Financial Management Exam Preparation
Guide
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in managing an organizations financial resources. The course covers essential topics such as financial analysis, planning, and control, as well as capital budgeting, financing decisions, and working capital management. Students will learn how to evaluate investment opportunities, assess risks, and make sound financial decisions that align with organizational goals. By understanding the role of financial markets and institutions, students will be equipped with the analytical tools necessary to optimize the value of firms and effectively manage corporate finances in dynamic business environments.
Recommended Textbook Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act?
Answer: Some of the key requirements of Sarbanes-Oxley are:the prohibition of personal loans from the company to its officers,an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's assessment of that report,a review and sign off by the corporate officers of the annual financial statements,and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm.While firms that have opted to remain publicly-owned are complying with these requirements,they are paying a cost to do so.This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U.S.exchange.While some of the results do match the intent of the Act,the costs,"going dark",and foreign listings were most likely not intended by the supporters of the Act.
Q2) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Page 3
Two: Financial Statements and Long-Term Financial Planning
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Sample Questions
Q1) A firm has net working capital of $640.Long-term debt is $4,180,total assets are $6,230,and fixed assets are $3,910.What is the amount of the total liabilities?
A) $2,050
B) $2,690
C) $4,130
D) $5,590
E) $5,860
Answer: E
Q2) The cash flow related to interest payments less any net new borrowing is called the:
A) operating cash flow.
B) capital spending cash flow.
C) net working capital.
D) cash flow from assets.
E) cash flow to creditors.
Answer: E
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of:
A) total assets.
B) total equity.
C) net income.
D) taxable income.
E) sales.
Answer: E
Q2) Canine Supply has sales of $2,200,total assets of $1,400,and a debt-equity ratio of 0.5.Its return on equity is 15 percent.What is the net income?
A) $128.16
B) $131.41
C) $132.09
D) $136.67
E) $140.00
Answer: E
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Page 5
Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Sample Questions
Q1) Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach.The pro forma has a projected external financing need of -$5,500.What are the firm's options in this case?
Q2) The sustainable growth rate of a firm is best described as the:
A) minimum growth rate achievable assuming a 100 percent retention ratio.
B) minimum growth rate achievable if the firm maintains a constant equity multiplier.
C) maximum growth rate achievable excluding external financing of any kind.
D) maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
E) maximum growth rate achievable with unlimited debt financing.
Q3) Which one of the following will cause the sustainable growth rate to equal to internal growth rate?
A) dividend payout ratio greater than 1.0
B) debt-equity ratio of 1.0
C) retention ratio between 0.0 and 1.0
D) equity multiplier of 1.0
E) zero dividend payments
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Page 6
Chapter 5: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) This afternoon,you deposited $1,000 into a retirement savings account.The account will compound interest at 6 percent annually.You will not withdraw any principal or interest until you retire in forty years.Which one of the following statements is correct?
A) The interest you earn six years from now will equal the interest you earn ten years from now.
B) The interest amount you earn will double in value every year.
C) The total amount of interest you will earn will equal $1,000 × .06 × 40.
D) The present value of this investment is equal to $1,000.
E) The future value of this amount is equal to $1,000 × (1 + 40)<sup>.06</sup>.
Q2) Which one of the following variables is the exponent in the present value formula?
A) present value.
B) future value.
C) interest rate.
D) time.
E) There is no exponent in the present value formula.
Q3) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
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Page 7
Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods.The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly.The first deposit will be made today.What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?
A) $80,459.07
B) $80,760.79
C) $81,068.18
D) $81,333.33
E) $81,548.20
Q2) You are borrowing money today at 8.48 percent,compounded annually.You will repay the principal plus all the interest in one lump sum of $12,800 two years from today.How much are you borrowing?
A) $9,900.00
B) $10,211.16
C) $10,877.04
D) $11,401.16
E) $11,250.00
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?
A) default risk
B) taxability
C) liquidity
D) inflation
E) interest rate risk
Q2) The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.
A) default
B) market
C) interest rate
D) inflation
E) maturity
Q3) Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.
Q4) Describe the relationships that exist between the coupon rate,the yield to maturity,and the current yield for both a discount bond and a premium bond.
