Financial Management Exam Review
Course Introduction
Financial Management is the study of planning, organizing, directing, and controlling financial activities within an organization or enterprise. This course explores essential topics such as capital budgeting, risk analysis, working capital management, financial statement analysis, and the evaluation of investment opportunities. Students will gain insights into the principles of financing, cost of capital, dividend policies, and the time value of money, while also developing the analytical skills necessary for effective decision-making in both corporate and personal finance. The course provides a foundational understanding of how to maximize shareholder value, manage financial resources efficiently, and adapt to the dynamic challenges of modern financial markets.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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17 Chapters
1391 Verified Questions
1391 Flashcards
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Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Capital market instruments include both long-term debt and common stocks.
B) An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
C) The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
D) If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
E) While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
Answer: A
Q2) If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.
A)True
B)False
Answer: False
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3
Chapter 2: Financial statements, cash flow, and taxes
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Sample Questions
Q1) Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
A) Companies' reported net incomes would decline.
B) Companies' net operating profits after taxes (NOPAT)would decline.
C) Companies' physical stocks of fixed assets would increase.
D) Companies' net cash flows would increase.
E) Companies' cash positions would decline.
Answer: E
Q2) Total net operating capital is equal to net fixed assets.
A)True
B)False Answer: False
Q3) Net operating working capital is equal to operating current assets minus operating current liabilities.
A)True
B)False Answer: True
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Chapter 3: Analysis of financial statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) All else equal, increasing the debt ratio will increase the ROA.
B) The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
C) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
D) If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
E) Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.
Answer: C
Q2) High current and quick ratios always indicate that a firm is managing its liquidity position well.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time value of money
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168 Flashcards
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Sample Questions
Q1) Suppose you are buying your first home for $145, 000, and you have $15, 000 for your down payment.You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month.What will your monthly payments be?
A) $741.57
B) $780.60
C) $821.69
D) $862.77
E) $905.91
Q2) On January 1, 2012, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250, 000 at a nominal annual rate of 7.0%, with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for 2012?
A) $17, 419.55
B) $17, 593.75
C) $17, 769.68
D) $17, 947.38
E) $18, 126.85
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Chapter 5: Bonds, bond valuation, and interest rates
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Sample Questions
Q1) One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1, 000.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?
A) $1, 077.01
B) $1, 104.62
C) $1, 132.95
D) $1, 162.00
E) $1, 191.79
Q2) A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)
A)True
B)False
Q3) As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
A)True
B)False
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Chapter 6: Risk and return
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Sample Questions
Q1) In portfolio analysis, we often use ex post (historical)returns and standard deviations, despite the fact that we are really interested in ex ante (future)data.
A)True
B)False
Q2) The slope of the SML is determined by the value of beta.
A)True
B)False
Q3) Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true about these securities? (Assume market equilibrium.)
A) Stock B must be a more desirable addition to a portfolio than A.
B) Stock A must be a more desirable addition to a portfolio than B.
C) The expected return on Stock A should be greater than that on B.
D) The expected return on Stock B should be greater than that on A.
E) When held in isolation, Stock A has more risk than Stock B.
Q4) The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.
A)True
B)False
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Page 8
Chapter 7: Valuation of stocks and corporations
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Sample Questions
Q1) Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?
A) $104.27
B) $106.95
C) $109.69
D) $112.50
E) $115.38
Q2) Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?
A) 6.62%
B) 6.82%
C) 7.03%
D) 7.25%
E) 7.47%
Q3) The corporate valuation model cannot be used unless a company doesn't pay dividends.
A)True
B)False
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Page 9
Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
A)True
B)False
Q2) The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.
A)True
B)False
Q3) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options)on the firm's stock.
A)True
B)False
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Chapter 9: The cost of capital
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Sample Questions
Q1) If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms.Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
A)True
B)False
Q2) The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
A)True
B)False
Q3) As a consultant to Basso Inc., you have been provided with the following data: D? = $0.67; P? = $27.50; and g = 8.00% (constant).What is the cost of common from reinvested earnings based on the DCF approach?
A) 9.42%
B) 9.91%
C) 10.44%
D) 10.96%
E) 11.51%
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Page 11
Chapter 10: The basics of capital budgeting: evaluating cash flows
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Sample Questions
Q1) The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.
A)True
B)False
Q2) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.
A) A project's MIRR is always less than its regular IRR.
B) If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.
C) To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
D) To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.
E) A project's MIRR is always greater than its regular IRR.
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Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) McLeod Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?
A) 0.67
B) 0.73
C) 0.81
D) 0.89
E) 0.98
Q2) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
Q3) Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
A)True
B)False
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13
Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) The capital intensity ratio is generally defined as follows:
A) The percentage of liabilities that increase spontaneously as a percentage of sales.
B) The ratio of sales to current assets.
C) The ratio of current assets to sales.
D) The amount of assets required per dollar of sales, or A0*/S0.
E) Sales divided by total assets, i.e., the total assets turnover ratio.
Q2) The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.
A)True
B)False
Q3) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
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14
Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
Q2) 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
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
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Page 15
Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) Which of the following actions will best enable a company to raise additional equity capital?
A) Declare a stock split.
B) Begin an open-market purchase dividend reinvestment plan.
C) Initiate a stock repurchase program.
D) Begin a new-stock dividend reinvestment plan.
E) Refund long-term debt with lower cost short-term debt.
Q2) In the real world, dividends
A) are usually more stable than earnings.
B) fluctuate more widely than earnings.
C) tend to be a lower percentage of earnings for mature firms.
D) are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
E) e.are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80.Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.
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Chapter 15: Capital structure decisions
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
B) Drug companies (prescription, not illegal!)generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.
C) Wide variations in capital structures exist both between industries and among individual firms within given industries.These differences are caused by differing business risks and also managerial attitudes.
D) Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms' costs of capital.
E) Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.
Q2) Whenever a firm borrows money, it is using financial leverage.
A)True
B)False
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Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).
A)True
B)False
Q2) Which of the following statements is most consistent with efficient inventory management? The firm has a
A) low incidence of production schedule disruptions.
B) below average total assets turnover ratio.
C) relatively high current ratio.
D) relatively low DSO.
E) below average inventory turnover ratio.
Q3) Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.
A)True
B)False
Q4) "Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.
A)True
B)False
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Chapter 17: Multinational financial management
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Sample Questions
Q1) The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.
A)True
B)False
Q2) If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.
A)True
B)False
Q3) Suppose that 1 British pound currently equals 1.62 U.S.dollars and 1 U.S.dollar equals 1.62 Swiss francs.What is the cross exchange rate between the pound and the franc?
A) 1 British pound equals 3.2400 Swiss francs
B) 1 British pound equals 2.6244 Swiss francs
C) 1 British pound equals 1.8588 Swiss francs
D) 1 British pound equals 1.0000 Swiss francs
E) 1 British pound equals 0.3810 Swiss francs
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