Financial Management Practice
Questions
Course Introduction
Financial Management is a comprehensive course that explores the fundamental principles and practices involved in managing an organizations financial resources. The curriculum covers key topics such as financial analysis, planning and forecasting, capital structure, working capital management, investment decision-making, and risk assessment. Students will learn to interpret financial statements, assess the cost of capital, evaluate investment opportunities, and understand the implications of various financing options. Through case studies and real-world examples, this course equips learners with the analytical tools and strategic mindset necessary for effective financial decision-making in a dynamic business environment.
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CFIN5 5th edition by Scott Besley
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.
A) keep confidential the procedures used to construct and report financial statements.
B) certify financial reports that are submitted to the Securities and Exchange Commission.
C) pursue interests that result in large gains for them and large losses for stockholders
D) oversee the corporation's audit and attest the audit report
E) render an unbiased (independent) opinion concerning the firm's financial statements
Answer: B
Q2) In a competitive marketplace "good ethics" is a wonderful idea but an impractical standard. There are simply too few benefits to be gained from maintaining high business ethics.
A)True
B)False
Answer: False
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Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following ratios shows the relationship between a firm's cash and other current assets, and its current liabilities?
A) Asset management ratios
B) Liquidity ratios
C) Debt management ratios
D) Profitability ratios
E) Market value ratios
Answer: B
Q2) Bicksler Corporation has a current ratio of 2.0 on 21st July. On 22nd July, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?
A) The current ratio will increase.
B) The current ratio will decrease.
C) The current ratio will become equal to its quick ratio.
D) The quick ratio will become more than its current ratio.
E) The current ratio will remain the same.
Answer: B
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) A stock with a dual listing is _____.
A) registered to be traded in more than one money market
B) registered to be traded in the money market as well as the capital market
C) registered to be traded in the debt market and the stock market
D) registered to be traded in more than one capital market
E) registered to be traded in the primary market as well as the secondary market
Answer: D
Q2) A money market is the market for trading in securities with maturities over one year and includes such financial assets as stocks and long-term corporate bonds.
A)True
B)False
Answer: False
Q3) Unlike physical asset markets, which deal with products such as wheat, autos, real estate, and machinery, financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows generated by such assets.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)
A) Future value = Present value × (1 + r)n
B) Future value = Present value + (1 + r)n
C) Future value = Present value - (1 + r)n
D) Future value = Present value / (1 + r)n
E) Future value = Present value / ((1 + r) × n)
Q2) An annuity with payments that occur at the beginning of each period is known as a
A) deferred annuity
B) ordinary annuity
C) immediate annuity
D) annuity due
E) discounted annuity
Q3) Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.
A)True
B)False
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6
Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) If a stock pays a dividend of $10 and the investors need 8% return on their investment, then the investors should pay _____ for the stock.
A) $150
B) $200
C) $350
D) $125
E) $75
Q2) In general, when rates in the financial markets increase, the prices (values) of financial assets decrease.
A)True
B)False
Q3) A foreign trade deficit occurs when a country's:
A) imports are greater than its exports.
B) tax revenue is greater than its expenditure.
C) savings rate is higher than its borrowing rate.
D) purchase of Treasury securities is more than sale of Treasury securities.
E) cash reserves are higher than the expenses.
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Chapter 6: Bonds Debtcharacteristics and Valuation
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Sample Questions
Q1) A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. The bond's yield to maturity is: (Round the answer to two decimal places.)
A) 6.05%.
B) 10.00%.
C) 10.06%.
D) 8.59%.
E) 11.26%.
Q2) A sinking fund call:
A) requires the company to pay a penalty to investors.
B) does not require the company to pay a call premium.
C) requires the company to redeem bonds at market price.
D) does not require the company to pay a small percentage of the issue every year.
E) requires the company to claim back all the interest payments from the bondholders.
Q3) A bond's value will increase with increases in interest rate over time.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) What does a P/E ratio of 10 indicate?
A) It would take 10 years for an investor to recover his or her initial investment.
B) The firm will pay a dividend of $10 per share.
C) The value of the stock will be 10 times the initial investment at the time of maturity.
D) A stock's value will increase by 10 percent every year.
E) An investor would receive 10 percent of the total earnings of the firm, at the time of liquidation.
Q2) The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock?
A) $38.50
B) $40.00
C) $45.69
D) $44.00
E) $50.00
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9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Stock A has a beta ( ) equal to 2.1 and Stock B has a beta equal to 0.7. Based on this information, according to the capital asset pricing model (CAPM), which of the following statements is correct?
A) The required rate of return for Stock A, rA, should be 2.1 times the required rate of return for Stock B, rB.
B) The risk premium associated with Stock A, RPA, should be 2.1 times the risk premium associated with Stock B, RPB.
C) The required rate of return for Stock A, rA, should be three times the required rate of return for Stock B, rB.
D) The risk premium associated with Stock A, RPA, should be three times the risk premium associated with Stock B, RPB.
E) The required rate of return for Stock A, rA, should be three times the risk premium associated with Stock A, RPA
Q2) Systematic risk is diversifiable, so it is an investment's relevant risk. Unsystematic risk is nondiversifiable risk and therefore not relevant.
A)True B)False
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Page 10
Chapter 9: Capital Budgeting Techniques
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Q1) Which of the following statements is true of a capital budgeting project with negative net present value (NPV)?