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Page 9
Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Sample Questions
Q1) An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:
A) floor trader.
B) exchange customer.
C) specialist.
D) floor broker.
E) market maker.
Q2) Jen's Fashions is growing quickly.Dividends are expected to grow at a 19 percent rate for the next 3 years,with the growth rate falling off to a constant 8 percent thereafter.The required return is 12 percent and the company just paid a $3.80 annual dividend.What is the current share price?
A) $128.96
B) $131.11
C) $135.95
D) $148.87
E) $152.20
Q3) Explain why small shareholders should prefer cumulative voting over straight voting.
Q4) What are the primary differences and similarities between NASDAQ and the NYSE?
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Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) The Chandler Group wants to set up a private cemetery business.According to the CFO,Barry M.Deep,business is "looking up".As a result,the cemetery project will provide a net cash inflow of $57,000 for the firm during the first year,and the cash flows are projected to grow at a rate of 7 percent per year forever.The project requires an initial investment of $759,000.The firm requires a 14 percent return on such undertakings.The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows.At what constant rate of growth would the company just break even?
A) 4.48 percent
B) 5.29 percent
C) 5.61 percent
D) 6.49 percent
E) 6.75 percent
Q2) A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?
A) net present value
B) internal return
C) payback value
D) profitability index
E) discounted payback
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Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) The equivalent annual cost considers which of the following?
I.required rate of return
II.operating costs
III.need for replacement
IV.economic life
A) I and II only
B) II and IV only
C) II,III,and IV only
D) I,II,and IV only
E) I,II,III,and IV
Q2) The depreciation tax shield is best defined as the:
A) amount of tax that is saved when an asset is purchased.
B) tax that is avoided when an asset is sold as salvage.
C) amount of tax that is due when an asset is sold.
D) amount of tax that is saved because of the depreciation expense.
E) amount by which the aftertax depreciation expense lowers net income.
Q3) In a single sentence,explain how you can determine which cash flows should be included in the analysis of a project.
Q4) What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.
Page 12
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Sample Questions
Q1) A proposed project has fixed costs of $36,000 per year.The operating cash flow at 18,000 units is $58,000.What will be the new degree of operating leverage if the number of units sold rises to 18,500?
A) 1.46
B) 1.59
Q2) The Metal Shop produces 1.8 million metal fasteners a year for industrial use.At this level of production,its total fixed costs are $320,000 and its total costs are $522,000.The firm can increase its production by 5 percent,without increasing either its total fixed costs or its variable costs per unit.A customer has made a one-time offer for an additional 50,000 units at a price per unit of $0.10.Should the firm sell the additional units at the offered price? Why or why not?
A) yes;The offered price is less than the marginal cost.
B) yes;The offered price is equal to the marginal cost.
C) yes;The offered price is greater than the marginal cost.
D) no;The offered price is less than the marginal cost.
E) no;The offered price is greater than the marginal cost.
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Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Which one of the following statements related to capital gains is correct?
A) The capital gains yield includes only realized capital gains.
B) An increase in an unrealized capital gain will increase the capital gains yield.
C) The capital gains yield must be either positive or equal to zero.
D) The capital gains yield is expressed as a percentage of the sales price.
E) The capital gains yield represents the total return earned by an investor.
Q2) To convince investors to accept greater volatility,you must:
A) decrease the risk premium.
B) increase the risk premium.
C) decrease the real return.
D) decrease the risk-free rate.
E) increase the risk-free rate.
Q3) According to Jeremy Siegel,the real return on stocks over the long-term has averaged about:
A) 6.7 percent
B) 8.7 percent
C) 10.4 percent
D) 12.3 percent
E) 14.8 percent
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Page 14
Six: Cost of Capital and Long-Term Financial Policy
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Sample Questions
Q1) Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:
A) average arithmetic return.
B) expected return.
C) market rate of return.
D) internal rate of return.
E) cost of capital.
Q2) Standard deviation measures which type of risk?
A) total
B) nondiversifiable
C) unsystematic
D) systematic
E) economic
Q3) A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio.However,the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio.Explain why this difference exists.
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Page 15
Chapter 14: Cost of Capital
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Sample Questions
Q1) The cost of preferred stock is computed the same as the:
A) pre-tax cost of debt.
