Financial Management
Mock Exam
Course Introduction
Financial Management is a foundational course focusing on the principles and practices involved in the effective management of an organizations financial resources. The course covers key topics such as financial analysis, planning and forecasting, working capital management, capital budgeting, cost of capital, and the fundamentals of risk and return. Students explore methods of raising and allocating funds, evaluating investment opportunities, and making strategic financial decisions to maximize organizational value. Through case studies and real-world examples, learners develop analytical skills to assess financial statements, understand market dynamics, and apply financial concepts to solve business problems.
Recommended Textbook
Finance Applications and Theory 3rd Edition by Marcia Millon Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) The overall goal of the financial manager is to:
A)minimize total costs.
B)maximize net income.
C)maximize earnings per share.
D)maximize shareholder wealth.
Answer: D
Q2) From a taxation perspective,the form of business organization with the highest business level taxes is the:
A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.
Answer: B
Q3) The biggest disadvantage of the sole proprietorship is:
A)unlimited liability.
B)double taxation.
C)limited access to capital.
D)total control.
Answer: A
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Corporate Taxes The Sasnak Corporation had a 2013 taxable income of $4,450,000 from operations after all operating costs but before (1)interest charges of $750,000, (2)dividends received of $900,000, (3)dividends paid of $500,000,and (4)income taxes.
Using the tax schedule in Table 2.3,what is Sasnak's income tax liability?
What are Sasnak's average and marginal tax rates on taxable income from operations?
A)$1,349,800, 30.33%, 34%, respectively
B)$1,349,800, 34.00%, 34%, respectively
C)$1,564,000, 34.00%, 34%, respectively
D)$1,564,000, 35.15%, 34%, respectively
Answer: A
Q2) Which of the following is NOT a source of cash?
A)The firm reduces its inventory.
B)The firm pays off some of its long-term debt.
C)The firm has positive net income.
D)The firm sells more common stock.
Answer: B
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Page 4
Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Which of the following refers to the amount of debt versus equity a firm has on its balance sheet?
A)Capital coverage
B)Capital structure
C)Debt structure
D)Financial structure
Answer: B
Q2) A firm reported year-end sales of $20 million.It listed $7 million of inventory on its balance sheet.Using a 365-day year,how many days did the firm's inventory stay on the premises?
A)127.75 days
B)157.75 days
C)97.75 days
D)87.75 days
Answer: A
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5
Chapter 4: Time Value of Money
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Sample Questions
Q1) The process of figuring out how much an amount that you expect to receive in the future is worth today is called:
A)discounting.
B)multiplying.
C)compounding.
D)computing.
Q2) A $1,000 investment has doubled to $2,000 in seven years.How much longer will it take for the investment to reach $5,000 if it continues to earn the same rate?
A)6.16 years
B)6.86 years
C)7.15 years
D)9.25 years
Q3) Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years?
A)1.40 percent
B)5.45 percent
C)5.77 percent
D)40.00 percent
Q4) Why is a dollar worth more today than a dollar received one year from now?
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Which of the following will increase the present value of an annuity?
A)The number of periods decreases.
B)The interest rate decreases.
C)The amortization schedule decreases.
D)The effective rate is calculated over fewer years.
Q2) You just bought a new home and have a 30-year mortgage with monthly payments.Which statement regarding your mortgage is correct?
A)Your monthly payments will decrease over time.
B)The dollar amount of interest expense you pay each year will remain the same each year.
C)The dollar amount of principal paid increases each month.
D)All of these statements are correct.
Q3) Loan amortization schedules show:
A)the principal balance paid per period only.
B)the interest paid per period only.
C)both the principal balance and interest paid per period.
D)the present value of the payments due.
Q4) How might credit card companies keep their cardholders in debt for a long time?
Q5) What is the difference between an annuity due and an ordinary annuity?
Q6) Describe how compounding affects the future value computation of an annuity.
Page 7
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Time to Maturity A bond issued by a corporation on October 1,2007,is scheduled to mature on October 1,3007.If today is October 2,2009,what is this bond's time to maturity? (Assume annual interest payments.)
