Financial Management for Executives
Midterm Exam
Course Introduction
Financial Management for Executives is designed to equip senior leaders and aspiring managers with the critical financial acumen required to make strategic decisions in modern organizations. The course covers core concepts such as financial statement analysis, capital budgeting, risk assessment, corporate valuation, and cash flow management from an executive perspective. Emphasizing practical applications, case studies, and real-world scenarios, participants learn how to interpret financial data, evaluate investment opportunities, and align financial strategies with organizational goals. By the end of the course, executives will possess the tools and confidence to lead financial discussions, drive profitability, and support sustainable growth in their organizations.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT?
A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.
B) There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes.
C) Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
D) Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
E) Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.
Answer: D
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3
Chapter 2: Financial Statements, cash Flow, and Taxes
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Q1) Which of the following statements is CORRECT?
A) A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.
B) The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year.
C) The balance sheet for a given year, say 2012, tells us how much money the company earned during that year.
D) The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).
E) For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
Answer: A
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Chapter 3: Analysis of Financial Statements
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Q1) Firms A and B have the same current ratio,0.75,the same amount of sales and cost of goods sold,and the same amount of current liabilities.However,Firm A has a higher inventory turnover ratio than B.Therefore,we can conclude that A's quick ratio must be smaller than B's.
A)True
B)False
Answer: False
Q2) Companies A and C each reported the same earnings per share (EPS),but Company A's stock trades at a higher price.Which of the following statements is CORRECT?
A) Company A trades at a higher P/E ratio.
B) Company A probably has fewer growth opportunities.
C) Company A is probably judged by investors to be riskier.
D) Company A must have a higher market-to-book ratio.
E) Company A must pay a lower dividend.
Answer: A
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5
Chapter 4: Time Value of Money
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Sample Questions
Q1) All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.
A)True
B)False
Q2) What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?
A) $11,262.88
B) $11,826.02
C) $12,417.32
D) $13,038.19
E) $13,690.10
Q3) Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
A)True
B)False
Q4) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
A)True
B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) Which of the following statements is CORRECT?
A) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
E) If a coupon bond is selling at a premium, then the bond's current yield is zero.
Q2) A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?
A) $839.31
B) $860.83
C) $882.90
D) $904.97
E) $927.60
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Page 7
Chapter 6: Risk and Return
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Q1) A firm can change its beta through managerial decisions,including capital budgeting and capital structure decisions.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio.
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
D) A stock with an above-average standard deviation must also have an above-average beta.
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
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8
Chapter 7: Valuation of Stocks and Corporations
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Q1) Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.
A)True
B)False
Q2) Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
A)True
B)False
Q3) Founders' shares are a type of classified stock where the shares are owned by the firm's founders,and they generally have more votes per share than the other classes of common stock.
A)True B)False
Q4) The corporate valuation model cannot be used unless a company doesn't pay dividends.
A)True
B)False
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Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
A) Put
B) Naked
C) Covered
D) Out-of-the-money
E) In-the-money
Q2) BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?
A) The exercise price of the option is increased.
B) The life of the option is increased, i.e., the time until it expires is lengthened.
C) The Federal Reserve takes actions that increase the risk-free rate.
D) BLW's stock price becomes more risky (higher variance).
E) BLW's stock price suddenly increases.
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10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method,the DCF method,and the bond-yield-plus-risk-premium method.However,only the DCF method is widely used in practice.
