than 8%.
C) If the yield to maturity increases, then the bond's price will increase.
D) If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
E) The bond's current yield is less than 8%.
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Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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146 Verified Questions
146 Flashcards
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Sample Questions
Q1) One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio.
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
D) A stock with an above-average standard deviation must also have an above-average beta.
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
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Page 7
Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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91 Verified Questions
91 Flashcards
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Sample Questions
Q1) Preferred stock is a hybrid a sort of cross between a common stock and a bond in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
A)True
B)False
Q2) $35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, r<sub>s</sub>, is 9.00%. What is the stock's expected price 3 years from today?
A) $37.86
B) $38.83
C) $39.83
D) $40.85
E) $41.69
Q3) The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.
A)True
B)False
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Chapter 8: Financial Options and Applications in Corporate Finance
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28 Verified Questions
28 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Call options give investors the right to sell a stock at a certain strike price before a specified date.
B) Options typically sell for less than their exercise value.
C) LEAPS are very short-term options that were created relatively recently and now trade in the market.
D) An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.
E) Put options give investors the right to buy a stock at a certain strike price before a specified date.
Q2) As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.
A)True
B)False
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9
Chapter 9: The Cost of Capital
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Sample Questions
Q1) When estimating the cost of equity by use of the dividend growth method, the single biggest potential problem is to determine the growth rate that investors use when they estimate a stock's expected future rate of return. This problem leaves us unsure of the true value of r<sub>s</sub>.
A)True
B)False
Q2) The CEO of Harding Media Inc. as asked you to help estimate its cost of common equity. You have obtained the following data: D<sub>0</sub> = $0.85; P<sub>0</sub> = $22.00; and g<sub>L</sub> = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00. Based on the dividend growth model, by how much would the cost of common from reinvested earnings change if the stock price changes as the CEO expects?
A) 1.49%
B) 1.66%
C) 1.84%
D) 2.03%
E) 2.23%
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Page 10
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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108 Flashcards
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Sample Questions
Q1) 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
Q2) Which of the following statements is CORRECT?
A) Projects with "normal" cash flows can have two or more real IRRs.
B) Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is "nonnormal."
C) The "multiple IRR problem" can arise if a project's cash flows are "normal."
D) Projects with "nonnormal" cash flows are almost never encountered in the real world.
E) Projects with "normal" cash flows can have only one real IRR.
Q3) One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.
A)True
B)False
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Page 11
Chapter 11: Cash Flow Estimation and Risk Analysis
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR) is affected by a small change in one of the input variables, say sales. Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant.
A)True
B)False
Q2) Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.
A)True
B)False
Q3) The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater.
A)True
B)False
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Chapter 12: Financial Planning and Forecasting Financial Statements
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46 Flashcards
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Sample Questions
Q1) Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.
A)True
B)False
Q2) A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.
A)True
B)False
Q3) 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
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Chapter 13: Corporate Valuation, Value-Based
6 Flashcards
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Sample Questions
Q1) 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
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q4) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Chapter 14: Distributions to Shareholders: Dividends and 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) Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.
A)True
B)False
Q3) If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.
A)True
B)False
Q4) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
A) The costs that would be incurred in the event of bankruptcy increase.
B) Management believes that the firm's stock has become overvalued.
C) Its degree of operating leverage increases.
D) The corporate tax rate increases.
E) Its sales become less stable over time.
Q2) Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity. This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?
A) $14.42
B) $19.36
C) $23.91
D) $28.85
E) $35.62
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.
A)True
B)False
Q2) Net working capital is defined as current assets divided by current liabilities.
A)True
B)False
Q3) Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)
A) 20.11%
B) 21.17%
C) 22.28%
D) 23.45%
E) 24.63%
Q4) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Sample Questions
Q1) 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
Q2) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
Q3) Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
A)True
B)False
Q4) A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
A)True
B)False
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