B) return on an annuity.
C) aftertax cost of debt.
D) return on a perpetuity.
E) cost of an irregular growth common stock.
Q2) Travis & Sons has a capital structure which is based on 40 percent debt,5 percent preferred stock,and 55 percent common stock.The pre-tax cost of debt is 7.5 percent,the cost of preferred is 9 percent,and the cost of common stock is 13 percent.The company's tax rate is 39 percent.The company is considering a project that is equally as risky as the overall firm.This project has initial costs of $325,000 and annual cash inflows of $87,000,$279,000,and $116,000 over the next three years,respectively.What is the projected net present value of this project?
A) $68,211.04
B) $68,879.97
C) $69,361.08
D) $74,208.18
E) $76,011.23
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) The Securities and Exchange Commission:
A) verifies the accuracy of the information contained in the prospectus.
B) verifies the accuracy of the information contained in the red herring.
C) examines the registration statement during the Green Shoe period.
D) is concerned only that an issue complies with all rules and regulations.
E) determines the final offer price once they have approved the registration statement.
Q2) Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities.How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $31 a share?
A) 417,647 shares
B) 437,856 shares
C) 445,065 shares
D) 453,604 shares
E) 458,065 shares
Q3) Explain why there is a tendency for IPOs to be underpriced.
Q4) Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?
A) exceptionally high depreciation expenses
B) very low marginal tax rate
C) substantial tax shields from other sources
D) low probabilities of financial distress
E) minimal taxable income
Q2) The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?
A) $18,387,702
B) $18,500,000
C) $19,666,667
D) $21,413,333
E) $22,293,333
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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18
Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Sample Questions
Q1) Jean's Warehouse has 16,000 shares of stock outstanding.The current market value of the firm is $768,000.The company has retained earnings of $130,000,paid in surplus of $321,000,and a common stock account value of 16,000.The company is planning a 5-for-3 stock split.What will the retained earnings account value be after the split?
A) $73,800
B) $130,000
C) $153,600
D) $205,000
E) $245,500
Q2) Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per share.Assume no market imperfections or tax effects exist.What will the new share price be if the firm declares a 40 percent stock dividend?
A) $31.12
B) $32.08
C) $35.19
D) $38.57
E) $40.00
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of alternative financing are available?
Q2) Which of the following statements is (are)correct?
I.An increase in the accounts payable period shortens the cash cycle.
II.The cash cycle is equal to the operating cycle minus the inventory period.
III.A negative cash cycle is preferable to a positive cash cycle.
IV.The cash cycle plus the accounts receivable period is equal to the operating cycle.
A) I only
B) III and IV only
C) I and III only
D) I and IV only
E) I,II,and III only
Q3) Using two separate graphs,illustrate a flexible and a restrictive short-term financing policy.Place costs on the vertical axis and current assets on the horizontal axis.On each graph,indicate the shortage costs,carrying costs,total costs,and indicate the optimal investment in current assets.
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Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) Why do firms need liquidity?
I.to meet compensating balance requirements
II.to take advantage of an opportunity that suddenly arises
III.to conduct daily business activities
IV.to be prepared for a financial emergency
A) I and II only
B) III and IV only
C) I,III,and IV only
D) II,III,and IV only
E) I,II,III,and IV
Q2) When Chris balanced her business checkbook,she had an adjusted bank balance of $11,418.She had 2 outstanding deposits worth $879 each and 11 checks outstanding with a total value of $3,648.What is the amount of the collection float on this account?
A) -$1,890
B) $1,758
C) $3,648
D) $5,406
E) $6,012
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21
Chapter
Topics in Corporate Finance
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Sample Questions
Q1) The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 2/10,net 25.What is the discounted price?
A) $43,470
B) $46,209
C) $47,334
D) $47,929
E) $48,300
Q2) Blackwell Brothers sells men's suits.The store offers a 1 percent discount if payment is received within 10 days.Otherwise,payment is due within 30 days.This credit offering is referred to as the:
A) terms of sale.
B) credit analysis.
C) collection policy.
D) payables policy.
E) collection float.
Q3) Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?
