Financial Management Exam Review
Course Introduction
Financial Management provides an in-depth exploration of the principles and practices essential to the effective management of an organizations financial resources. The course covers key topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Students will learn to evaluate financial performance, make informed investment decisions, and understand the role of financial markets and institutions. Through case studies and practical applications, the course develops critical skills necessary for strategic planning, resource allocation, and value maximization in both corporate and non-corporate settings.
Recommended Textbook
Fundamentals of Corporate Finance 5th Canadian Edition by Richard A Brealey
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Chapter 1: Goals and Governance of the Firm
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Q1) Firms can alter their capital structure by:
A)Not accepting any capital budgeting projects.
B)Investing in non-tangible assets.
C)Issuing stock to repay debt.
D)Becoming a limited liability company.
Answer: C
Q2) What are the two major decisions made by a financial manager?
Answer: Financial management can be broken down into (1) the investment, or capital budgeting decision, and (2) the financing decision.The firm has to decide on how much to invest and which real assets to invest in, and secondly, how to raise the necessary cash.
Q3) Which of the following would be considered a capital budgeting decision?
A)Planning to issue common stock rather than issuing preferred stock
B)A decision to expand into a new line of products, at a cost of $5 million
C)Repurchasing shares of common stock
D)Issuing debt in the form of long-term bonds
Answer: B
Q4) Tabulate and compare the differences among corporations, proprietorships and partnerships.
Answer: 11ea68e2_3f58_e75c_935e_8d737f8a414d_TB1770_00
Page 3
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Chapter 2: Financial Markets and Institutions
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Q1) How can an individual save and invest in a corporation?
Answer: Households and foreign investors provide most of the savings for corporate financing; financial markets and institutions provide the process and contracts to channel funds from savers to corporations (financial investment) for real investment.Figures 2-1 and 2-2 are excellent graphics for this discussion.Individuals can save and invest in a corporation by lending to, or buying shares in, the financial markets or a financial intermediary such as a bank or mutual fund that subsequently invests in the corporation.When the corporation retains cash and reinvests in the firm's operations, that cash is saved and invested on behalf of the firm's shareholders.The reinvested cash could have been paid out to the shareholders.By not taking the cash, these investors have also reinvested their savings in the corporation.
Q2) Liquidity is important to a mutual fund because:
A)A fund that is more liquid will attract more investors.
B)The fund's shareholders may want to redeem their shares at any time.
C)The fund's managers need liquidity to trade actively.
D)The fund needs to distribute payouts to its shareholders and managers periodically. Answer: B
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Page 4
Chapter 3: Accounting and Finance
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Q1) Determine the net cash flows for periods 1 through 3 for a firm with the following transactions: $1,000 spent in period 1 and $2,000 spent in period 2 to produce goods to be sold in the following periods, sales of $2,000 in period 2 and $4,000 in period 3, one-half of all sales are in cash with the other half collected in the following period.
Answer: 11ea68e2_3ec3_5e73_935e_39057fd446dc_TB1770_00
Q2) Market-value balance sheets differ from book-value balance sheets in that market values:
A)Are higher than book values
B)Are lower than book values
C)Conform more to GAAP accounting
D)Conform to investors' expectations
Answer: D
Q3) Which of the following is more likely to be correct if market value of equity is less than book value of equity?
A)Investors anticipate excellent earning potential
B)Investors anticipate low earning potential
C)Assets have been fully depreciated
D)The company is bankrupt
Answer: B
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Chapter 4: Measuring Corporate Performance
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Q1) Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10 percent and the leverage ratio equals 1.0?
A)Increase the leverage ratio
B)Increase the debt burden from its current level
C)Decrease assets from the current level
D)Decrease the debt burden from its current level
Q2) What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?
A)The growth rate can increase from 6 percent to 10.5 percent
B)The growth rate can increase from 6 percent to 12 percent
C)The growth rate can increase from 8 percent to 14 percent
D)The growth rate can increase from 11 percent to 14 percent current growth rate in earnings = plowback ratio x ROE = )3 x .2 = 6%
Q3) The sum of the payout ratio and the plowback ratio will always equal 1.0.
