Financial Management
Chapter Exam Questions
Course Introduction
Financial Management is a foundational course that introduces students to the principles and techniques essential for effective financial decision-making within organizations. The course covers key concepts such as financial planning, analysis, and control; the time value of money; capital budgeting; risk and return; cost of capital; and working capital management. Students will learn to interpret financial statements, evaluate investment opportunities, and understand the impact of financial decisions on business strategy and performance. By the end of the course, students will be equipped with the analytical tools necessary to manage financial resources, maximize firm value, and support long-term organizational objectives.
Recommended Textbook
Corporate Finance 3rd Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) How much would you have to pay to purchase 100 shares of XYZ stock on November 18th?
A) $2520
B) $2525
C) $2593
D) $2600
Answer: D
Q2) If you buy shares of Coca-Cola on the primary market:
A) Coca-Cola receives the money because the company has issued new shares.
B) you buy the shares from another investor who decided to sell the shares.
C) you buy the shares from the New York Stock Exchange.
D) you buy the shares from the Federal Reserve.
Answer: A
Q3) Which of the following organization forms accounts for the greatest number of firms?
A) "S" corporation
B) Limited partnership
C) Sole proprietorship
D) "C" corporation
Answer: C
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) On the balance sheet, short-term debt appears:
A) in the Stockholders' Equity section.
B) in the Operating Expenses section.
C) in the Current Assets section.
D) in the Current Liabilities section.
Answer: D
Q2) Which of the following balance sheet equations is INCORRECT?
A) Assets - Liabilities = Shareholders' Equity
B) Assets = Liabilities + Shareholders' Equity
C) Assets - Current Liabilities = Long Term Liabilities
D) Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity
Answer: C
Q3) On the balance sheet, current maturities of long-term debt appears:
A) in the Stockholders' Equity section.
B) in the Operating Expenses section.
C) in the Current Assets section.
D) in the Current Liabilities section.
Answer: D
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4
Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Which of the following statements is INCORRECT?
A) In general, money today is worth more than money in one year.
B) We define the risk-free interest rate, r<sub>f</sub> for a given period as the interest rate at which money can be borrowed or lent without risk over that period.
C) We refer to (1 - r<sub>f</sub>) as the interest rate factor for risk-free cash flows.
D) For most financial decisions, costs and benefits occur at different points in time. Answer: C
Q2) Which of the following statements is FALSE?
A) Financial transactions are not sources of value, but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors.
B) The NPV of trading a security in a normal market is zero.
C) We cannot separate a firm's investment decision from the decision of how to finance the investment.
D) In normal markets, trading securities neither creates nor destroys value. Answer: C
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Page 5
Chapter 4: The Time Value of Money
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Q1) Draw a timeline detailing Joe's cash flows from the sale of the family business.
Q2) In terms of present value, how much will Joe receive for selling the family business?
Q3) You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to:
A) $71,429
B) $500,000
C) $166,667
D) This problem cannot be solved.
Q4) If the current rate of interest is 8% APR, then the future value of an investment that pays $500 every two years and lasts 20 years is closest to:
A) $10,979
B) $10,661
C) $22,881
D) $20,000
Q5) Draw a timeline detailing the cash flows from investment "A."
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Chapter 5: Interest Rates
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Q1) If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%, then the inflation rate is closest to:
A) 5.70%
B) 6.20%
C) 6.55%
D) 12.25%
Q2) What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one, three, and five years?
Q3) If your income tax rate is 30%, then the after-tax return you receive on your money market fund is closest to:
A) 3.7%
B) 5.1%
C) 3.6%
D) 4.2%
Q4) Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q5) What is the effective after-tax rate of each instrument, expressed as an EAR?
Q6) Should you purchase the delivery truck or lease it? Why?
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Chapter 6: Valuing Bonds
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Q1) Assuming that this bond trades for $903, then the YTM for this bond is closest to:
A) 8.0%
B) 6.8%
C) 9.9%
D) 9.2%
Q2) Wyatt oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 8%, and a face value of $1000. Wyatt Oil believes it can get a AAA rating from Standard and Poor's for this bond issue. If Wyatt Oil is successful in getting a AAA rating, then the issue price for these bonds would be closest to:
A) $891
B) $901
C) $1,000
D) $1,107
Q3) The credit spread of the BBB corporate bond is closest to:
A) 1.0%
B) 5.6%
C) 1.6%
D) 0.8%
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8
Chapter 7: Investment Decision Rules
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Q1) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are mutually exclusive projects, which project would you take and why?
