Financial Management Practice Exam
Course Introduction
Financial Management is a comprehensive course that explores the principles, techniques, and tools used by organizations to plan, analyze, and control their financial resources. Students will learn key concepts such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and capital structure. The course also examines working capital management, dividend policy, and financial planning in both domestic and international contexts. Emphasis is placed on practical application through case studies and problem-solving, enabling students to make informed financial decisions that enhance organizational value and sustainability.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Q1) Accounting-based measures of performance ____ subject to short-term manipulation by managers; cash flows ____ subject to short-term manipulation.
A) are, are not
B) are not, are
C) are, are also
D) are not, also are not
Answer: A
Q2) The success of a firm is linked to its stakeholders. This group includes:
A) community neighbors
B) suppliers
C) employees
D) all the above
Answer: D
Q3) The most widely accepted objective of the firm is to
A) minimize risk
B) maximize profits
C) maximize shareholder wealth
D) maximize earnings per share
Answer: C
Page 3
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) The main purpose of an economy's financial system is to facilitate the transfer of funds from
A) financial middlemen to financial intermediaries
B) surplus spending units to deficit spending units
C) primary claimholders to secondary claimholders
D) lenders to financial intermediaries
Answer: B
Q2) What are the differences between the primary and secondary markets?
Answer: The primary market allows the investor to purchase new securities. Net proceeds from such sales go to the issuing corporation.
The secondary market allows the investor to purchase securities that are already in circulation. These are purchased through an organized security exchange, for example NYSE, or in the over-the-counter market, and none of the proceeds go to the issuing corporation.
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Chapter 3: Evaluation of Financial Performance
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Q1) The following ratio(s) that would probably not be used to assess the profitability of a firm is:
A) return on stockholders' equity
B) return on total assets
C) times interest earned
D) both return on stockholders' equity and return on total assets
Answer: C
Q2) If a firm's price to earnings (P/E) ratio is 10,
A) it is not possible for it to be paying dividends also
B) its market to book ratio has to be at least 2.0
C) its net profit margin is positive
D) its return on stockholders' equity is negative
Answer: C
Q3) The type of ratio that indicates the firm's ability to provide adequate returns in the form of dividends and share price appreciation is:
A) Profitability ratios
B) Asset management ratios
C) Liquidity ratios
D) Financial leverage management ratios
Answer: A
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Chapter 4: Financial Planning and Forecasting
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Q1) Explain the cash flow generation process:
Q2) The financial plan that is a "blueprint" detailing where the firm wants to be at some future point in time is the:
A) Executive Manifest
B) Strategic Plan
C) FASB Plan
D) Operational plan
Q3) Last year Molex's net cash provided by operating activities was $14.1 million and its net cash used by investing activities was $20.7 million. If net cash provided by financing activities was $9.8 million, what was the net increase (or decrease) in cash and cash equivalents during the year? Molex started the year with $2.1 million in cash.
A) $44.6 million
B) $3.2 million
C) $25.0 million
D) $5.3 million
Q4) Why would a firm want to develop a cash budget since it is only a projection of cash inflows and outflows over some future period of time?
Q5) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Q1) The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments?
A) $130,872
B) $149,194
C) $142,710
D) $264,000
Q2) Why does an annuity due have a greater future value than a regular annuity - all things being equal?
Q3) If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years?
A) $909,090
B) $930,510
C) $783,879
D) $510,285
Q4) What is the difference between the nominal interest rate and the effective interest rate?
Q5) Explain a perpetuity and list some investment vehicles that can be perpetuities.
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Q1) The call feature of a long-term bond
A) is an optional retirement provision
B) states the call price
C) allows the issuer to replace a high coupon bond with one with a lower coupon bond
D) all the above are correct
Q2) The largest user of mortgage bonds is
A) credit unions.
B) commercial banks.
C) utility companies.
D) small companies.
Q3) WPI has a bond issue outstanding that has a coupon rate of 10%, and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semi-annually and has 10 years to mature?
