Financial Management
Final Exam
Course Introduction
Financial Management is a comprehensive course that introduces students to the principles and practices of managing an organizations financial resources. The course covers essential topics such as financial statement analysis, budgeting, working capital management, risk and return, time value of money, capital budgeting, and financing decisions. Emphasis is placed on applying quantitative techniques to analyze financial problems, make informed decisions, and maximize shareholder value. By examining real-world scenarios and case studies, students gain practical skills in financial planning, investment assessment, and strategic financial decision-making within both the corporate and individual contexts.
Recommended Textbook
Business Finance 11th Edition by Graham Peirson
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Page 2
Chapter 1: Introduction
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Q1) The principal role of a company's financial manager is:
A)to undertake the company's accounting and financial reporting activities.
B)to obtain the funds necessary for the capital budget and make sure they are used effectively.
C)to provide advice to the Board of Directors on the company's profitability.
D)none of the given options.
Answer: B
Q2) Maximising the value of the firm can also be described as:
A)maximising the value of the company's ordinary shares.
B)maximising the accounting profit of the firm.
C)minimising the interest rate charged by creditors of the firm.
D)maximising sales revenue or turnover of the firm.
Answer: A
Q3) A company has an indefinite life.
A)True
B)False
Answer: True
Q4) The possibility that managers may pursue their own objectives rather than shareholder interests is known as the _________ problem.
Answer: agency
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Chapter 2: Consumption, Investment and the Capital Market
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Q1) The assumed overall financial objective of a company is to:
A)raise capital.
B)reduce debt.
C)maximise profits.
D)maximise the market value of its ordinary shares.
Answer: D
Q2) Fisher's separation theorem shows important relationships between:
A)companies and the capital market.
B)shareholders and the capital market.
C)companies and shareholders.
D)companies,their shareholders and the capital market.
Answer: D
Q3) The curve showing a set of combinations that an individual derives equal utility from any combinations in the set is the:
A)indifference curve.
B)production possibilities curve.
C)production frontier curve.
D)differential curve.
Answer: A
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Chapter 3: The Time Value of Money: An Introduction to Financial Mathematics
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Q1) A lender offers a nominal interest rate on a loan of 6% p.a.compounding quarterly.This corresponds to an effective interest rate of 6.136%.
A)True
B)False
Answer: True
Q2) Five years ago,you entered into a loan agreement to borrow $100 000.The loan was to be paid off over 20 years through equal monthly instalments.If the interest rate was fixed at 12% p.a.for the entire loan term,how much do you pay per month?
A)$949
B)$1066
C)$1101
D)$1223
Answer: C
Q3) An __________ interest rate is one where the frequency of payment does not match the time period specified by the interest rate.
Answer: effective
Q4) A principle-and-interest loan is a common example of an __________ annuity.
Answer: ordinary
Page 5
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Chapter 4: Applying the Time Value of Money to Security
Valuation
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Q1) As debtholders rank ahead of shareholders it is expected that the required rate of return on debt will be less than the required rate of return on shares.
A)True
B)False
Q2) Liquidity premium theory suggests that:
A)there is a downward bias in the yield curve.
B)the market for some securities may be thinly traded;hence,investors require a reward for this risk.
C)there is an upward bias in the yield curve because interest rate risk decreases with term to maturity.
D)there is a premium due to uncertainty about the future level of interest rates.
Q3) In general,a downward-sloping term structure implies that investors expect future short-term interest rates to:
A)decrease.
B)increase.
C)be the same as the current rate.
D)none of the options given.
Q4) Once a bond has been issued,its promised future cash flows are ___________.
Page 6
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Chapter 5: Project Evaluation: Principles and Methods
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Q1) The number of internal rates of return is:
A)not affected by the magnitude of cash flows.
B)not limited to the number of sign reversals in the cash flow stream.
C)limited to the number of sign reversals in the cash flow stream.
D)limited by the life of the investment.
Q2) The assumed financial objective of a company is to:
A)maximise profits.
B)minimise costs.
C)maximise revenue.
D)maximise shareholders' wealth.
Q3) Which of the following items of information is not necessary for project evaluations?
A)The initial cash outlay.
B)The life of a project.
C)The internal rate of return.
D)The required rate of return.
Q4) A major shortcoming in the use of accounting rate of return as a method of project evaluation is that it ignores the time value of money.
A)True
B)False
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Chapter 6: The Application of Project Evaluation Methods
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Q1) Which of the following costs should be excluded from incremental cash flows?
A)The wage costs related to producing the new product.
B)The cost of establishing a new plant.
C)The consultant's fee for the feasibility study of the project.
D)The plant operating costs.
Q2) Head office costs should be included in a net present value analysis.
