Financial Management Practice Exam
Course Introduction
Financial Management is a foundational course that explores the key principles and practices involved in managing an organizations financial resources. Students will learn about financial analysis, planning, and control, with an emphasis on understanding financial statements, budgeting, capital structure, and investment decision-making. The course covers concepts such as risk and return, time value of money, working capital management, and methods for financing, enabling students to make informed financial decisions that support organizational goals.
Recommended Textbook
Finance Applications and Theory 3rd Edition by Marcia Millon Cornett
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which of these are NOT basic approaches to minimizing the agency problem?
A)Ignore the conflict of interest
B)Monitor managers' actions
C)Align managers' personal interest with those of the owners by making the managers owners
D)All of these are basic approaches to minimizing the agency problem.
Answer: D
Q2) Methods to minimize agency problem include all EXCEPT:
A)offer the managers an equity stake in the firm.
B)award the CEO stock options.
C)allow the CEO to purchase stock via an employee stock option plan.
D)allow the CEO to purchase bonds via an employee bond option plan.
Answer: D
Q3) The financial crisis that started in 2006 was magnified by which of the following?
A)Public concern over the war in Afghanistan
B)Consistently increasing oil and gas prices
C)Ethical issues affecting high value investment
D)Mortgage lenders securitizing large quantities of their loans
Answer: D
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Statement of Cash Flows Café Creations Inc.has net cash flow from financing activities for the last year of $25 million.The company paid $15 million in dividends last year.During the year,the change in notes payable on the balance sheet was a decrease of $40 million,and change in common and preferred stock was an increase of $50 million.The end of year balance for long-term debt was $40 million.What was their beginning of year balance for long-term debt?
A)$10 million
B)$20 million
C)$30 million
D)$40 million
Answer: A
Q2) When a firm alters its capital structure to include more or less debt (and,in turn,less or more equity),it impacts which of the following?
A)The residual cash flows available for stock holders
B)The number of shares of stock outstanding
C)The earnings per share (EPS)
D)All of the choices
Answer: D
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Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Which of the following statements is correct?
A)If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity.
B)An extremely low average collection period will maximize net income.
C)In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible.
D)All of these statements are correct.
Answer: A
Q2) A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2.What is the firm's ROA and ROE?
A)ROA = 6.6 percent; ROE = 14.52 percent
B)ROA = 7.2 percent; ROE = 15.84 percent
C)ROA = 9.5 percent; ROE = 20.9 percent
D)ROA = 8.1 percent; ROE = 17.82 percent
Answer: A
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Solving for Time How many years will it take $200 to grow to $250 with an annual interest rate of 4 percent?
A)1.24 years
B)5.69 years
C)6.25 years
D)18.00 years
Q2) One Year Future Value What is the future value of $700 deposited for one year earning 4 percent interest rate annually?
A)$28
B)$700
C)$728
D)$1,428
Q3) Solving for Rates What annual rate of return is implied on a $1,000 loan taken next year when $1,500 must be repaid in year 5?
A)8.45 percent
B)10.00 percent
C)10.67 percent
D)12.50 percent
Q4) How does compounding help build wealth (or increase debt)over time?
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Chapter 5: Time Value of Money
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Q1) Investing for Retirement Monica has decided that she wants to build enough retirement wealth that,if invested at 7 percent per year,will provide her with $3,000 monthly income for 30 years.To date,she has saved nothing,but she still has 20 years until she retires.How much money does she need to contribute per month to reach her goal?
A)$671.78
B)$865.62
C)$3,000.00
D)$7,025.77
Q2) Future Value Compute the future value in year 4 of a $500 deposit in year 1 and another $1,000 deposit at the end of year 3 using a 5 percent interest rate.
A)$1,625.00
B)$1,628.81
C)$1,800.00
D)$1,823.26
Q3) Loan Payments You wish to buy a $30,000 car.The dealer offers you a 4-year loan with a 6 percent APR.What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be?
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Chapter 7: Valuing Bonds
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Q1) What does a call provision allow the issuer to do,and why would they do it?
Q2) Explain how investors can assess bond market performance.
Q3) Yields of a Bond A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75.The bond can be called in four years.The call premium is one year of coupon payments.What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)
A)4.5 percent
B)4.78 percent
C)7.13 percent
D)14.48 percent
Q4) Bond Prices and Interest Rate Changes A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity.You believe that in one year,the yield to maturity will be 6.25 percent.What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)
A)$19.67
B)$21.55
C)$25.00
D)$41.22
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Chapter 8: Valuing Stockspart
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Sample Questions
Q1) JPM has earnings per share of $3.75 and P/E of 47.What is the stock price?
A)$174.08
B)$176.25
C)$185.95
D)$112.98
Q2) Value of Future Cash Flows A firm recently paid a $1.00 annual dividend.The dividend is expected to increase by 10 percent in each of the next four years.In the fourth year,the stock price is expected to be $100.If the required rate for this stock is 14 percent,what is its value?
