Financial Management Practice Exam
Course Introduction
Financial Management is a comprehensive course designed to provide students with an understanding of the key concepts, tools, and techniques used in managing the financial resources of an organization. The course covers fundamental topics such as financial analysis, planning and forecasting, capital budgeting, cost of capital, working capital management, and risk assessment. Students will learn how to evaluate investment opportunities, assess the financial health of a business, and make informed decisions to maximize shareholder value. Through practical case studies and real-world examples, the course equips students with the analytical skills necessary to address complex financial challenges in both corporate and entrepreneurial settings.
Recommended Textbook Fundamentals of Investing 11th Edition by
Lawrence J. Gitman
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Chapter 1: The Investment Environment
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Sample Questions
Q1) Stocks are a(n)________ investment representing ________ of a business.
A) direct; ownership
B) direct; debt
C) indirect; ownership
D) indirect; debt
Answer: A
Q2) Tax planning
A) guides investment activities to maximize after-tax returns over the long term for an acceptable level of risk.
B) ignores the source of income and concentrates solely on the amount of income.
C) is primarily done by individuals with incomes below $200,000.
D) is limited to reviewing income for the current year and determining how to minimize current taxes.
Answer: A
Q3) An example of a direct investment is the purchase of mutual fund shares.
A)True
B)False
Answer: False
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Chapter 2: Securities Markets and Transactions
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Sample Questions
Q1) Stocks, bonds and mutual fund shares are bought and sold in the capital market.
A)True
B)False
Answer: True
Q2) Describe the initial public offering (IPO)process and explain the role of the underwriter, the Securities and Exchange Commission (SEC), and the red herring.
Answer: The underwriter is responsible for promoting the stock and facilitating the sale of the company's IPO shares.The SEC approves the registration statement including the prospectus.This statement includes the key aspects of the issue, the issuer, the company management, and the financial position of the company.The SEC does NOT recommend the investment nor offer an opinion on the value of the stock.The red herring is the preliminary prospectus issued on tentative offerings.The prospectus has red lettering on the front cover.
Q3) The Sarbanes-Oxley Act of 2002 strengthens accounting disclosure requirements and ethical guidelines for financial officers.
A)True
B)False
Answer: True
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Chapter 3: Investment Information and Securities Transactions
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Sample Questions
Q1) Which one of the following statements about back-office research reports is FALSE?
A) They frequently include buy or sell recommendations.
B) They include analyses of current and future prospects for the securities markets.
C) They look at specific companies as well as industries.
D) They are only available to high-profile clients who maintain large accounts with the brokerage firm.
Answer: D
Q2) EAFE stands for
A) Europe, Asia, Far East.
B) Europe, Australia, Far East.
C) England, America, Far East.
D) England, America, France, European Community.
Answer: B
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Page 5
Chapter 4: Return and Risk
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Sample Questions
Q1) Christopher purchased 200 shares of ABC stock at $21.25 per share.After nine months, he sold all of his shares at a price of $19.88 a share.Jake received a total of $0.55 per share in dividends during the time he owned the shares.Jake's holding period return is
A) -6.4%.
B) -3.9%.
C) 2.6%.
D) 9.7%.
Q2) The expected rate of return and standard deviations, respectively for four stocks are given below:
ABC 9%, 3%
CDE 11%, 9%
FGH 12%, 8%
IJK 14%, 10%
Which stock is clearly least desirable?
A) ABC
B) CDE
C) FGH
D) IJK
Q3) Identify and discuss five sources of risk.
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Page 6
Chapter 5: Modern Portfolio Concepts
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Sample Questions
Q1) Portfolios located on the efficient frontier are preferable to all other portfolios in the feasible set.
A)True
B)False
Q2) Betas must be positive numbers.
A)True
B)False
Q3) The CAPM estimates the required rate of return on a stock held as part of a well diversified portfolio.
A)True
B)False
Q4) Beta measures
A) total risk.
B) diversifiable risk.
C) relevant risk.
D) the total return.
Q5) An investment portfolio should be built around the needs of the individual investor.
A)True
B)False
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Chapter 6: Common Stocks
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Sample Questions
Q1) Gypsum Corp.pays out 25% of its earnings as dividends.Earnings per share are currently $1.32, book value per share is $16.80, and the market price per share is $22.44.What is the dividend yield?
A) 1.5%
B) 2.0%
C) 5.9%
D) 7.9%
Q2) The value of a stock distribution is considered taxable income at the time of the distribution.
A)True
B)False
Q3) A bear market is described as a stock market decline of 25% or more.
A)True B)False
Q4) Since 1960, returns on the Dow Jones Industrial Average have never been negative for 3 consecutive years.
A)True
B)False
Q5) Explain why every stock portfolio should include some defensive stocks.
Q6) Why do some companies split their stock?
Page 8
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Chapter 7: Analyzing Common Stocks
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Sample Questions
Q1) Quick Cement has a return on assets of 8%.If it has $1.5 million in total assets and a total asset turnover of 2, it follows that the firm must have a net profit margin of
A) 4%.
B) 6%.
C) 8%.
D) 12%.
Q2) Which of the following tend to increase security market prices?
I.An increase in industrial production
II.An increase in corporate profits
III.An increase in the federal deficit when the economy is strong IV.An increase in interest rates
A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV
Q3) Return on equity (ROE)is computed by dividing net income by the market value of equity.
A)True
B)False
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Page 9
Chapter 8: Stock Valuation
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Sample Questions
Q1) What is the required rate of return on a common stock that is expected to pay a $0.75 annual dividend next year if dividends are expected to grow at 2 percent annually and the current stock price is $8.59?