A)True
B)False
Q3) If an investment costing $2000 is expected to generate real cash flows of $900 p.a.for three years,prices are expected to increase at a rate of 10% p.a. ,and the nominal cost of capital is 15%,what is the net present value of the investment?
A)$520.59
B)$740.79
C)$471.97
D)$389.79
Q4) How can we compare mutually exclusive projects with different timeframes?
Q5) The inclusion of ______________ as cash flows in a net present value analysis would result in double counting.
Q6) How would you go about conducting sensitivity analysis?
Page 8
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Chapter 7: Risk and Return
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Q1) Which distribution can be fully described by its expected value and standard deviation?
A)Normal distribution.
B)Probability distribution.
C)Both Normal distribution and Probability distribution.
D)None of the given options.
Q2) Beta is a measure of the extent to which:
A)the returns on the stock market as a whole change over time.
B)a security's risk can be eliminated by proper diversification.
C)the returns on a given stock move with the stock market.
D)a security's risk can be eliminated by random diversification.
Q3) Systematic risk represents:
A)diversifiable risk.
B)risk that is unavoidable.
C)risk that is diversifiable.
D)none of the options given.
Q4) If an asset has a beta of 0.8,this indicates that the expected return of the asset should be greater than the market portfolio.
A)True
B)False
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Chapter 8: The Capital Market
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Q1) The term 'to underwrite' refers to:
A)a type of insurance that is offered by brokers to investors for protection against capital loss.
B)a legal contract binding both the seller and buyer of shares against potential loss.
C)an agreement by a broker to buy a portion of shares that are to be issued.
D)insurance offered by banks against changes to mortgage interest rates.
Q2) Superannuation funds are characterised as ___________ institutions.
Q3) ______________________ borrow funds on their own behalf and then lend the funds to another party.
Q4) Which of the following accounts for approximately 90% of all commercial lending by intermediaries?
A)Banks
B)Finance Companies
C)Money Market Corporations
D)Merchant Banks
Q5) Securitisation is the process of converting _________ assets such as bank loans into tradeable securities.
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Chapter 9: Sources of Finance: Equity
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Q1) __________________ is the process of share issuance that involves competitive bidding by market participants.
Q2) For legal purposes,preference shares are:
A)debt.
B)equity.
C)hybrids of debt and equity in some circumstances.
D)none of the given options.
Q3) Which of the following statements is true?
A)Companies cannot issue shares at less than par value.
B)Companies can issue shares at a premium to par value.
C)Ordinary shareholders have a residual claim on the proceeds from liquidation.
D)Limited liability means that shareholders can only lose the paid-up value of their shares.
Q4) Venture capitalists can dispose of their investment via:
A)a sale.
B)a private placement.
C)an involuntary liquidation.
D)either a sale or an involuntary liquidation.
Q5) Following a one-for-one bonus share issue,the share price of the company should decrease by _________.
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Chapter 10: Sources of Finance: Debt
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Q1) The role of an acceptor in relation to bills of exchange is to:
A)act as a negotiator.
B)provide the funds.
C)write up the documents.
D)repay the face value of the debt at maturity.
Q2) Converting preference shares offer a guaranteed price prior to a specified conversion date:
A)so that the holder is effectively protected against a fall in the price of the ordinary shares prior to conversion.
B)so that the holder has the opportunity to profit from a fall in the price of the ordinary shares prior to conversion.
C)so that the holder has the opportunity to profit from an increase in the price of the ordinary shares prior to conversion.
D)so that the holder has the opportunity to profit from an increase in the price of the ordinary shares after the conversion.
Q3) ______________________ is a loan for general business purposes secured against the inventory of the borrower.
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Chapter 11: Payout Policy
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Q1) Share buybacks are a means by which a company can improve its performance measures,particularly earnings per share and net assets per share.
A)True
B)False
Q2) A key limitation of Miller and Modigliani's theory of dividend irrelevance is that they assume there is a perfect capital market with no ___________.
Q3) A constant payout policy for dividends involves:
A)a constant total amount of dividends paid each year.
B)a constant ratio of dividends to profit and a constant amount of dividends paid from year to year.
C)consideration given to profitable investment proposals.
D)a constant ratio of dividends to profit but not a constant amount of dividends paid from year to year.
Q4) The imputation system was introduced in:
A)June 1987.
B)July 1987.
C)June 1988.
D)July 1988.
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Page 13
Chapter 12: Principles of Capital Structure
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Q1) Financial leverage exposes shareholders to financial risk because:
A)competition forces companies to adopt an optimal capital structure.
B)a company uses debt to increase the expected rate of return to shareholders.
C)interest on debt needs to be paid even when operating performance declines.
D)none of the given options.