Q2) Which of the following statements is FALSE?
A) The profitability index measures the value created in terms of NPV per unit of resource consumed.
B) The profitability index is the ratio of value created to resources consumed.
C) The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.
D) The profitability index measures the "bang for your buck."
Q3) The IRR for this project is closest to:
A) 15.60%
B) 18.95%
C) 20.00%
D) 25.85%
Q4) What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?
Q5) If the discount rate for project B is 15%, then what is the NPV for project B?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) If the Krusty Krab's opportunity cost of capital is 12%, then the IRR for upgrading to the new grill is closest to:
A) 3.25%
B) 16.00%
C) 18.25%
D) 21.00%
Q2) Which of the following statements is FALSE?
A) The terminal of continuation value of the project represents the market value (as of the last forecast period) of the free cash flow from the project at all future dates.
B) The incremental effect of a project on the firm's available cash is the project's free cash flow.
C) (1 - <sub>c</sub>) × Depreciation is called the depreciation tax shield.
D) To evaluate a capital budgeting decision, we must determine its consequences for the firm's available cash.
Q3) Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.
Q4) How does scenario analysis differ from sensitivity analysis?
Q5) What is sensitivity analysis?
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A) Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows.
B) Given accurate information about any two of these variables (a firm's future cash flows, its cost of capital, and its share price) a valuation model allows use to make inferences about the third variable.
C) A valuation model will tell us the most about the variable for which our prior information is the least reliable.
D) The idea that investors are able to identify positive NPV trading opportunities is referred to as the efficient markets hypothesis.
Q2) Assuming that Defenestration's dividend payout rate and expected growth rate remain constant, and Defenestration does not issue or repurchase shares, then Defenestration's stock price is closest to:
A) $50.00
B) $32.30
C) $22.25
D) $30.75
Q3) Calculate the enterprise value for DM Corporation.
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) The beta for security "Z" is closest to:
A) -1.00
B) -0.25
C) 0.00
D) 0.25
Q2) If the expected return on the market is 11% and the expected return of investing in Merck is 10.35%, then the risk-free rate must be:
A) 3.0%
B) 4.0%
C) 4.5%
D) 5.0%
Q3) Suppose an investment is equally likely to have a 35% return or a -20% return. The standard deviation on the return for this investment is closest to:
A) 38.9%
B) 0%
C) 19.4%
D) 27.5%
Q4) Do expected returns for individual stocks increase proportionately with volatility?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset
Pricing Model
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Q1) What alternative investment has the highest possible expected return while having the same volatility as Google?
A) -25% in the risk-free asset and +125% in the market portfolio
B) -20% in the risk-free asset and +120% in the market portfolio
C) -94% in the risk-free asset and +194% in the market portfolio
D) 6% in the risk-free asset and +94% in the market portfolio
Q2) What is the efficient frontier and how does it change when more stocks are used to construct portfolios?
Q3) The expected return of a portfolio that is consists of a long position of $10000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:
A) 21%
B) 12%
C) 27%
D) 18%
Q4) The Sharpe Ratio for the market portfolio is closest to:
A) 0.40
B) 0.48
C) 0.56
D) 0.80
Page 13
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Chapter 12: Estimating the Cost of Capital
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Q1) The difference between the weighted-average cost of capital (WACC) and the pre-tax (unlevered) WACC is:
A) the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.
B) the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate) and the pre-tax WACC does not.
C) the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not.
D) the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.