A) 8.73%
B) 8.91%
C) 10.73%
D) 11.38%
Q2) An investor should purchase a stock when
A) the market price exceeds the intrinsic value.
B) the expected rate of return equals or exceeds the required return.
C) the capital gains rate is less than the required return and no dividends are paid. D) the market price is greater than the justified price.
Q3) The rate of dividend growth can be estimated by multiplying the return on equity rate by the dividend payout ratio.
A)True
B)False
Q4) Explain how the time value of money concept is used in stock valuation.
Q5) How can you determine the current value of a non-dividend paying stock?
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Chapter 9: Market Efficiency, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) Technical analysts believe that some of the key elements of market behavior-called technical indicators-can provide valuable insights about the condition of the market.Briefly discuss each of the following indicators.
-Market volume
-Breadth of the market
-Short-interest
-Odd-lot trading
Q2) The weak form of the efficient market theory contends that A) past price performance is useless in predicting future price movements. B) past performance can help determine the general direction of future price movements.
C) any publicly available information is useless in predicting future price movements. D) price movements are not random but follow a general trend over a period of time.
Q3) A relatively high level of short sells is an indicator of a current bull market.
A)True B)False
Q4) Explain why technical analysts use charts so extensively.
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Chapter 10: Fixed-Income Securities
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Sample Questions
Q1) The Franklin Company issued a 6% bond three years ago at par value.The market interest rate on comparable bonds today is 5%.The Franklin Company bond currently pays ________ a year in interest and the bond sells at a ________.
A) $60; discount
B) $60; premium
C) $50; discount
D) $50; premium
Q2) One disadvantage of mortgage backed securities is their uncertain maturity date. A)True
B)False
Q3) One of the major problems associated with mortgage-backed securities is that A) the principal portion of each payment is considered taxable income.
B) they are refundable.
C) they are self-liquidating.
D) they are serial issues.
Q4) An increase in the market rate of return on an outstanding bond will
A) increase the coupon rate.
B) decrease the coupon rate.
C) increase the bond price.
D) decrease the bond price.
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Chapter 11: Bond Valuation
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Sample Questions
Q1) The price of a bond with an 8% coupon rate paid semi-annually and a par value of $1,000, and fifteen years to maturity is the present value of
A) 15 payments of $40 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
B) 15 payments of $80 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
C) 30 payments of $40 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
D) 30 payments of $80 at 1 year intervals plus $1,000 received at the end of the 30th year.
Q2) Which one of the following statements concerning interest rates is correct?
A) A decrease in the money supply will cause interest rates to decline.
B) A federal budget surplus will cause interest rates to decline.
C) Economic expansions will cause interest rates to decline.
D) Rising interest rates in foreign countries will cause U.S. interest rates to decline.
Q3) The risk-free rate of return considers the expected rate of inflation.
A)True B)False
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Page 13
Chapter 12: Mutual Funds: Professionally Managed Portfolios
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Sample Questions
Q1) Which one of the following statements concerning mutual funds is correct?
A) The selection of individual securities remains with the mutual fund investor.
B) Mutual funds were first created in the 1980s.
C) The mutual fund industry is the largest financial intermediary in the United States.
D) Mutual funds are generally highly concentrated portfolios.
Q2) Which of the following statements is(are)correct concerning hedge funds?
I.they are highly regulated.
II.they hedge all positions to limit risks.
III.management and other fees are extremely low compared to other types of funds.
IV.access is limited to institutions and high net worth or high income individuals.
A) I, II and III only
B) II and IV only
C) IV only
D) I, II, III, and, IV
Q3) Mutual funds are used extensively as retirement investments.
A)True
B)False
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Page 14
Chapter 13: Managing Your Own Portfolios
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Sample Questions
Q1) A rational investor will require the same after-tax return from a corporate security as from a government security.
A)True
B)False
Q2) The fixed-weightings approach to asset allocation
A) is based on an allocation of an equal percentage of the portfolio to each separate asset category.
B) requires periodic rebalancing of the portfolio to maintain the desired weights.
C) is based on periodic adjustments to category weights in response to market changes.
D) uses stock-index futures and bond futures in a market timing strategy.
Q3) Asset allocation should focus on
A) the investor's financial and family situation.
B) selection of individual securities within an asset class.
C) maximization of current income.
D) maximization of short-term profits.
Q4) Dollar-cost averaging plans and constant-dollar plans are both formula approaches to portfolio management.Briefly explain the two plans.
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Chapter 14: Options: Puts and Calls
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Sample Questions
Q1) Jason purchased a six-month put on ABC stock at a cost of $100.The strike price was $15.At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes.
A) $15
B) $16
C) $14
D) Cannot be determined from the information provided
Q2) Kyle believes the price of Ajax stock is about to decrease.If he wants to profit from the decline in price, he should ________ on Ajax stock.
A) buy a call
B) write a put
C) buy a put
D) sell a put
Q3) The party that accepts the legal obligation to stand behind the option is the buyer of the contract.
A)True
B)False
Q4) What is the difference between a naked call option and a covered call option? Which one is riskier and why?
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Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) Because a futures contract deals with very large trading units, even a modest price change in the price of the underlying commodity can have a large impact on the market value of the contract.
A)True
B)False
Q2) With futures contracts, the price at which the commodity must be delivered is A) set when the futures contract is sold.
B) set when the contract expires.
C) is equivalent to the strike price for an options contract.
D) changes frequently during the life of the contract.
Q3) Mr.Lecourt sells short 200,000 euros for $280,000.The exchange rate moves from $1.40 per euro to $1.47.If Mr.Lecourt covers his short at this point, he
A) loses $14,000
B) gains $14,000
C) loses $5,600
D) gains $5,600
Q4) All futures contracts are traded on a margin basis.
A)True
B)False
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