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Page 22
Chapter 21: International Corporate Finance
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Q1) The international Fisher effect states that _____ rates are equal across countries.
A) spot
B) one-year future
C) nominal
D) inflation
E) real
Q2) What conditions are necessary for absolute purchasing power parity (PPP)to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?
Q3) Assume the spot exchange rate for the Hungarian forint is HUF 215.Also assume the inflation rate in the United States is 4 percent per year while it is 9.5 percent in Hungary.What is the expected exchange rate 5 years from now?
A) 269
B) 276
C) 281
D) 294
E) 299
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Stewart is a fellow finance student at your school who is addicted to day trading and thus buys and sells stocks between classes and over his lunch break.He never has time to really analyze a security so just trades the stock symbols that other investors appear to be trading.Stewart is which one of the following?
A) noise trader
B) arbitrageur
C) crasher
D) regret averter
E) myopic loss averter
Q2) You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts that he never would have opened the new store in Centre City.Which one of the following caused your boss to make a bad decision?
A) regret aversion
B) endowment effect
C) money illusion
D) affect heuristic
E) representativeness heuristic
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Chapter 23: Enterprise Risk Management
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Q1) Browning Enterprises currently has all fixed-rate debt.The firm would like to convert part of this to floating-rate debt.Which one of the following will accomplish this for the firm?
A) option on floating-rate bonds
B) forward contract on U.S.Treasury bills
C) interest rate swap
D) currency swap
E) interest rate call option
Q2) Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option.What type of option contract did Steve sell?
A) futures option
B) call option
C) put option
D) straddle
E) strangle
Q3) What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?
Q4) Explain why a swap is effectively a series of forward contracts.
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Chapter 24: Options and Corporate Finance
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Q1) Mark owns both a March $20 put and a March $20 call on Alpha stock.Which one of the following statements correctly relates to Mark's position? Ignore taxes and transaction costs.
A) A price decrease in Alpha stock will increase the value of Mark's call option.
B) A March $30 call is worth more than Mark's $20 call.
C) The time premium on an April $20 put is less than the time premium on Mark's put.(Assume both puts expire in the same calendar year. )
D) A price increase in Alpha stock from $26 to $28 will increase the value of Mark's put.
E) If the intrinsic value of Mark's put increases by $1 then the intrinsic value of his call must either decrease by $1 or equal zero.
Q2) Which one of the following considers all of the options implicit in a project?
A) expansion planning
B) contingency planning
C) asset management review
D) prospective evaluation
E) strategic evaluation
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Chapter 25: Option Valuation
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Q1) Explain how an increase in T-bill rates will affect the value of an American call and an American put.
Q2) Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?
A) $12,203
B) $12,245
C) $12,287
D) $12,241
E) $12,367
Q3) The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?
A) 4.43 percent
B) 4.50 percent
C) 4.68 percent
D) 5.00 percent
E) 5.23 percent
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Chapter 26: Mergers and Acquisitions
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Q1) When evaluating an acquisition you should:
A) concentrate on book values and ignore market values.
B) focus on the total cash flows of the merged firm.
C) apply the rate of return that is relevant to the incremental cash flows.
D) ignore any one-time acquisition fees or transaction costs.
E) ignore any potential changes in management.
Q2) The incremental cash flows of a merger can relate to changes in which of the following?
I.revenue
II.capital requirements
III.operating costs
IV.income taxes
A) I and II only
B) II,III,and IV only
C) I,III,and IV only
D) I,II,and III only
E) I,II,III,and IV
Q3) Identify the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Page 28
Chapter 27: Leasing
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Sample Questions
Q1) Deep Mining,Inc. ,is contemplating the acquisition of some new equipment for controlling coal dust that costs $174,000.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.After that time,the equipment will be worthless.The equipment can be leased for $53,100 a year for 4 years.The firm can borrow money at 11.5 percent and has a 36 percent tax rate.What is the net advantage to leasing?
A) $5,225
B) $5,607
C) $6,611
D) $6,847
E) $6,950
Q2) Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".
Q3) Why might a firm opt to sell and leaseback an asset which it currently owns?
Q4) Explain the differences between purchasing an asset and leasing an asset.
Q5) What are some "good" reasons for opting to lease rather than purchase an asset?
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