Q2) Your estimate of the asset beta for Nielson Motors is closest to:
A) 0.59
B) 0.66
C) 0.71
D) 1.75
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14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) The expected alpha for Taggart Transcontinental is closest to:
A) -3.00%
B) -1.00%
C) 1.00%
D) 3.00%
Q2) The market value for Bernard is closest to:
A) $12.0 million
B) $10 million
C) $15.0 million
D) $12.5 million
Q3) Which of the following stocks represent buying opportunities? 1. Taggart Transcontinental
2) Rearden Metal
3) Wyatt Oil
4) Nielson Motors
A) 1 only
B) 1 and 2 only
C) 2 and 3 only
D) 2 and 4 only
Q4) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Nielson's EPS if they choose not to change their capital structure is closest to:
A) $2.00
B) $2.30
C) $2.50
D) $2.90
Q2) The market value of Luther's non-cash assets is closest to:
A) $20 billion
B) $19 billion
C) $25 billion
D) $24 billion
Q3) Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%. Taggart is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If Taggart borrows until they achieved a debt -to-value ratio of 20%, then Taggart's levered cost of equity would be closest to:
A) 8.0%
B) 9.2%
C) 10.0%
D) 11.0%
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Page 16
Chapter 15: Debt and Taxes
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Q1) Your firm currently has $250 million in debt outstanding with an 8% interest rate. The terms of the loan require the firm to repay $50 million of the balance each year. Suppose that the marginal corporate tax rate is 35% and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?
Q2) In 2000, assuming an average dividend payout ratio of 50%, the effective tax advantage for debt (t*) was closest to:
A) 40%
B) 24%
C) 30%
D) 18%
Q3) IF FBNA increases leverage so that its interest expense rises by $1 million, then the amount its net income will change is closest to:
A) -$400,000
B) -$600,000
C) $400,000
D) $600,000
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17
Chapter 16: Financial Distress, Managerial Incentives, and Information
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Q1) Rose Industries has a $20 million loan due at the end of the year and its assets will have a market value of only $15 million when the loan comes due. Currently Rose has $2 million in cash. Rose is considering two possible alternative uses for this cash. One possibility is to pay the $2 million out to shareholders in the form of a special dividend. The second possibility is to invest the $2 million into a project that offers a $4 million NPV. What are the payoffs to the debt and equity holders under each of the two alternatives? Which alternative would equity holders prefer? Which alternative would debt holders prefer? What is the economic term that describes this situation?
Q2) Because debtor-in-possession (DIP) financing is senior to all existing creditors:
A) it allows a firm that has filed for bankruptcy renewed access to financing to keep operating.
B) it is an important cost for firms that rely heavily on trade credit.
C) it is likely to be small for producers of raw materials, as the value of those goods, once delivered, does not depend on the seller's continued success.
D) it allows debtors to assume they may have an opportunity to avoid their obligations to a firm.
Q3) List five general categories of indirect costs associated with bankruptcy.
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Page 18
Chapter 17: Payout Policy
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Q1) Assume that Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value. After the repurchase, and following the release of the new information regarding the true value of Rockwood, the firm's share price is closest to:
A) $30.00
B) $31.50
C) $28.75
D) $30.60
Q2) In which years were dividends NOT tax disadvantaged?
A) 1987 - 2002
B) 1987, 1993 - 2002
C) 1987, 1991 - 2002
D) 1988 - 1990, 2003 - 2009
Q3) The firm will pay the dividend to all shareholders who are registered owners on a specific date, set by the board, called the:
A) declaration date.
B) record date.
C) distribution date.
D) ex-dividend date.
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Page 19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) The unlevered cost of capital for "Eenie" is closest to:
A) 6.0%
B) 5.5%
C) 7.5%
D) 6.5%
Q2) The WACC for this project is closest to:
A) 3.0%
B) 5.0%
C) 7.0%
D) 8.2%
Q3) The unlevered cost of capital for Anteater Enterprises is closest to:
A) 10.1%
B) 9.5%
C) 9.9%
D) 10.3%
Q4) The unlevered value of Rose's acquisition is closest to:
A) $63 million
B) $50 million
C) $167 million
D) $100 million
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%, then the cost of capital for Nike is closest to:
A) 14.7%
B) 10.2%
C) 9.1%
D) 13.5%
Q2) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation enterprise value of Ideko in 2010 is closest to:
A) $152.8 million
B) $272.8 million
C) $301.7 million
D) $181.7 million
Q3) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation equity value of Ideko in 2010 is closest to:
A) $152.8 million
B) $181.7 million
C) $301.7 million
D) $272.8 million
Q4) What is the purpose of the sensitivity analysis?