Q2) Which of the following statements is true?
A)Bankruptcy costs do not concern shareholders because they are borne entirely by other parties.
B)Debtholders rarely realise the potential for bankruptcy and do not demand a higher rate of interest on their loans in compensation.
C)Debtholders will not demand higher interest rates on loans because in so doing they may increase the likelihood of bankruptcy.
D)For any given level of business risk,the higher the financial risk,the greater the probability of bankruptcy.
Q3) The effect of debt on the rate of return earned by shareholders of the company is known as _____________________.
Q4) The proportion of debt and equity financing used by a company is known as its ____________________.
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Page 14
Chapter 13: Capital Structure Decisions
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Q1) In a survey on managers' perceptions of capital structure,it was found that their reluctance to issue new ordinary shares appeared to vary over time,depending on the recent price behaviour of the company's shares.This evidence is consistent with:
A)the tax deductibility of interest.
B)the pecking order theory.
C)the financial distress theory.
D)any theory of capital structure.
Q2) The trade-off theory implies that the actual debt ratios will be described by:
A)a target model where companies have a leverage target.
B)an adjustment model where companies adjust their leverage.
C)a target model where companies have a leverage target but make no adjustments.
D)a target-adjustment model where companies have a leverage target and make gradual adjustments to it.
Q3) The pecking order theory identifies a target debt-equity ratio.
A)True
B)False
Q4) ___________ risk includes the possibility that a sudden change of government may be followed by expropriation of foreign-owned assets or a difficulty to transfer dividends out of the country.
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Chapter 14: The Cost of Capital and Taxation Issues in Project Evaluation
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Q1) From the estimates,calculate the return on equity (after tax)if Rf = 5%,E(Rm)= 13%,franking premium = 3%,beta = 1.5 and the corporate tax rate is 30 per cent.
A)15.05%
B)21.5%
C)18.8%
D)15%
Q2) Issue costs should be included in the calculation of cost of capital.
A)True
B)False
Q3) During the year,Success Ltd shares have increased from $8 to $9 and shareholders received a final dividend of 50 cents per share,fully franked at the company tax rate of 30 per cent.Calculate first the conventional rate of return and second,the dividend yield (using the beginning of the year share price)on Success shares.
A)18.75% and 6.25%.
B)15.18% and 5.5%.
C)18.75% and 5.5%.
D)15.18% and 6.25%.
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Page 16
Chapter 15: Leasing and Other Equipment Finance
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Q1) In the lease contract,the party that owns the asset is called the _________.
Q2) Myers,Dill and Bautista (1976)evaluated finance leases in the context of its effect on the lessee's ______________.
Q3) A finance lease is a short-term,cancellable lease.
A)True
B)False
Q4) Which feature of a lease ensures that lease payments are tax deductible to the lessee?
A)It must be a finance lease.
B)The lease must be non-cancellable.
C)The lease agreement cannot explicitly provide the lessee with an option to purchase the asset.
D)The lease agreement must provide that the lessee must guarantee that the lessor receives a specified residual value from the sale of the asset at the end of the lease term.
Q5) A loan secured by a mortgage over movable property is known as a:
A)hire-purchase agreement.
B)chattel mortgage.
C)leveraged lease.
D)sale and lease-back agreement.
Page 17
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Chapter 16: Capital Market Efficiency
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Q1) A number of studies have found that better (or poorly)performing shares continue to perform well (poorly)in the medium term.This effect is termed the:
A)book-to-market effect.
B)price/earnings effect.
C)momentum effect.
D)None of the given answers.
Q2) Semi-strong-form efficiency can best be described as: A)the ability of investors to earn abnormal profits from the over-reaction of share prices to news.
B)a market in which trading strategies based on past prices cannot earn abnormal profits.
C)a market in which trading strategies based on all publicly available information cannot earn abnormal profits.
D)all information,public and private,is fully impounded in share prices.
Q3) In an efficient market,there should be an instantaneous and ____________ share price reaction to information.
Q4) A _______________ policy is an investment strategy in which shares are bought and then retained in the investor's portfolio for a long period.
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Chapter 17: Futures Contracts
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Q1) The spot price of a commodity is:
A)the cost of holding a commodity for a specified period of time.
B)the price that a commodity was traded for on the previous trading day.
C)the agreed price that a commodity will be traded for at some point in time in the future.
D)the price of the commodity when the buyer pays immediately and the seller delivers immediately.
Q2) Which of the following is true regarding a futures contract?
A)Few contracts end in delivery of a commodity.
B)Most contracts end in delivery of a commodity.
C)All contracts end in delivery of a commodity.
D)No contracts end in delivery of a commodity.
Q3) The cost of holding a commodity from one period to another is known as:
A)carrying cost.