A)True
B)False
Q4) What are some potential pitfalls of ratio analysis based on accounting data?
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Chapter 5: The Time Value of Money
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Q1) You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10 percent interest rate.If the amount of the payment is $315.47, how much of that payment is accrued interest?
A)$28.68
B)$31.55
C)$100.00
D)$315.47
Q2) The term "constant dollars" refers to equal payments for amortizing a loan.
A)True
B)False
Q3) A stream of equal cash payments lasting forever is termed:
A)An annuity
B)An annuity due
C)An installment plan
D)A perpetuity
Q4) Lincoln wants to buy a new Mercedes-Benz Jeep.He will need to borrow $20,000 to go with his down payment in order to afford this car.If car loans are available at a 6 percent annual interest rate, what will Lincoln's monthly payment be on a four-year loan?
Q5) Explain the difference between a very long annuity and a perpetuity.
Page 7
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Chapter 6: Valuing Bonds
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Q1) If a four year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth one year from now if interest rates are constant?
A)$904.90
B)$925.39
C)$947.93
D)$1,000.00 Using the BAII Plus calculator:
Q2) What price will be paid for a Canadian government bond with an ask price of 122.28?
A)$1,122.28
B)$1,228.88
C)$1,280.00
D)$1,222.80
Q3) An investor buys a five-year, 9 percent coupon bond for $975, holds it for one year and then sells the bond for $985.What was the investor's rate of return?
A)9.00 percent
B)9.23 percent
C)9.65 percent
D)10.26 percent
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Chapter 7: Valuing Stocks
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Q1) What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?
A)5.00 percent
B)10.00 percent
C)14.09 percent
D)15.00 percent Expected Return =
Q2) ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?
A)$31.16
B)$33.23
C)$37.42
D)$47.77 P<sub>o</sub> =
Q3) How can you reconcile the fact that whether an investor favours dividends or capital gains, the investor should accept the dividend discount model as a determination of share value?
Q4) What might be included in building a case for "appropriate" P/E ratios in the currently high stock markets?
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent, you should:
A)Buy the new machine and save $600 in equivalent annual costs
B)Buy the new machine and save $388 in equivalent annual costs
C)Keep the old machine and save $388 in equivalent annual costs
D)Keep the old machine and save $580 in equivalent annual costs $12,000 + $5,000
Q2) Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.
A)True
B)False
Q3) One method that can be used to increase the NPV of a project is to decrease the:
A)Project's payback
B)Project's cost of capital
C)Time until receipt of cash inflows
D)Number of project IRRs
Q4) Why doesn't the payback rule always make shareholders better off?
Q5) Discuss three reasons why a firm may want to impose soft capital rationing.
Q6) What is the net present value of an investment, and how do you calculate it?
Page 10
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Q1) An asset's CAA class number affects its CCA dollar deduction amount from taxable income.
A)True
B)False
Q2) The value of a proposed capital budgeting project depends upon the:
A)Total cash flows produced
B)Incremental cash flows produced
C)Accounting profits produced
D)Increase in total sales produced
Q3) Which of the following statements is correct?
A)Real cash flows must be discounted at a real discount rate
B)Nominal cash flows must be discounted at a nominal rate
C)(1 + real rate of interest) = (1 + nominal rate of interest)/(1 + inflation rate)
D)All statements are correct
Q4) The correct method to handle overhead costs in capital budgeting is to:
A)Allocate a portion to each project
B)Allocate them to projects with the highest NPVs
C)Ignore all except identifiable incremental amounts
D)Ignore them in all cases
11
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Chapter 10: Project Analysis
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Q1) If the project requires an initial investment of $6,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and NPV break-even levels of sales? The initial investment will be depreciated straight-line over 10 years to a final value of zero, and the discount rate is 10 percent.
Q2) Fixed costs including depreciation have increased at Leverage, Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable-cost percentage be to leave break-even at $20 million?