A)2 years
B)50 years
C)998 years
D)100 years
Q2) What does a call provision allow the issuer to do,and why would they do it?
Q3) Interest Payments Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually),4.75 percent coupon Treasury note,and a corporate zero coupon bond maturing in 15 years.(Assume a $1,000 par value.)
A)$4.00, $4.75, $0, respectively
B)$20.00, $23.75, $0, respectively
C)$20.00, $23.75, $150, respectively
D)$40.00, $47.50, $0, respectively
Q4) Explain what credit quality risk measures.
Q5) All else equal,which bond's price is more affected by a change in interest rates,a bond with a large coupon or a small coupon? Why?
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Chapter 8: Valuing Stockspart
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Sample Questions
Q1) Sally has researched GLE and wants to pay no more than $50 for the stock.Currently,GLE is trading in the market for $54.Sally would be best served to:
A)buy using a limit order.
B)buy using a market order.
C)use the bid-ask spread to her advantage.
D)None of these.
Q2) Investors buy stock at the: A)dealer price.
B)bid price.
C)quoted ask price.
D)broker price.
Q3) A firm is expected to pay a $4.00 dividend per share.The stock is selling in the market place for $55.00 per share.If investors are demanding 12 percent on this stock,what is this stock's growth rate?
A)4.73 percent
B)7.25 percent
C)5.91 percent
D)6.14 percent
Q4) When will a limit order be executed?
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Portfolio Weights You have $45,050 to invest.You want to purchase shares of Company Air at $10.25,Company B at $15.10,and Company F at $9.05.How many shares of each company should you purchase so that your portfolio consists of 30 percent Company A,50 percent Company B,and 20 percent Company F? Report only whole stock shares.
A)Company A = 30 shares, Company B = 50 shares, Company F = 20 shares
B)Company A = 44 shares, Company B = 30 shares, Company F = 50 shares
C)Company A = 308 shares, Company B = 755 shares, Company F = 181 shares
D)Company A = 1,323 shares, Company B = 1,490 shares, Company F = 993 shares
Q2) Portfolio Return Year to date,Company Y had earned a 10.8 percent return.During the same time period,Company R earned 12.20 percent and Company C earned -1.56 percent.If you have a portfolio made up of 45 percent Y,35 percent R,and 20 percent
C,what is your portfolio return?
A)7.15 percent
B)8.19 percent
C)8.82 percent
D)9.44 percent
Q3) Define an efficient portfolio and an efficient frontier.
Q4) How do we define risk in this chapter and how do we measure it?
Q5) Why is the percentage return a more useful measure than the dollar return?
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Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) A manager believes his firm will earn an 18 percent return next year.His firm has a beta of 1.75,the expected return on the market is 13 percent,and the risk-free rate is 5 percent.Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
A)19 percent; overvalued
B)19 percent; undervalued
C)16.7 percent; overvalued
D)16.7 percent; undervalued
Q2) Which of these is the line on a graph of return and risk (standard deviation)from the risk-free rate through the market portfolio?
A)Capital asset pricing line
B)Capital market line
C)Efficient market line
D)Efficient market hypothesis
Q3) Which of the following is correct?
A)Hedge funds often sell stock they don't even own.
B)Hedge funds maintain secrecy about their holdings, trading, and strategies.
C)Hedge funds are limited to sophisticated investors.
D)All of these statements are correct.
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Page 11
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Suppose that Wave Runners' common shares sell for $35 per share,are expected to set their next annual dividend at $2.00 per share,and that all future dividends are expected to grow by 10 percent per year,indefinitely.If Wave faces a flotation cost of 15 percent on new equity issues,what will be the flotation-adjusted cost of equity?
A)6.73 percent
B)10.07 percent
C)15.71 percent
D)16.72 percent
Q2) A firm uses only debt and equity in its capital structure.The firm's weight of equity is 75 percent.The firm's cost of equity is 16 percent and it has a tax rate of 30 percent.If the firm's WACC is 13%,what is the firm's before-tax cost of debt?