A)True
B)False
Q2) As a consultant to Basso Inc.,you have been provided with the following data: D<sub>1</sub> = $0.67; P<sub>0</sub> = $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%
Q3) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Murray Inc.is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and not repeatable.The CEO wants to use the IRR criterion,while the CFO favors the NPV method.You were hired to advise Murray on the best procedure.If the wrong decision criterion is used,how much potential value would Murray lose? \(\begin{array}{lccccc}
\text { WACC: } & 6.00 \% & & & \\ \text { Year } & 0 & 1 & 2 & 3 & 4 \\ \mathrm{CF}_{\mathrm{S}} & -\$ 1,025 & \$ 380 & \$ 380 & \$ 380 & \$ 380 \\ \mathrm{CF}_{\mathrm{L}} & -\$ 2,150 & \$ 765 & \$ 765 & \$ 765 & \$ 765 \end{array}\)
A) $188.68
B) $198.61
C) $209.07
D) $219.52
E) $230.49
Q2) The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows. A)True B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) McPherson Company must purchase a new milling machine.The purchase price is $50,000,including installation.The machine has a tax life of 5 years,and it can be depreciated according to the following rates.The firm expects to operate the machine for 4 years and then to sell it for $12,500.If the marginal tax rate is 40%,what will the after-tax salvage value be when the machine is sold at the end of Year 4?
\(\begin{array}{cc}
{\text { Year }} & \text { Depreciation Rate } \\
1 & 0.20 \\
2 & 0.32 \\
3 & 0.19 \\
4 & 0.12 \\
5 & 0.11 \\
6 &0.06
\end{array}\)
A) $8,878
B) $9,345
C) $9,837
D) $10,355
E) $10,900
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Chapter 12: Corporate Valuation and Financial Planning
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Q1) Which of the following statements is CORRECT?
A) Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
B) If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
C) Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
D) If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
E) Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
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Chapter 13: Agency Conflicts and Corporate Governance
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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) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q3) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Sanchez Company has planned capital expenditures that total $2,000,000.The company wants to maintain a target capital structure that is 35% debt and 65% equity.The company forecasts that its net income this year will be $1,800,000.If the company follows a residual dividend policy,what will be its total dividend payment?
A) $100,000
B) $200,000
C) $300,000
D) $400,000
E) $500,000
Q2) McCann Publishing has a target capital structure of 35% debt and 65% equity.This year's capital budget is $850,000 and it wants to pay a dividend of $400,000.If the company follows a residual dividend policy,how much net income must it earn to meet its capital budgeting requirements and pay the dividend,all while keeping its capital structure in balance?
A) $904,875
B) $952,500
C) $1,000,125
D) $1,050,131
E) $1,102,638
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Chapter 15: Capital Structure Decisions
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Q1) Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
B) The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
C) The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
D) The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
E) As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
Q3) 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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Q1) Which of the following will cause an increase in net working capital,other things held constant?
A) A cash dividend is declared and paid.
B) Merchandise is sold at a profit, but the sale is on credit.
C) Long-term bonds are retired with the proceeds of a preferred stock issue.
D) Missing inventory is written off against retained earnings.
E) Cash is used to buy marketable securities.
Q2) Which of the following statements concerning the cash budget is CORRECT?
A) Cash budgets do not include financial items such as interest and dividend payments.
B) Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
C) Changes that affect the DSO do not affect the cash budget.
D) Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
E) Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.
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Chapter 17: Multinational Financial Management
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Q1) Tashakori Trucking,a U.S.-based company,is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years,$6 million for the next 2 years,and then a possible terminal value of $8 million.In addition,due to political risk factors,Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However,the government of the host country will block 20% of all cash flows.Thus,cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%,but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions,what is the project's NPV?
A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million
Q2) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
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Page 19
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Q1) Which of the following statements is most CORRECT?
A) The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity.
B) The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.
C) If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.
D) Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings.
E) If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt.
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) There are 10,000,000 shares outstanding of O'Connell Co.'s stock,which now sells for $50 per share.The company plans to raise $100 million as new equity by selling common stock.Since the preemptive right is in the corporate charter,rights will be used.Management has decided that the rights should be worth $1 each: Such a price would assure that most stockholders would either exercise or sell their rights rather than just letting them expire,yet a careless failure to use the rights would not impose too severe a hardship on anyone.What subscription price should O'Connell set for its offering to obtain the desired price of the rights,and what will be the ex-rights stock price (M<sub>e</sub>),assuming the theoretical relationships hold? (Hint: N = Number of old shares/Number of new shares; Number of new shares = Dollars to be raised/Subscription price per share.)