A) $ 941
B) $1021
C) $1000
D) $ 885
Q4) Explain a sinking fund.
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) What is the current value of a share of Chyrox if its current dividend is $1.50 and dividends are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years for $72.
A) $44.31
B) $35.78
C) $39.63
D) $72.00
Q2) The common stock of Kute & Kuddly Kids Clothes, Inc. currently sells for $88.50 and its current (D<sub>0</sub>) dividend is $1.10. Determine the implied growth rate for Kute assuming that an investor's required rate of return is 14% and that earnings and dividends are expected to grow at a constant rate.
A) 13.9%
B) 12.3%
C) 13.8%
D) 12.6%
Q3) What are the advantages and disadvantages of common stock financing?
Q4) Why do closely held firms need to have an outside appraiser to determine their value? What are the reasons for valuation?
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Chapter 8: Analysis of Risk and Return
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Q1) Investors can obtain high returns in their investments if:
A) they use hedging techniques
B) they assume high risks
C) they invest only international securities
D) they invest in legal Ponzi type securities
Q2) The ability of an investor to buy and sell a company's securities quickly and without a significant loss of value is known as the
A) financial risk
B) marketability risk
C) business risk
D) security risk
Q3) Security A offers an expected return of 14% with a standard deviation of 8%. Security B offers an expected return of 11% with a standard deviation of 6%. If you wish to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of security A?
A) 55%
B) 60%
C) 65%
D) 45%
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Determine if this project is profitable under the following circumstances: A company is undertaking a new project. The specialized equipment that needs to be bought has an expense of $28,000. In addition, permits and licenses are required which will cost $1500. Employee training will be an additional $46,000 expenditure. To produce the merchandise, raw materials are required that will cost $48,000 and this project will generate cash flows of $25,000 per year for 10 years. The cost of capital for this project is 12%.
A) Yes, the project is acceptable with a net present value equaling about $17,756.
B) Yes, the project is acceptable with a net presernt value equaling about $48,257.
C) No, the project is not acceptable with a net present value equaling about -$15,275.
D) No, the project is not acceptable with a net present value equaling about -$18,000.
Q2) What is the marginal cost of capital and why does the MCC schedule increase as more funds are sought in the capital markets?
Q3) Why should sunk costs not be considered when evaluating a project?
Q4) List the steps that a firm uses in the capital budgeting process:
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11
Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Q1) Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics cost of capital is 14%?
A) $252,760
B) $110,840
C) $88,200
D) $47,570
Q2) Which of the following statements about comparing the techniques of net present value (npv) and internal rate of return (irr) is/are correct?
I. The net present value assumes that all cash flows are reinvested at the cost of capital and is therefore realistic.
II. The internal rate of return is stated as a percent and is therefore easy to communicate to decision-makers who may not understand the fine points of finance.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) In working with capital budgeting, what does a post-audit do?
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Chapter 11: Capital Budgeting and Risk
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Q1) A project has an expected NPV of $50,000 with a standard deviation of the NPV of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a net present value greater than $60,000?
A) 1915%
B) 69.15%
C) 0.13%
D) 30.85%
Q2) The basic capital budgeting decision models, that is, NPV and IRR, handle risk by A) ignoring it
B) assuming all cash flows are known with certainty
C) assuming all projects are of average risk and evaluating them based on expected values
D) using risk-adjusted discount rates to evaluate projects
Q3) What is the reason companies utilize the certainty equivalent approach in evaluating projects?
Q4) How can beta, a measure of systematic risk of a portfolio of securities, be used to judge the risk of a firm?
Q5) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital
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Q1) A firm has a beta of 1.2. The return in the market is 14% and the risk-free rate is 6%. The estimated cost of common stock equity is:
A) 6%
B) 7.2%
C) 15.6%
D) 14%
Q2) The optimal capital budget is indicated by the point at which the ____ and the ____ intersect.