Page 21
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Chapter 20: Financial Options
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Q1) Which of the following statements is FALSE?
A) Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move.
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out of-the-money.
C) Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price.
D) European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date.
Q2) In describing Galt's equity as a call option, the market value of the assets underlying the call option is:
A) $200 million
B) $300 million
C) $500 million
D) $700 million
Q3) Graph the payoff at expiration of a short position in a put option with a strike price of $20.
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Chapter 21: Option Valuation
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Q1) Which of the following statements is FALSE?
A) The techniques of the binomial option pricing model are specific to European call and put options.
B) We can summarize the payoffs for the Binomial Option Pricing Model in a binomial tree-a timeline with two branches at every date that represent the possible events that could happen at those times.
C) We define the state in which the stock price goes up as the up state and the state in which the stock price goes down as the down state.
D) When using the Binomial Option Pricing Model, by the Law of One Price, the price of the option today must equal the current market value of the replicating portfolio.
Q2) Using the binomial pricing model, the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A) -7.7
B) 2.4
C) 4.6
D) -1.8
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Chapter 22: Real Options
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Q1) If you are awarded the government contract and your sales increase by 20%, then the value of your plant will be closest to:
A) $5 million
B) $8 million
C) $0
D) $4 million
Q2) If you are not awarded the government contract and your sales decrease by 25%, then the value of your plant will be closest to:
A) -$1 million
B) $5 million
C) $8 million
D) $0
Q3) Assume that you are not able to sell the plant, but you are able to shut down the plant at no cost at any time. Given the embedded option to abandon production the value of your plant will be closest to:
A) $8.0 million
B) $4.0 million
C) $5.0 million
D) $6.5 million
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Page 24
Chapter 23: Raising Equity Capital
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Q1) Which of the following statements is NOT true regarding Angel Investors?
A) They are typically arranged as limited partnerships.
B) For many start-ups, the first round of outside private equity financing is often obtained from them.
C) Because their capital investment is often large relative to the amount of capital already in place at the firm, they typically receive a sizeable equity share in the business in return for their funds.
D) These investors are frequently friends or acquaintances of the entrepreneur.
Q2) Which of the following statements is FALSE?
A) A venture capital firm is a limited partnership that specializes in raising money to invest in the private equity of young firms.
B) Venture capitalists typically control about three-quarters of the seats on a start-up's board of directors, and often represent the single largest voting block on the board.
C) The initial capital that is required to start a business is usually provided by the entrepreneur herself and her immediate family.
D) Individual investors who buy equity in small private firms are called angel investors.
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25
Chapter 24: Debt Financing
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Q1) Which of the following statements regarding municipal bonds is FALSE?
A) A single municipal bond issue will often contain a number of different maturity dates. Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years.
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue.
C) Municipal bonds are sometimes also referred to as tax-exempt bonds.
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government.
Q2) Treasury securities that are semiannual coupon bonds with original maturities of between 1 and 10 years are called:
A) Treasury bonds.
B) Treasury bills.
C) Treasury notes.
D) TIPS.
Q3) What is the Yield to Call (YTC) on this bond?
Q4) What is the Yield to Maturity (YTM) on this bond?
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Page 26
Chapter 25: Leasing
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Q1) Assuming that Rearden's annual lease payments are $1.1 million, then the effective after-tax lease borrowing rate is closest to:
A) 8.0%
B) 12.8%
C) 15.4%
D) 17.0%
Q2) Which of the following statements is FALSE?
A) For a lease to be attractive to both the lessee and the lessor, the gains must come from some underlying economic benefits that the leasing arrangement provides.
B) With a true tax lease, the lessor replaces depreciation and interest tax deductions with a deduction for the lease payments.
C) Generally speaking, if the asset's tax depreciation deductions are more rapid than its lease payments, a true tax lease is advantageous if the lessor is in a higher tax bracket than the lessee.
D) A tax gain occurs if the lease shifts the more valuable deductions to the party with the higher tax rate.
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Chapter 26: Working Capital Management
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Q1) The amount of cash a firm needs to be able to pay its bills is sometimes referred to as a(n):
A) operating balance.