A)60 percent
B)65 percent
C)70 percent
D)75 percent Old: = $20 million
\(\rightarrow\) Variable costs = 80%
New: = $20 million
X = 30%
Q3) Calculate the accounting break-even point for the following firm: revenues of $700,000, $100,000 fixed costs, $75,000 depreciation, 60 percent variable costs, and a 35 percent tax rate.What happens to the break-even if a trade-off is made which increases fixed costs by $30,000 and decreases variable costs to 55 percent of sales?
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Q1) What is the expected return on a portfolio that will decline in value by 13 percent in a recession, will increase by 16 percent in normal times, and will increase by 23 percent during boom times if each scenario has equal likelihood?
A)8.67 percent
B)13.00 percent
C)13.43 percent
D)17.33 percent Expected return =
Q2) Market risk can be eliminated in a stock portfolio through diversification.
A)True
B)False
Q3) What is the variance of return of a three-stock portfolio (with unequal weights 25%, 50% and 25%) that produced returns of 20%, 25% and 30%, respectively?
A)10.00
B)12.50
C)15.00
D)20.00 Mean =
Q4) Calculate risk for the two stocks and the portfolio, given the following information:
Q5) What are the components of total return and total risk?
Page 13
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken?
Project Beta IRR
Q2) Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line?
A)A portfolio of cyclical stocks
B)A portfolio that includes borrowed funds
C)A portfolio of smaller companies
D)A portfolio split between Treasury bills and the market index
Q3) Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?
Q4) Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%:
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) Company X has 2 million shares of common stock outstanding at a book value of $2 per share.The stock trades for $3.00 per share.It also has $2 million in face value of debt that trades at 90% of par.What is its ratio of debt to value for WACC purposes?
A)15.38%
B)28.6%
C)31.0%
D)33.3% 2 million shares x $3.00 = $6,000,000
$2 million debt x 90% = $1,800,000
Total value = $7,800,000
Q2) How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if: the tax rate is 40%, there is $10 million in common stock requiring a 12% return, and $6 million in bonds requiring an 8% return?
A)$1,392,000
B)$1,488,000
C)$2,480,000
D)$2,800,000 Working backwards:
Q3) Calculate the beta of a firm's equity if the asset beta is 1.1, the debt beta is .05, and the firm has 30% debt in the capital structure.
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Chapter 14: Introduction to Corporate Financing and Governance
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Q1) Compare the after-tax rates of return for a Canadian corporate investor from the following two investments: A 20-year, Canadian corporate bond that sells for par and offers a 9 % coupon versus an investment in preferred stock that sells for $40.00 per share and pays a $2.40 dividend.The corporation has a 35 % tax rate.
Q2) A corporation has authorized share capital of 1 million shares, of which 800,000 shares are issued and 200,000 are treasury shares.Construct the equity portion of the balance sheet if the net common equity is $40 million, all shares were issued with a par value of $1 and an issue price of $25, and retained earnings are $30 million.
Q3) Eurobonds are long-term, corporate liabilities that:
A)Are issued by European firms
B)Are held outside the U.S
C)Are marketed in all countries
D)Are repaid in U.S.dollars
Q4) Bonds with the callable feature sell at lower prices than bonds without such a feature.
A)True
B)False
Q5) What does it mean to say that financing is a zero-NPV transaction?
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Chapter 15: Venture Capital, Ipos, and Seasoned Offerings
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Q1) Why do provincial securities commissions deem it necessary to require the issuance of a prospectus prior to security issuance?
Q2) A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.
A)True
B)False
Q3) Ying Corporation, Inc.plans to issue 10 million additional shares of its stock.The investment bank recommends net proceeds of $19.90 per share and will charge an underwriter's spread of 5.5% of the gross proceeds.In addition, Ying Corporation must pay $2 million in legal and other administrative expenses.Calculate the gross proceeds and the total funds received by Ying Corporation from the sale of the 10 million shares of stock.
Q4) Securities exchanges will not permit securities to be sold:
A)If they have been overpriced
B)prior to approval of the registration statements
C)Unless the issuer guarantees their value
D)Until a shelf registration exists
Q5) Discuss the functions conducted by security underwriters.