A)$25.00
B)$36.60
C)$62.87
D)$72.30
Q3) GEN has 3 million shares outstanding and a P/E ratio of 15.Its earnings per share is $3.00.What is GEN's market capitalization?
A)$45,000,000
B)$135,000,000
C)$112,000,000
D)$9,000,000
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Page 9
Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Why is the percentage return a more useful measure than the dollar return?
Q2) Which of the following is correct?
A)Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market.
B)Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation.
C)Your optimal portfolio is an efficient portfolio with your desired risk level.
D)All of these statements are correct.
Q3) Which statement is true?
A)The larger the standard deviation, the lower the total risk.
B)The larger the standard deviation, the higher the total risk.
C)The larger the standard deviation, the more portfolio risk.
D)The standard deviation is not an indication of total risk.
Q4) Explain how to compute a portfolio's return.
Q5) You are a risk-averse investor with a low-risk portfolio of bonds.How is it possible that adding some stocks (which are riskier than bonds)to the portfolio can lower the total risk of the portfolio?
Q6) What does diversification do to the risk and return characteristics of a portfolio?
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Chapter 10: Estimating Risk and Return
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Q1) Required Return If the risk-free rate is 10 percent and the market risk premium is 4 percent,what is the required return for the market?
A)4 percent
B)7 percent
C)10 percent
D)14 percent
Q2) The study of the cognitive processes and biases associated with making financial and economic decisions is known as:
A)asset pricing model.
B)behavioral finance.
C)efficient market hypothesis.
D)stock market bubble.
Q3) Stock Market Bubble If the NASDAQ stock market bubble peaked at 3,750,and two and a half years later it had fallen to 2,200,what would be the percentage decline?
A)-15.87 percent
B)-17.05 percent
C)-41.33 percent
D)-58.67 percent
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11
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Marme Inc.has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend.What would be Marme's component cost of preferred stock?
A)11.00 percent
B)8.03 percent
C)8.17 percent
D)10.16 percent
Q2) Which of the following statements is correct?
A)The WACC is a measure of the before-tax cost of capital.
B)The WACC measures the marginal cost of capital.
C)It is common that the after-tax cost of debt exceeds the cost of equity.
D)None of these statements is correct.
Q3) A firm uses only debt and equity in its capital structure.The firm's weight of equity is 70 percent.The firm's cost of equity is 13 percent and it has a tax rate of 30 percent.If the firm's WACC is 11 percent,what is the firm's before-tax cost of debt?
A)7.17 percent
B)9.05 percent
C)6.38 percent
D)5.36 percent
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Page 12
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) You are evaluating two different cookie-baking ovens.The Pillsbury 707 costs $25,000,has a six-year life,and has an annual OCF (after tax)of -$5,000 per year.The Keebler CookieMunster costs $40,000,has a seven-year life,and has an annual OCF (after tax)of -$500 per year.If your discount rate is 10 percent,what is each machine's EAC?
A)Pillsbury: -$11,594.94; Keebler: $8,716.22
B)Pillsbury: -$11,594.94; Keebler: -$9,145.62
C)Pillsbury: -$10,740.18; Keebler: -$9,145.62
D)Pillsbury: -$10,740.18; Keebler: -$8,716.22
Q2) Your firm needs a machine which costs $90,000,and requires $30,000 in maintenance for each year of its five-year life.After five years,this machine will be replaced.The machine falls into the MACRS five-year class life category.Assume a tax rate of 35 percent and a discount rate of 13 percent.What is the depreciation tax shield for this project in year 5?
A)$471.74
B)$1,347.84
C)$3,628.80
D)$6,739.20
Q3) Identify which cash flows we can incrementally apply to a project and which ones we cannot.
Page 13
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) A company is considering two mutually exclusive projects,A and B)Project A requires an initial investment of $100, followed by cash flows of $95, $20, and $5.Project B requires an initial investment of $100, followed by cash flows of $0, $20, and $130.What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.
A)15.24 percent
B)15.96 percent
C)15.42 percent
Q2) Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?
A)Discounted payback
B)Net present value
C)Internal rate of return
D)Profitability index
Q3) The least-used capital budgeting technique in industry is:
A)NPV.
B)IRR.
C)P\payback.
D)MIRR.
Page 14
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Chapter 14: Working Capital and Policies
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Q1) If a firm is going to take a loan with a bank that has a compensating balance requirement,how does that affect the amount of money the firm must borrow?
Q2) Suppose your firm is seeking a seven-year,amortizing $400,000 loan with annual payments and your bank is offering you the choice between a $410,000 loan with a $10,000 compensating balance and a $400,000 loan without a compensating balance.If the interest rate on the $400,000 loan is 9.5 percent,how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?
A)The rate would have to be lower than 8.76 percent.
B)The rate would have to be lower than 8.29 percent.
C)The rate would have to be lower than 8.14 percent.
D)The rate would have to be lower than 7.99 percent.
Q3) PNB Cos.has sales of $250,000 and cost of goods sold of $120,000.The firm had a beginning inventory of $19,000 and an ending inventory of $13,000.What is the length of the days' sales in inventory?
