Course Introduction
Financial Management
Exam Materials
Financial Management is a foundational course that explores the principles and practices of managing an organization's financial resources. The course covers essential topics such as financial analysis, planning and control, capital budgeting, cost of capital, financing decisions, and working capital management. Students will learn to interpret financial statements, assess investment opportunities, evaluate risk and return, and formulate strategies for long-term financial sustainability. Through case studies and real-world scenarios, the course emphasizes the role of financial management in achieving organizational objectives and maximizing shareholder value.
Recommended Textbook
Principles of Managerial Finance 13th Edition by Lawrence J. Gitman
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19 Chapters
3260 Verified Questions
3260 Flashcards
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Managing the firm's assets includes all of the following EXCEPT
A) inventory.
B) fixed assets.
C) accounts receivable.
D) notes payable.
Answer: D
Q2) Profit maximization as a goal is not ideal because it does NOT directly consider
A) risk and cash flow.
B) cash flow and stock price.
C) risk and EPS.
D) EPS and stock price.
Answer: A
Q3) Which of the following legal forms of organization's income is NOT taxed under individual income tax rate?
A) Sole proprietorships.
B) Partnerships.
C) Limited partnership.
D) Corporation.
Answer: D
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Tax laws often are used to accomplish economic goals such as providing incentives for corporate investment in certain types of assets.
A)True
B)False
Answer: True
Q2) The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ________ of funds, and businesses are net ________ of funds.
A) demanders; suppliers
B) users; providers
C) suppliers; demanders
D) purchasers; sellers
Answer: C
Q3) Securities exchanges create efficient markets that do all of the following EXCEPT
A) ensure a market in which the price reflects the true value of the security.
B) allocate funds to the most productive uses.
C) control the supply and demand for securities through price.
D) allow the price to be determined by supply and demand of securities.
Answer: C
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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209 Flashcards
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Sample Questions
Q1) All of the following are examples of current assets EXCEPT
A) accounts receivable.
B) cash.
C) accruals.
D) inventory.
Answer: C
Q2) Paid-in-capital in excess of par represents the amount of proceeds
A) from the original sale of stock.
B) in excess of the par value from the original sale of common stock.
C) at the current market value of common stock.
D) at the current book value of common stock.
Answer: B
Q3) The liquidity of a business firm refers to the solvency of the firm's overall financial position.
A)True
B)False
Answer: True
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Chapter 4: Cash Flow and Financial Planning
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183 Flashcards
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Sample Questions
Q1) In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the
A) pro forma income statement, pro forma balance sheet, and cash budget.
B) pro forma balance sheet and cash budget.
C) cash budget and statement of retained earnings.
D) pro forma income statement and pro forma balance sheet.
Q2) A firm's operating cash flow (OCF) is defined as
A) gross profit minus operating expenses.
B) gross profit minus depreciation.
C) EBIT times one minus the tax rate plus depreciation.
D) EBIT plus depreciation.
Q3) ________ is an expense that is a legal obligation of the firm.
A) Labor expense
B) Interest expense
C) Salaries expense
D) Rent expense
Q4) If a pro forma balance sheet dated at the end of May was prepared from the information presented, the accounts receivable would total ________. (See Table 4.3)
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Nico is the new assistant branch manager of a larger Florida-based bank and the branch manager has asked him a question to test his knowledge. The question he asked is which rate should the bank advertise on monthly-compounded loans, the nominal annual percentage rate or the effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings accounts? Explain. As a consumer, which would you prefer to see and why?
Q2) James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement will be
A) $19,636.
B) $91,524.
C) $98,846.
D) $21,207.
Q3) Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of $960.43. Calculate the original principal amount.
Q4) An annuity due is an amount that occurs at the beginning of each period.
A)True B)False
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.
A) $1,000
B) $805.20
C) $851.50
D) $1,268.20
Q2) There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.
A)True
B)False
Q3) An upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs is called A) normal yield curve.
B) inverted yield curve.
C) flat yield curve.
D) none of the above.
Q4) Calculate the current value of Bond M. (See Table 6.2)
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Chapter 7: Stock Valuation
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188 Flashcards
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Sample Questions
Q1) A firm has the balance sheet accounts, common stock, and paid-in capital in excess of par, with values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for
A) $11.50/share.
B) $12.50/share.
C) $13.50/share.
D) $15.50/share.
Q2) The cost of preferred stock is
A) lower than the cost of long-term debt.
B) higher than the cost of common stock.
C) higher than the cost of long-term debt and lower than the cost of common stock.
D) lower than the cost of convertible long-term debt and higher than the cost of common stock.
Q3) A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left the residual after all other claims on the firm's income and assets have been satisfied.
A)True
B)False
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Chapter 8: Risk and Return
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Sample Questions
Q1) The risk of an asset can be measured by its variance, which is found by subtracting the worst outcome from the best outcome.
A)True
B)False
Q2) The real utility of the coefficient of variation is in comparing assets that have equal expected returns.
A)True
B)False
Q3) Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year?
A) 11.7 percent
B) 13.2 percent
C) 14.1 percent
D) 15.9 percent
Q4) For the risk-averse manager, required return would decrease for an increase in risk. A)True
B)False
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) The firm's cost of retained earnings is ________. (See Table 9.2)
A) 10.2 percent
B) 14.3 percent
C) 16.7 percent
D) 17.0 percent
Q2) Target weights are either book value or market value weights based on the actual historical capital structure proportions.