B)commodity cost.
C)holding cost.
D)exercise cost.
Q4) The 10-year bond futures contract can be useful in hedging against an exposure to changes in ____________ fixed-interest rates.
Q5) Distinguish between a forward-rate agreement (FRA)and a futures contract.
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Chapter 18: Options and Contingent Claims
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Q1) A convertible note is equivalent to ordinary debt plus:
A)a call option on the assets of the company.
B)a call option on the shares of the company.
C)a put option on the assets of the company.
D)a put option on the shares of the company.
Q2) Calculate the price of a two-month European put option given the following information: the exercise price is $19,the current share price is $15 and the risk-free interest rate is 12% p.a.Furthermore,the share price may go up by 10 per cent or down by 10 per cent at the end of each month.Assume a risk-neutral world and time periods of one month each.
A)$4.26
B)$3.66
C)$4.21
D)$3.63
Q3) An option creates the obligation for delivery of the underlying asset at a pre-determined point of time in the future.
A)True
B)False
Q4) A _______________ call option can only be exercised on maturity.
Q5) A convertible bond is an example of a ____________ claim.
Page 20
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Chapter 19: Analysis of Takeovers
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Q1) Which of the following statements is not a conclusion drawn by Jensen (1988)based on US evidence?
A)Actions by managers that prevent mergers are the most likely to be harmful to shareholders.
B)Takeover gains do not result from the creation of monopoly power.
C)Takeovers often waste credit or resources.
D)None of the given options.
Q2) Bishop,Dodd and Officer (1987)reported a close relationship between changes in share prices and the number of:
A)takeovers.
B)horizontal takeovers.
C)vertical takeovers.
D)conglomerate takeovers.
Q3) One approach to valuing target companies for a takeover bid is to use a multiple of the target company's earnings per share and P/E ratio.
A)True
B)False
Q4) A ________ is a strategic move by a company to make themselves less attractive to potential acquirers.
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Chapter 20: International Financial Management
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Q1) Foreign currency ___________ are a suitable way to undertake contingent hedging.
Q2) Which of the following transactions minimises exchange rate risk for an importer that buys computer equipment from the US?
A)Taking out a forward contract to buy US dollars in the future when payment is required.
B)Transacting all trades in Australian dollars.
C)Lending US dollars to be repaid when payment is required.
D)All of the given options.
Q3) Bonds denominated in US dollars and issued in the US by non-US companies are known as:
A)American bonds.
B)USA bonds.
C)Yankee bonds.
D)Bulldog bonds.
Q4) The general principle of exchange rate hedging is to:
A)transact in the currency of the country with which you are dealing.
B)deposit foreign currency in a cash deposit until commitment is due.
C)enter into an offsetting commitment in another foreign currency.
D)enter into an offsetting commitment in the same foreign currency.
Q5) The difference between spot and forwards rates is called the ______________.
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Chapter 21: Management of Short-Term Assets: Inventory
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Q1) DEF Ltd produces a specialised type of metal sheeting.Demand is 5 000 sheets per year.Each production run costs $1 750 to set up and storage costs are $25 per sheet per year.What is the optimal size of a production run?
A)873 sheets.
B)937 sheets.
C)837 sheets.
D)737 sheets.
Q2) __________ stock is additional inventory that is held when demand is uncertain,to reduce the probability of a stockout.
Q3) The opportunity cost of investment refers to:
A)capital that could have been invested elsewhere in the company's activities instead of being tied up by inventory.
B)missing out on discounts by placing smaller orders.
C)the loss incurred if there is a decrease in the price of merchandise held in inventory.
D)the costs incurred by forgoing rental revenue.
Q4) ___________ includes raw materials,work in progress and finished goods not yet sold.
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Chapter 22: Management of Short-Term Assets: Liquid
Assets and Accounts Receivable
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Q1) XYZ Ltd begins with a cash balance of $600 000 and its cash outflows exceed its inflows by $100 000 each week.Calculate how long the supply of cash would last.
A)Four weeks.
B)Two weeks.
C)Six weeks.
D)Three weeks.
Q2) The steps a company takes to recover the amount owing on debts is called its _______ policy.
Q3) Management of interest-rate risk involves:
A)taking advantage of discrepancies between fixed and floating interest rates.
B)minimising losses due to fluctuations in exchange rates.
C)ensuring a company's assets are liquid.
D)minimising losses due to fluctuations in interest rates.
Q4) According to the transaction motive,businesses hold liquid assets because:
A)there is always the possibility that extra cash will be needed to meet unexpected costs.
B)the opportunity to make profitable investments is anticipated.
C)cash is needed to meet obligations.
D)cash inflows and outflows are not perfectly matched in both timing and amount.
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