\(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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Chapter 19: Lease Financing
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Q1) Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and,under certain conditions,leased assets and associated liabilities do not appear on the firm's balance sheet.
A)True
B)False
Q2) In a synthetic lease a special purpose entity (SPE)is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
Q3) A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.
A)True
B)False
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22
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Q1) Which of the following statements concerning warrants is correct?
A) Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
B) Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
C) A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
D) A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
E) Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.
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Chapter 21: Dynamic Capital Structures
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Q1) A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is the value of your firm's tax shield,i.e.,how much value does the use of debt add?
A) $92,571
B) $102,857
C) $113,143
D) $124,457
E) $136,903
Q2) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True
B)False
Q3) In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
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Chapter 22: Mergers and Corporate Control
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Q1) Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.
A)True
B)False
Q2) A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.
A)True
B)False
Q3) Although goodwill created in a merger may not be amortized for shareholder reporting purposes,it may be amortized for Federal tax purposes.
A)True
B)False
Q4) A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
A)True
B)False
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25
Chapter 23: Enterprise Risk Management
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Q1) The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.
A)True
B)False
Q2) A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?
A) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
B) Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
C) A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
D) A company can swap fixed interest payments for floating interest payments.
E) A swap involves the exchange of cash payment obligations.
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) In the event of bankruptcy under the federal bankruptcy laws,debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders.Moreover,in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
Q2) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q3) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) If the returns of two firms are negatively correlated,then one of them must have a negative beta.
A)True
B)False
Q2) It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.
A)True
B)False
Q3) In a portfolio of three different stocks,which of the following could NOT be true?
A) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
B) The beta of the portfolio is less than the betas of each of the individual stocks.
C) The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
D) The beta of the portfolio cannot be equal to 1.
E) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
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Chapter 26: Real Options
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Q1) Which of the following is most CORRECT?
A) Real options change the risk, but not the size, of projects' expected cash flows.
B) Real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows.
C) Very few projects actually have real options.
D) Real options are less valuable when there is a lot of uncertainty about the true values future sales and costs.
E) Real options change the size, but not the risk, of projects' expected cash flows.
Q2) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q3) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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29 Verified Questions
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Sample Questions
Q1) Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.
A)True
B)False
Q2) DSO analysis of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.
A)True
B)False
Q3) When deciding whether to offer a discount for cash payment,a firm must balance the profits from additional sales with the lost revenues from the discount.
A)True
B)False
Q4) If sales are seasonal,the days sales outstanding will fluctuate from month to month,even if the amount of time customers take to pay remains unchanged.
A)True
B)False
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Sample Questions
Q1) Which of the following is true of the EOQ model? Note that the optimal order quantity,Q,will be called EOQ.
A) If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
B) If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
C) If the average inventory increases by 20% the total order costs will increase by 20%.
D) The EOC is the same for all companies.
E) If the fixed per order cost increases by 20%, then EOQ will increase by 20%.
Q2) Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180,and the total cash needed for transactions annually is $960,000.On what opportunity cost of holding cash was this analysis based?
A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%
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Page 31
Chapter 29: Pension Plan Management
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Sample Questions
Q1) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows.)
A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491
Q2) Under a defined contribution plan,employees agree to contribute some percentage of their salaries,up to 20 percent,to the firm's pension fund.
A)True
B)False
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32
Chapter 30: Financial Management in Not For Profit
Businesses
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Q1) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True B)False
Q2) Which of the following statements about a not-for-profit firm's ownership is most correct?
A) The residual earnings (profits) of not-for-profit firms can be distributed to the firm's top managers.
B) Not-for-profit firms are exempt from federal taxes, but they must pay state and local taxes, including property taxes.
C) Upon liquidation of a not-for-profit firm, the proceeds from the sale of its assets are distributed, on a pro rata basis, to the firm's employees.
D) None of the profits are used for private inurement.
E) Not-for-profit firms are governed by a board of trustees whose members are elected by the community at large.
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