A)6.89 percent
B)6.28 percent
C)5.97 percent
D)5.71 percent
Q3) Denote the impact that flotation costs have on capital budgeting decisions.
Q4) What might happen when managers use a single,firmwide WACC for all projects?
Q5) List and explain all the components of the WACC equation.
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) ABC Engineering just purchased a new machine.All of the following are examples of incremental cash flows EXCEPT:
A)freight charged to ship the machine.
B)developmental costs to determine which machine would best work with their unique process.
C)increase in electric bill to run the machine.
D)reduction in maintenance expense associated with the new machine.
Q2) Accelerated depreciation allows firms to:
A)receive less of the dollars of depreciation earlier in the asset's life.
B)receive more of the dollars of depreciation earlier in the asset's life.
C)not pay any taxes during an asset's life.
D)receive more of the dollars of depreciation later in the asset's life.
Q3) Equipment was purchased for $45,000 plus $2,000 in freight charges.Installation costs were $1,500 and sales tax totaled $1,000.Hiring a special consultant to provide advice during the selection of the equipment cost $3,000.What is this asset's depreciable basis?
A)$51,500
B)$49,500
C)$48,500
D)$52,500
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) Which of the following is incorrect regarding the IRR statistic?
A)For independent projects, IRR will give the same accept/reject decision as NPV.
B)For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.
C)To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero.
D)None of these statements is incorrect.
Q2) Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?
A)Expected cash flows
B)Time line cash flows
C)Non-normal cash flows
D)Normal cash flows
Q3) Define and evaluate the net present value (NPV)method of evaluating capital investment opportunities.
Q4) Explain the Rule of Signs as it pertains to IRR.
Q5) Compare and contrast the IRR and the MIRR statistic.
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Chapter 14: Working Capital and Policies
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Sample Questions
Q1) The area of management concerned with designing and overseeing the process of production is which of the following?
A)Production science
B)Production management
C)Operations management
D)Operations science
Q2) All of the following will result in an increase in net working capital EXCEPT:
A)an increase in inventory.
B)a decrease in accounts payable.
C)an increase in cash.
D)an increase in accruals.
Q3) Which of the following approach for determining the target cash balance assumes that the distribution of daily net cash flows is normally distributed,and allows for both cash inflows and outflows?
A)The Baumol model
B)The Miller-Orr model
C)The Merton model
D)The Interbank Financial model
Q4) Detail the major differences between the three inventory loan types.
Q5) List and explain the "five C's" of credit analysis.
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Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) Forecasted sales drives all of the following EXCEPT:
A)the amount of assets needed.
B)the liabilities needed.
C)the external funds needed.
D)earnings per share on the annual report.
Q2) Goldilochs Inc.reported sales of $8 million and net income of $1.5 million.The firm has $10.5 million in total assets.The firm's chief financial officer is projecting a 20 percent increase in sales.If the firm's sales do increase by 20 percent,it is expected that spontaneous liabilities will increase by $500,000.The firm currently pays out 30 percent of its net income to shareholders.Assuming that all assets are expected to grow with sales,how much in additional funds will Goldilochs need from external sources to fund the expected growth?
A)$340,000
B)$299,000
C)$321,000
D)$360,000
Q3) Which liabilities would tend to spontaneously increase with sales? Why?
Q4) Contrast the difference between first order effects and higher order effects when forecasting financial statements.
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Chapter 16: Assessing Long-Term Debt, equity, and Capital Structure
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Sample Questions
Q1) A situation that arises when a firm's equity is close to worthless,and equity holders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debt holders their regularly schedule payments is referred to as:
A)separation principle.
B)underinvestment problem.
C)overinvestment problem.
D)passive capital structure management.
Q2) Which of the following is a true statement?
A)A firm's cost of debt increases with the use of equity in the capital structure.
B)A firm's cost of equity increases with the use of equity in the capital structure.
C)A firm's cost of equity increases with the use of debt in the capital structure.
D)A firm's cost of equity decreases with the use of debt in the capital structure.