A)True
B)False
Q3) One major expense associated with issuing new shares of common stock is
A) underwriting fees.
B) legal fees.
C) registration fees.
D) underpricing.
Q4) The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) When the net present value is negative, the internal rate of return is ________ the cost of capital.
A) greater than
B) greater than or equal to C) less than D) equal to
Q2) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
A) 5.83%
B) 9.67%
C) 11.44%
D) None of the above
Q3) For conventional projects, both NPV and IRR techniques will always generate the same accept-reject decision, but differences in their underlying assumptions can cause them to rank mutually exclusive projects differently.
A)True
B)False
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Page 12
Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) The initial outlay equals ________. (See Table 11.3)
A) $41,100
B) $44,100
C) $38,800
D) $38,960
Q2) A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is
A) $0 tax liability.
B) $1,100 tax liability.
C) $3,600 tax liability.
D) $280 tax benefit.
Q3) Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as
A) necessary cash flows.
B) relevant cash flows.
C) consistent cash flows.
D) ordinary cash flows.
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Page 13
Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate (RADR) approach implicitly assumes that risk is an increasing function of time.
A)True
B)False
Q2) In a capital budgeting context, risk is generally thought of as the chance that NPV and IRR will provide conflicting recommendations to management.
A)True
B)False
Q3) The NPVs of projects A and B are ________. (See Table 12.6)
A) $95,066 and $56,386, respectively
B) $56,386 and $95,066, respectively
C) -$56,386 and -$95,066, respectively
D) none of the above
Q4) In general, political risk is easier to protect against than exchange rate risk.
A)True
B)False
Q5) Calculate the risk-adjusted discount rates for project X and project Y. (See Table 12.5)
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of the firm.
A)True
B)False
Q2) A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial breakeven point is
A) $ 25,000.
B) $170,000.
C) $186,667.
D) $145,000.
Q3) In general, a firm's theoretical optimal capital structure is that which balances the tax benefits of debt financing against the increase probability of bankruptcy that result from its use.
A)True
B)False
Q4) What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 13.1)
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15
Chapter 14: Payout Policy
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Sample Questions
Q1) Paying a stock dividend ________ the retained earnings account.
A) decreases
B) has no effect on C) increases
D) reorganizes
Q2) Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of the firm's stock is unaffected by dividend policy.
A)True
B)False
Q3) By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at a value that is below the prevailing market price.
A)True B)False
Q4) The residual theory of dividends tends to suggest that the required return of investors is not influenced by the firm's dividend policy and, thus, dividend policy is irrelevant.
A)True B)False
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) The ABC system is an inventory management technique for determining the optimal order quantity for an item of inventory.
A)True
B)False
Q2) Short-term instruments issued by the Federal Home Loan Bank, the Federal National Mortgage Association, and the Federal Land Bank are examples of
A) Treasury notes.
B) Treasury bills.
C) federal agency issues.
D) banker's acceptances.
Q3) If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would ________, the annual profits on total assets would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 15.2)
A) increase; decrease; increase
B) decrease; increase; decrease
C) increase; decrease; decrease
D) decrease; increase; increase
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.
A)True
B)False
Q2) All of the following goods represent appropriate collateral for a secured loan to a candy manufacturer EXCEPT A) boxes.
B) cocoa beans.
C) individually wrapped chocolates.
D) cream.
Q3) A trust receipt inventory loan is an arrangement in which the lender receives control of the pledged inventory collateral, which is warehoused by a designated agent.
A)True
B)False
Q4) Lines of credit are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
A)True
B)False
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share of common stock. The bond's conversion ratio is
A) 20.
B) 25.
C) 40.
D) 50.
Q2) When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments.
A)True
B)False
Q3) One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a higher interest rate if a warrant is attached than if it is not.
A)True
B)False
Q4) Leasing is considered a source of financing provided by the lessee to the lessor.
A)True
B)False
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Page 19
Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) The selling of some of a firm's assets is called
A) business failure.
B) vertical segmentation.
C) reverse merger.
D) divestiture.
Q2) An involuntary petition for reorganization may be filed against a firm if any one of the following conditions are met EXCEPT
A) the book value of the firm's assets is less than the stated liabilities.
B) past-due debts of $5,000 or more.
C) three or more creditors who can prove aggregate claims of $5,000 against the firm.
D) insolvency.
Q3) ________ is a pro rata cash settlement of creditor claims.
A) A composition
B) A creditor control agreement
C) An extension
D) A liquidation
Q4) A vertical merger is a merger of two firms in the same line of business.
A)True
B)False
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) The Mercosur Group is a major European trading bloc made up of former Soviet bloc countries in Eastern Europe.
A)True
B)False
Q2) All of the following are considered to be major or "hard" currencies EXCEPT
A) the Japanese yen.
B) the British pound.
C) the Mexican peso.
D) the U.S. dollar.
Q3) All of the following are considered offshore centers EXCEPT A) Cuba.
B) Singapore.
C) London.
D) Nassau.
Q4) Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance contracts, and inventory swaps.
A)True
B)False
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Page 21