Q6) Detail the difference between a prospectus and a red herring prospectus?
Page 17
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Chapter 16: Debt Policy
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Q1) Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:
A)6.25%.
B)13.64%.
C)16.00%.
D)21.00%.
Q2) A firm is currently expected to develop $2 EPS when operating income equals $4 million and interest expense equals $2 million.How low can operating income drop before EPS is reduced by half, to $1? Ignore taxes.
A)Operating income drops to $3.5 million
B)Operating income drops to $3.0 million
C)Operating income drops to $2.5 million
D)Operating income drops to $2.0 million
Q3) According to MM II, as a firm's debt-to-equity ratio decreases:
A)Its financial risk increases
B)Its operating risk increases
C)The required rate of return on equity increases
D)The required rate of return on equity decreases
Q4) Calculate the required return on the company stock.
Q5) Calculate the required return on the debt.
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Chapter 17: Payout Policy
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Q1) Some assets are almost impossible to lease short-term because:
A)They are too expensive
B)The assets are hard to transport for use
C)The lessees don't want pay enough
D)The assets to be leased are too susceptible to damage and abuse
Q2) Cash-flow analysis of a financial lease counts capital cost allowances from owning as savings for a lessee.
A)True
B)False
Q3) If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%?
A)$15,816
B)$73,114
C)$17,155
D)$55,000
Q4) A lessor and lessee have the same exposure to financial risk.
A)True
B)False
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Chapter 18: Long-Term Financial Planning
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Q1) Which of the following is not a logical justification for dividend preference (versus capital gains) in the real world?
A)Institutional restrictions involving dividends
B)Higher share prices from higher payouts
C)A steady source of cash without transaction costs
D)Differing income tax rates
Q2) A stock split and/or a stock dividend will result in an:
A)Increase in the number of shares outstanding
B)Increase in the market value of the firm
C)Increase in the total assets of the firm
D)Increase in both the number of shares outstanding and the total assets of the firm
Q3) According to the MM dividend-irrelevance proposition, since investors do not need dividends to convert their shares to cash, they will not pay higher prices for firms with higher dividend payouts.
A)True
B)False
Q4) Anyone holding a stock before its ex-dividend date is entitled to the dividend.
A)True
B)False
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Chapter 19: Short-Term Financial Planning
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Q1) A firm that admits to having "financial slack" has:
A)Uncommitted liquid assets or unused borrowing power
B)A low ROE but high leverage
C)More than sufficient cash to pay dividends
D)Grown at a rate less than its sustainable growth
Q2) The following data has been collected for Xancho Corporation:
Q3) A firm cannot expect to expand its profit margin by acquiring one of its own suppliers.
A)True
B)False
Q4) Prove that "sustainable growth rate = plowback ratio x return on equity."
Q5) Why is it uncommon to expect assets to change proportionately with sales?
Q6) A firm's required external financing is determined by the:
A)Firm's projected growth rate
B)Sustainable growth rate
C)Plowback ratio
D)Amount of external financing available
Q7) Financial planning models routinely adjust for present value and risk.
A)True
B)False
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Chapter 20: Working Capital Management
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Q1) If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable?
A)Net working capital increases
B)Net working capital decreases
C)Current ratio increases
D)Current ratio decreases
Q2) Keeping a large surplus of cash and investing it in Treasury bills will bring positive NPV to a firm.
A)True
B)False
Q3) Which of the following statements is correct concerning marketable securities on a firm's balance sheet?
A)All are U.S.government obligations
B)All earn interest income
C)All are without price risk
D)Not all are guaranteed against loss
Q4) The lower the average level of inventory, the more profitable the firm.
A)True
B)False
Q5) List and explain the four forecast uses of cash.
Page 22
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Chapter 21: Mergers, Acquisitions, and Corporate Control
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Q1) The rationale behind a zero-balance account is that:
A)Float increases when suppliers wait for their funds
B)Creditors will not be informed of cash balances
C)No unnecessary funds are tied up
D)Budgeting is easier to conduct
Q2) Concentration banking allows the banks to use the local collection system to clear the customers' cheques.