B) compensating balance.
C) transactions balance.
D) precautionary balance.
Q2) Wyatt Oil purchases goods from its suppliers on terms 3/20 net 40. The effective annual cost to Wyatt if they do not take the discount and pay on day 50 is closest to:
A) 18%
B) 45%
C) 75%
D) 82%
Q3) Your firm purchases goods from its supplier on terms of 2/10, net 45. Calculate the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered.
Q4) Goldsboro Industries has an average accounts payable balance of $680,000. Its annual cost of goods sold is $4,500,000, and it receives terms of 1/10, net 40 from its suppliers. Goldsboro chooses to forgo this discount. Is Goldsboro managing its accounts payables well?
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Chapter 27: Short-Term Financial Planning
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Q1) The effective annual rate for Taggart if they choose alternative #3 is closest to:
A) 13.9%
B) 18.8%
C) 27.0%
D) 27.9%
Q2) The temporary working capital needs for Hasbeen Toys in quarter 3 is closest to:
A) $845 million
B) $0 million
C) $770 million
D) $ 340 million
Q3) A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000. The effective annual rate that this firm is paying is closest to:
A) 8.0%
B) 7.5%
C) 1.8%
D) 7.3%
Q4) Calculate the temporary working capital needs for each of the four quarters for Hasbeen Toys.
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Chapter 28: Mergers and Acquisitions
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Sample Questions
Q1) Savings that come from combining the marketing and distribution of different types of related products. are called:
A) horizontal integration.
B) vertical integration.
C) economies of scale.
D) economies of scope.
Q2) If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then Rearden's earnings per share after the merger will be closest to:
A) $1.85
B) $1.90
C) $2.00
D) $2.25
Q3) In a ________ merger, the target and the acquirer operate in unrelated industries.
A) conglomerate
B) vertical
C) horizontal
D) diagonal
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Chapter 29: Corporate Governance
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Sample Questions
Q1) Which of the following statements is FALSE?
A) Researchers have hypothesized that boards with a majority of outside directors are better monitors of managerial effort and actions.
B) Studies have found that firms with independent boards make fewer value-creating acquisitions but are more likely to act in shareholders' interests if targeted in an acquisition.
C) One early study showed that a board was more likely to fire the firm's CEO for poor performance if the board had a majority of outside directors.
D) Although the firm's stock price increases on the announcement of its addition of an independent board member, the increased firm value appears to come from the potential for the board to make better decisions on acquisitions and CEO turnover rather than from improvements in the firm's operating performance.
Q2) Which of the following is/are NOT corporate monitors?
A) Security analysts
B) Lenders
C) Securities and Exchange Commission
D) All of the above are monitors.
Q3) What is the role of takeovers in corporate governance?
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Chapter 30: Risk Management
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Q1) A currency forward contract specifies all of the following EXCEPT:
A) the amount of currency to exchange.
B) the spot exchange rate.
C) the delivery date on which the exchange will take place.
D) the currencies to be exchanged.
Q2) To insure their assets against hazards such as fire, storm damage, vandalism, earthquakes, and other natural and environmental risks firms commonly purchase:
A) key personnel insurance.
B) business liability insurance.
C) business interruption insurance.
D) property insurance.
Q3) Which of the following statements regarding long-term supply contracts is FALSE?
A) The market value of the contract at any point in time may not be easy to determine, making it difficult to track gains and losses.
B) Long-term supply contracts are designed to eliminate credit risk.
C) Long-term supply contracts insulate the firms from commodity price risk.
D) Long-term supply contracts are bilateral contracts negotiated by a buyer and a seller.
Q4) What are some of the disadvantages of long-term supply contracts?
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Chapter 31: International Corporate Finance
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Q1) The present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:
A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695
Q2) After the Japanese taxes are paid, the amount of the earnings before interest and after taxes in dollars from the Japanese operations is closest to:
A) $20.5 million
B) $29.5 million
C) $5.1 million
D) $50.0 million
Q3) The present value of Rearden Metal's cash outflow computed by first discounting the cash flow at the appropriate Argentine Peso rate and then converting to dollars is closest to:
A) $469,500
B) $475,000
C) $481,000
D) $484,500
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