A) depreciation schedule; investment opportunity schedule
B) investment opportunity curve; marginal cost of capital curve
C) investment opportunity curve; average cost of capital curve
D) efficient portfolio curve; marginal cost of capital curve
Q3) There are four major components that determine the risk premium. They include all the following except
A) interest rate risk
B) business risk
C) reinvestment rate risk
D) financial risk
Q4) How is the marginal cost of the various component capital sources determined?
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Chapter 13: Capital Structure Concepts
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Q1) Which of the following statements is true regarding the relationship between the firm's cost of debt and its capital structure (as measured by the debt ratio)?
A) The range of debt ratios where the cost of debt begins to increase rapidly varies by firm and industry, depending on the level of business risk.
B) The precise relationship between the cost of debt and the debt ratio is simple to determine.
C) The relationship is a saucer-shaped curve.
D) The relationship is determined by the static tradeoff theory.
Q2) When a corporation must get external financing, the first place to look for funds is with debt. There are various reasons for this preference. List the reasons why debt is generally issued first.
Q3) Modigliani and Miller show that the value of a firm is ____ capital structure given perfect capital markets and no corporate income taxes.
A) maximized by having no debt in the B) independent of C) maximized by having an optimal D) dependent on the
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Chapter 14: Capital Structure Management in Practice
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Q1) What type of security is used to purchase a target company in a leveraged buy-out?
A) common stock
B) dividends
C) debt
D) retained earnings
Q2) Dagger Company has a current capital structure consisting of $60 million in long-term debt with an interest rate of 9% and $60 million in common equity (12 million shares). The firm is considering an expansion plan costing $23 million. The expansion plan can be financed with additional long-term debt at a 12% interest rate or the sale of new common stock at $8 per share. The firm's marginal tax rate is 40%. Determine the indifference level of EBIT for the two financing plans.
A) -$30.24 million
B) $18.36 million
C) $30.24 million
D) $19.68 million
Q3) List the five steps developed to assist financial managers in making capital structure decisions.
Q4) In what way does management's willingness to assume risk impact the firm?
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Page 16
Chapter 15: Dividend Policy
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Q1) Restrictive covenants are contained in all of the following except
A) preferred stock agreements
B) lease contracts
C) bond indentures
D) agency restrictions
Q2) The record date in the normal dividend payment procedure is
A) the same day as the declaration date
B) the same day as the ex-dividend date
C) the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend
D) one day prior to the payment date
Q3) Which of the following would be considered an alternative dividend policy?
I. Passive residual approach
II. Increasing dollar dividend approach
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q4) Explain the "clientele effect".
Q5) What are the factors that determine the dividend policy of a firm?
Page 17
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Chapter 16: Working Capital Policy and Short-term Financing
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Q1) The firm's receivables conversion period (measured in days) is equal to its accounts receivable divided by its ____.
A) annual credit sales/365
B) annual credit sales
C) annual sales/365
D) none of the above
Q2) Linear Technology had sales (all on credit) of $36 million and a gross profit margin of 30% last year. If Linear Technology's inventory averaged $3.9 million, and its accounts receivable were $5.0 million, what was the length of its operating cycle?
A) 90.2 days
B) 128.9 days
C) 111.9 days
D) 107.2 days
Q3) Negotiated short-term credit sources are all of the following EXCEPT:
A) commerical paper
B) inventory loans
C) trade credit
D) bank credit
Q4) Explain trade credit.
18
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Liquid asset balances include all of the following except A) accounts receivable
B) checking account balances
C) marketable securities
D) currency on hand
Q2) Cash flows differ with respect to their degree of certainty. Which of the following can be forecasted the easiest?
A) Cash outflows
B) Current cash inflows
C) Seasonal cash requirements
D) Future cash inflows
Q3) ____ are short-term debt instruments issued as part of a commercial transaction, with payment guaranteed by a commercial bank.
A) Negotiable certificates of deposit
B) Commercial paper
C) Repurchase agreements
D) Bankers' acceptances
Q4) Banks use depository transfer checks to move surplus funds from bank accounts to its concentration bank account or accounts. Explain how this is done.