A)True
B)False
Q3) In the Baumol model, the optimal sale amount is _____ with higher interest rates and ______ with a higher cost of selling securities.
A)Increased; increased
B)Decreased; increased
C)Decreased; decreased
D)Increased; decreased
Q4) What are some tactics to increase net float?
Q5) What is float and why can it be valuable?
Q6) Short-term securities have high interest-rate risk.
A)True
B)False
23
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Chapter 22: International Financial Management
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Q1) Which of the following would be least expected to change as a result of a higher average age of receivables?
A)Current ratio
B)Total collection costs
C)Accounts payable
D)Bad debt expense
Q2) Before spilling coffee on an invoice and obliterating the final due date, you calculate the implied interest cost of trade credit at 24.89% and remember there is a 3% cash discount if paid within 10 days.When is the due date?
A)30 days
B)45 days
C)60 days
D)90 days
Q3) A breakdown of accounts receivable according to the length of time outstanding is known as a(n):
A)Amortization schedule
B)Sources of cash flow statement
C)Receivables inventory
D)Aging schedule
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Chapter 23: Options
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Q1) The benefits of merger is easier when the merging companies:
A)Have different computer systems
B)Have different pay structures
C)Have different resources
D)Have different company cultures
Q2) Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?
A)Stock financing is always less costly due to tax consequences
B)EPS fall when mergers are financed with cash
C)Target-firm shareholders will bear part of the cost if merger benefits were overestimated
D)All merger gains go to the acquirer when financed with stock
Q3) If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines), the merger would be:
A)A conglomerate
B)A divestiture
C)Horizontal
D)Vertical
Q4) Briefly discuss some of the more logical reasons for mergers to occur.
Q5) In what ways do companies change the composition of ownership and management?
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Chapter 24: Risk Management
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Q1) It is much easier for a firm to hedge non-contractual rather than contractual exchange rate risk.
A)True
B)False
Q2) If prices in the U.S.rise less rapidly than in Canada, which of the following would be expected according to purchasing power parity?
A)The value of the Canadian Dollar will decline, relative to the U.S.Dollar
B)The value of the U.S.Dollar will decline, relative to the Canadian Dollar
C)Inflation will increase in Canada
D)The price of gold will decline
Q3) High inflation rates are usually associated with:
A)Low nominal interest rates
B)High nominal interest rates
C)High real interest rates
D)Low real interest rates
Q4) What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in Canada but only 3% is expected in Spain.The nominal Canadian interest rate is 9%.
Q5) Explain the purchasing power parity.
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Chapter 25: Conclusion
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Q1) Which graph represents a selling a put option?
Q2) Assume that call options on Microsoft stock with the same exercise date in October are available with exercise prices $45, $55, and $65.Also assume that the price of the middle call were the average of the other two calls.Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in October may be positive but cannot be negative despite the fact that your net outlay today is zero.What can you deduce from this example about option pricing?
Q3) A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.
A)True
B)False
Q4) Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit <loss> per share at tomorrow's expiration?
A)($3)
B)$3
C)$7
D)$10
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Chapter 26: What We Do and Do Not Know About Finance
Available Study Resources on Quizplus for this Chatper
122 Verified Questions
122 Flashcards
Source URL: https://quizplus.com/quiz/49980
Sample Questions
Q1) Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:
A)Option traders
B)Futures traders
C)Hedgers
D)Speculators
Q2) All financial futures contracts are written on a deliverable asset.
A)True
B)False
Q3) Why do corporations spend billions on insurance worldwide? Should corporations insure against all risk or does insurance make sense for some risks than others?
Q4) 118.Discuss the statement, "the better the risk management policies of a company, the greater a company's debt capacity".
Q5) Which of the following is a major reason for firms to engage in currency swaps?
A)They will only be required to repay the interest
B)They can obtain more favourable borrowing terms in a different currency
C)The debt will not show on their balance sheets
D)Borrowing in a foreign currency offers lucrative tax breaks
Q6) What is a currency swap and give an example of how this might be used?
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