Q3) Describe "The More Debt,The Better" statement with regard to the optimal capital structure.
Q4) Explain why utility firms tend to have fairly high debt ratios.
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17
Chapter 17: Sharing Firm Wealth: Dividends, share
Repurchases and Other Payouts
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Q1) List and define the definitive set of four dates associated with a firm paying out a dividend.
Q2) Analyze a firm's decision to distribute constant ordinary dividends or extraordinary dividends.
Q3) PQR Corp.is expected to pay a dividend of $1.50 per year indefinitely.If the appropriate rate of return on this stock is 8 percent per year,and the stock consistently goes ex-dividend 25 days before dividend payment date,what will be the expected minimum price in light of the dividend payment logistics?
A)$12.84
B)$18.61
C)$18.75
D)$20.09
Q4) Suppose a firm has a retention ratio of 15 percent,net income of $60 million,and 15 million shares outstanding.What would be the dividend per share paid out on the firm's stock?
A)$0.25
B)$0.60
C)$3.40
D)$4.00
Page 18
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Chapter 18: Issuing Capital and the Investment Banking Process
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Q1) Calculating Costs of Issuing Debt Basketball Games,Inc.,with the help of its investment bank recently issued $5 million of new debt.The offer price (and face value)on the debt was $1,000 per bond and the underwriter's spread was 6 percent of the gross proceeds.What is the amount of capital funding Basketball Games raised through this debt offering?
A)$1,000
B)$0.30 million
C)$4.7 million
D)$5 million
Q2) Which of the following describes the type of venture capital firms who are wealthy individuals who make equity investments?
A)Blue chip venture capital firms
B)Institutional venture capital firms
C)Angel venture capitalists
D)Expertise venture capitalists
Q3) Contrast best efforts underwriting and firm commitment underwriting.
Q4) Explain the different methods for small firms to get funding.
Q5) As a new or small firm considers going public,what must the owners consider?
Q7) How does a competitive sale of securities differ from a negotiated sale? Page 19
Q6) Explain what venture capital is and how it encourages entrepreneurship.
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Page 20
Chapter 19: International Corporate Finance
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Q1) Exchange Rate Risk A U.S.firm is expecting cash flows of 5 million Mexican pesos and 10 million Indian rupees.The current spot exchange rates are: $1 = 11.255 pesos and $1 = 44.864 rupees.If these cash flows are not received for one year and the expected spot rates at that time will be $1 = 10.080 pesos and $1 = 44.125 rupees,then what is the difference in dollars received that was caused by the delay?
A)$56,000 more
B)$56,000 less
C)$13.265 million more
D)$9.275 million more
Q2) Given these two exchange rates,$1 = 1.32 Australian dollars and $1 = £0.56,compute the cross-rate between the Australian dollar and the pound.State this exchange rate in Australian dollars and in pounds.
A)A$2.49
B)A$2.36
C)A$2.91
D)A$2.17
Q3) Explain political risks when investing internationally and how it can be managed.
Q4) What are the advantages of borrowing money in the country you plan to invest in?
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Page 21
Chapter 20: Mergers and Acquisitions and Financial
Distress
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Q1) Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X<sub>1</sub> = Net working capital/Total assets = 0.25,X<sub>2</sub> = Retained earnings/Total assets = 0.30,X<sub>3</sub> = Earnings before interest and taxes/Total assets = 0.35,X<sub>4</sub> = Market value of equity/Book value of long-term debt = 0.50,X<sub>5</sub> = Sales/Total assets ratio = 0.9.Calculate the Altman's Z-score for this firm.
A)2.30
B)3.075
C)9.8
D)1.96
Q2) When will the Justice Department most likely to challenge a firm's application to acquire another firm? What measure might they use?
Q3) Which of the following is defined as the purchase of one firm by another firm?
A)Merger
B)Synergy
C)Acquisition
D)Assignment
Q4) The Altman's Z-score model has several weaknesses.What are they?
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Q5) List and explain the three dimensions of the revenue-enhancement argument.