19
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Chapter 18: Management of Accounts Receivable and Inventories
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Q1) Wallace Company sells $73 million of its products to retailers on credit terms of "net 30". Its average collection period is 55 days. To speed up the collection of receivables, the company is considering changing its credit terms to "2/10, net 30". The company expects 40% of its customers to take the cash discount and its average collection period to decline to 35 days. Wallace's required pretax rate of return on receivables investments is 15%. Determine the net effect on Wallace's pretax profits of the change in credit terms. (Assume 365 days per year in any calculations.)
A) -$860,000
B) $600,000
C) $16,000
D) $584,000
Q2) Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit". Each of the following is one of the "five Cs" except A) capacity
B) cooperation
C) character
D) conditions
Q3) How can a company use its credit period to affect sales and inventory?
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Chapter 19: Lease and Intermediate-term Financing
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Q1) Unilog is considering leasing a computer from UniNet under a 6-year lease. The computer costs $200,000 and will be depreciated as a 5-year MACRS asset. The expected salvage value of the computer after 6 years is $20,000. UniNet's marginal tax rate is 35 percent and its average tax rate is 30%. UniNet requires a 13 percent after-tax rate of return on leases of this type. What annual, pretax, beginning-of-the-year lease payment must Unilog make to UniNet? (Problem requires MACRS depreciation tables.)
A) $48,786
B) $31,711
C) $50,500
D) $16,848
Q2) In a lease arrangement, the owner of the property is called the A) lessee
B) lessor
C) equity trustee
D) lender
Q3) The IRS has general rules pertaining to the tax status of true leases which allow the annual lease payments to be tax deductible. What are those rules?
Q4) Explain a leveraged lease.
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Chapter 20: Financing With Derivatives
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Q1) What is the difference between a conversion price and a conversion ratio?
Q2) The value of the right can be calculated under one of the following circumstances. A) using the Gordon model
B) trading ex-rights
C) market order
D) based on a margin account
Q3) Mills Trucking, Inc. has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature 20 years from today. Straight debt of equivalent risk is yielding 10% today. The company's common stock today is selling at $23 a share. Calculate the straight-bond value of the issue.
A) about $830
B) about $1,000
C) about $950
D) about $1,500
Q4) List some securities that have option features.
Q5) Why would a company issue convertible securities instead of straight bonds?
Q6) Which companies are the primary issuers of convertible securities and why do they do it?
Page 22
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Chapter 21: Risk Management
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Q1) Forward contracts are said to possess ____ risk.
A) business risk
B) financial risk
C) performance risk
D) spot risk
Q2) Which of the following statements about risk management strategies is/are correct?
I. It reduces the variability of a firm's expected cash flows.
II. It reduces the chance of catastrophic financial distress.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) Which of the following is the current price in a futures contract?
A) volatile price
B) spot price
C) short price
D) long price
Q4) What is marking-to-market and how is this process guaranteed?
Q5) List several reasons why a firm may choose to employ risk management techniques.
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Chapter 22: International Financial Management
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Q1) A parent company's foreign investment risk exposure depends on the foreign subsidiary's net ____ position.
A) cash
B) equity
C) present value
D) working capital
Q2) The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____ prevailing in the two countries.
A) inflation rates
B) interest rates
C) trade deficit rates
D) GNP growth rates
Q3) There are two methods used to forecast future exchange rates. What are they and how do companies use them to protect against risk?
Q4) How does a firm manage economic exposure due to changes in exchange rates?
Q5) Name the factors that affect exchange rates.
Q6) How do market forces support the relative purchasing power parity?
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Chapter 23: Corporate Restructuring
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Q1) The basic methods used in combining financial accounts in a merger include all of the following except the
A) goodwill consolidation method
B) purchase method
C) pooling of interests method
D) book value method
Q2) A firm is technically insolvent when: it is unable to meet it current obligations and:
A) the value of its assets exceeds the value of its liabilities.