A)27.74 days
B)57.79 days
C)18.98 days
D)39.54 days
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Chapter 15: Financial Planning and Forecasting
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Q1) Which of the following is the amount of external financing a firm must seek in order to change the asset base as necessary to support a different level of sales?
A)Additional funds needed
B)Capital intensity ratio
C)Current ratio
D)Spontaneous assets
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 25 percent increase in sales.The firm has $1.25 million in accounts payable and $1,500,000 in long-term debt (bonds).The firm currently pays out 20 percent of its net income to shareholders.Assuming that all assets and spontaneous liabilities are expected to grow with sales,how much in additional funds will Goldilochs need from external sources to fund the expected growth?
A)$902,700
B)$812,500
C)$821,000
D)$746,600
Q3) Is forecasting more important for small firms or large firms? Why?
Q4) Explain the process of financial planning process of a firm.
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Chapter 16: Assessing Long-Term Debt, equity, and Capital Structure
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Q1) A firm faces a 30 percent tax rate and has $500m in assets,currently financed entirely with equity.Equity is worth $100 per share,and book value of equity is equal to market value of equity.Also,let's assume that the firm's expected EBIT is $70m.The firm is considering switching to an 18 percent debt capital structure,and has determined that they would have to pay an 8 percent yield on perpetual debt.How much will ROE change if they switch to the proposed capital structure?
A)There will be no change in the firm's ROE.
B)The ROE will decrease by 0.52 percent.
C)The ROE will increase by 1.58 percent.
D)The ROE will increase by 0.92 percent.
Q2) Which of the following is a feature of the "perfect world" in M&M's theorem for optimal capital structure?
A)Income taxes
B)The chance of bankruptcy
C)Perfectly efficient markets
D)Asymmetric information sets for all participants
Q3) Explain how Irving Fisher's separation principle addresses the question of what will happen to a firm's WACC in M&Ms perfect world as the capital structure changes.
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Chapter 17: Sharing Firm Wealth: Dividends, share
Repurchases and Other Payouts
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Q1) Note the advantages and disadvantages of a firm's stock repurchases.
Q2) Which of these is the idea that it does not matter whether a firm pays dividends or not as derived from a Modigliani and Miller Theorem?
A)Dividend indifference theory
B)Dividend irrelevance theorem
C)Shareholder maximization theorem
D)Shareholder rationalization theorem
Q3) Suppose a firm has a retention ratio of 35 percent,net income of $35 million,and 10 million shares outstanding.What would be the dividend per share paid out on the firm's stock?
A)$1.225
B)$2.275
C)$3.50
D)$7.00
Q4) Which of the following is described as a firm buying back shares of its own stock?
A)Ex-dividend
B)Ex-stock purchase
C)Repurchase or buyback
D)Repossession
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Chapter 18: Issuing Capital and the Investment Banking Process
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Q1) Calculating Costs of Issuing Stock TV Technology Corp.recently went public with an initial public offering of 1.5 million shares of stock.The underwriter used a firm commitment offering in which the net proceeds was $24.50 per share and the underwriter's spread was 5 percent of the gross proceeds.TV Technology also paid legal and other administrative costs of $300,000 for the IPO.Calculate the gross proceeds per share received by TV Technology from the sale of the 1.5 million shares of stock.
A)$24.50
B)$24.70
C)$25.79
D)$26.00
Q2) Calculating Costs of Issuing Stock Paige's Purses,Inc.,needs to raise $25 million to finance plant expansion.In discussions with its investment bank,Paige's Purses learns that the bankers recommend an offer price (or gross proceeds)of $50 per share and Paige's Purses will receive $45 per share.What is the underwriter's spread on the issue?
A)$5
B)$45
C)$50
D)$0
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Chapter 19: International Corporate Finance
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Q1) 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
Q2) If the spot rate between the U.S.dollar and the Mexican peso is $1 = 2.45 peso and the 3-month forward rate is $1 = 2.05 pesos,is the forward peso selling at a discount or a premium?
A)Discount
B)Premium
C)Unable to determine with the cross-rates
Q3) If fewer dollars will buy a unit of foreign currency,then the dollar is:
A)strengthening.
B)weakening.
C)violating the law of purchasing power parity.
D)not in equilibrium.
Q4) What is meant by hedging exchange rate risk and what are some ways it is done?
Q5) What are the advantages of borrowing money in the country you plan to invest in?
Page 20
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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 = 0.35,X<sub>2</sub> = Retained earnings/Total assets = 0.50,X<sub>3</sub> = Earnings before interest and taxes/Total assets = 0.60,X<sub>4</sub> = Market value of equity/Book value of long-term debt = 1.50,X<sub>5</sub> = Sales/Total assets ratio = 3.65.Calculate the Altman's Z-score for this firm.
A)7.65
B)1.54
C)6.60
D)1.32
Q2) Which of the following is a poor justification for a merger?
A)Tax considerations
B)Lowering cost of capital
C)Reducing costs
D)Increasing the size of the firm
Q3) Which of the following is defined as the purchase of one firm by another firm?
A)Merger
B)Synergy
C)Acquisition
D)Assignment
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