B) the value of its assets is less than the value of its liabilities.
C) it files a bankruptcy petition.
D) it merges with another firm.
Q3) One reason for a company to spin-off a division is to:
A) consolidate expenses.
B) remove an underperforming unit.
C) create a better distribution unit.
D) achieve synergy.
Q4) What are some informal alternatives for salvaging a failing business?
Q5) Explain the motivation for a company to divest through a spin-off or equity carve-out.
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Chapter 24: Continuous Compounding and Discounting
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Q1) City Bank offers a 7 year CD with a nominal rate of interest of 7.0%. If compounding occurs continuously, what is the effective annual rate?
A) 7.25%
B) 6.77%
C) 7.32%
D) 7.00%
Q2) Jack invested $25,000 into an account paying 6% compounded continuously. In five years how much money will he have?
A) $92,190.45
B) $215,905.42
C) $65,871.15
D) $33,746.47
Q3) Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.
A) $6,886
B) $3,631
C) $4,616
D) None of the above
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Q1) What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data?
Q2) When two or more mutually exclusive alternative investments have ____, neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time.
A) unequal lives
B) unequal net cash flows
C) unequal net investments
D) a and b
Q3) Quorex is evaluating two mutually exclusive projects. Project A has a net investment of $48,000 and net cash flows over a six year period of $12,500 per year. Project B also has a net investment of $48,000 but its net cash flows of $8,640 per year will occur over a 12 year period. If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen and what is its NPV?
A) A, $862
B) A, $1,800
C) B, $2,475
D) B, $902
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Chapter 26: Breakeven Analysis
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Q1) The contribution margin per unit is the difference between:
A) the selling price per unit and fixed costs
B) the fixed costs and the variable costs
C) the variable cost per unit and the selling price per unit
D) the variable costs and the number of units sold
Q2) Bouncy Bungee Rubber Band Company is trying to determine its probability of incurring a loss. Its fixed costs are $2,760,000 per year, it sells its rubber bands for $3.75 per pack and the variable cost of these packs is $.75. They estimate they will sell 1,000,000 packs this year and they have a standard deviation of 40,000 units. (A normal distribution table - Table V - must accompany this problem).
A) 3.22%
B) 6.71%
C) 5.48%
D) 2.87%
Q3) What are the possible uses for breakeven analysis?
Q4) How can a firm have more than one breakeven output point?
Q5) List the limitations of breakeven analysis:
Q6) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
Page 28
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Chapter 27: Bond Refunding Analysis
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Q1) Bond ____ occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.
A) redemption
B) retirement
C) recall
D) refunding
Q2) In bond refunding analysis the ____ is believed to be the most appropriate discount rate.
A) after-tax cost of new debt
B) firm's marginal cost of capital
C) weighted average cost of capital
D) both b and c
Q3) In a bond refunding analysis, the principal benefit, or cash inflow, is the present value of the
A) pretax interest savings over the life of the issue
B) aftertax flotation cost savings
C) aftertax interest savings over the life of the issue
D) aftertax call premium
Q4) Why is the after-tax cost of debt used in bond refunding analysis?
Q5) Why would a corporation consider bond refunding?
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Chapter 28: Taxes
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Sample Questions
Q1) ____ received by corporations are normally entitled to a 70 percent exclusion from federal income taxes.
A) Capital gains income
B) Dividend income
C) Loss carrybacks and carryforwards
D) none of the above
Q2) For most large U.S. corporations, the maximum capital gain tax rate is
A) 14%
B) 35%
C) 50%
D) 28%
Q3) Corporate capital gains income is currently taxed at ____ ordinary income.
A) 80 percent of the marginal tax rate on
B) the same marginal rate as
C) 50 percent of the marginal tax rate on
D) none of the above
Q4) Explain the difference between average tax rate and marginal tax rate.
Q5) How does a tax loss affect a corporation as it applies to past and future income?
Q6) How are dividends received by a corporation treated for tax purposes?
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