A) The project's internal rate of return is also negative.
B) The project's discounted payback period is greater than its economic life.
C) A firm should invest in a project with negative NPV if the initial investment outlay is low.
D) The project's traditional payback period is greater than the firm's expected payback period.
E) The project's internal rate of return is higher than the discount rate used for NPV analysis.
Q2) Which of the following statements is true of the payback period method of capital budgeting?
A) It is the simplest and oldest formal model to evaluate capital budgeting projects.
B) It directly accounts for the time value of money.
C) It considers the discounted value of cash flows beyond the payback period.
D) It always results in maximizing the value of the firm.
E) It incorporates risk into the discount rate used to solve the payback period.
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Page 11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) Investing in foreign subsidiaries can be less risky when:
A) laws to repatriate earnings are complex.
B) the host country has higher tax rates.
C) the host country is politically unstable.
D) the exchange rates are volatile.
E) there is international diversification.
Q2) Which of the following rules is essential for successful cash flow estimates, and ultimately, to successful capital budgeting?
A) The return on invested capital is the only relevant cash flow.
B) Only incremental cash flows are relevant to the accept/reject decision.
C) Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.
D) Inflation is considered while estimating incremental cash flows.
E) Shipping and installation costs are included in cash flow estimation.
Q3) If an asset being considered for acquisition has a beta of zero, its expected return will be equal to the risk-free rate.
A)True
B)False
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) As per the Bond-Yield-Plus-Risk-Premium Approach, analysts estimate the cost of common equity by adding a risk premium of 3 to 5 percentage points to:
A) the cost of preferred stock of the firm.
B) the risk free rate of the common equity of the firm.
C) the interest rate on the long term debt of the firm.
D) the return on the firm's investment in municipal bonds.
E) the growth rate of the firm.
Q2) Super Solutions Inc. is a constant growth firm, which just paid a dividend of $3.00, sells for $33.00 per share, and has a growth rate of 6 percent. Which of the following is the cost of retained earnings using the discounted cash flow (DCF) approach? (Round off the answer to two decimal places.)
A) 12.55 percent
B) 15.64 percent
C) 16.25 percent
D) 13.35 percent
E) 12.40 percent
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Chapter 12: Capital Structure
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Sample Questions
Q1) The fact that interest is tax-deductible makes corporate debt less expensive than common stock or preferred stock.
A)True
B)False
Q2) If a firm with favorable prospects sells new shares, _____.
A) the debt/assets ratio of the firm will increase
B) the marginal bankruptcy-related costs of the firm will increase
C) the retained earnings of the firm will decrease
D) the tax payable by the firm will decrease
E) the value of the firm's stock will decrease.
Q3) According to the signaling theory, which of the following is considered a signal from an investor's point of view?
A) A small company raising any required new capital by issue of new shares
B) A mature company raising any required new capital by issue of new shares
C) A small company maintaining a reserve borrowing capacity
D) A mature company maintaining a reserve borrowing capacity
E) A mature company raising any required new capital using debt beyond the normal target capital structure
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) Which of the following policies represents a compromise between a stable, predictable dividend and a constant payout ratio?
A) The Free cash flow policy
B) The Residual dividend policy
C) The Dividend reinvestment policy
D) The Constant payout ratio policy
E) The Low regular dividend plus extras policy
Q2) Firms using the constant payout ratio dividend policy offer to reinvest dividends in the stocks of the dividend-paying firm.
A)True
B)False
Q3) Firms following the constant payout ratio dividend policy:
A) will have a stable dividend payment when earnings fluctuate.
B) will have a fluctuating dividend payment when earnings are stable.
C) will have a higher cost of equity when earnings are stable compared to other similar firms.
D) will have a lower cost of equity when earnings are stable compared to other similar firms.
E) will have a fluctuating dividend payment when earnings fluctuate.
Page 15
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) Gale Corporation recently issued 270-day commercial paper with a face value of $100,000 and a simple interest rate of 11 percent per annum. Assuming there are 360 days in a year, what is the commercial paper's annual percentage rate (APR)? (Round your answer to two decimal places.)
A) 11.99%
B) 12.25%
C) 11.72%
D) 12.51%
E) 13.02%
Q2) The maturity matching approach calls for matching the maturities of:
A) long-term liabilities and equity.
B) long-term liabilities and short-term liabilities.
C) long-term assets and short-term assets.
D) assets and equity.
E) assets and liabilities.
Q3) Accruals are generally considered free debt in the sense that no explicit interest is paid on funds raised through them.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) Which of the following statements is true about the cash management of multinational companies?
A) Multinational companies safeguard their foreign operations through quotas.
B) Multinational companies do not use lock box systems due to longer distances.
C) Multinational companies prefer keeping cash idle.
D) Multinational companies try to slow down collections and speed up disbursements where possible.
E) Multinational companies face restrictions in transfers of funds from foreign governments.
Q2) What type of system allows a customer's bank to periodically transfer funds from its account to a selling firm's bank account for payment of bills?
A) Disbursement agreement
B) Preauthorized debit system
C) Lockbox agreement
D) Concentration banking system
E) Zero-balance account
Q3) A firm should adopt a new credit policy if it reduces the value of the firm.
A)True
B)False
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Page 17
Chapter 16: Financial Planning and Control
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Sample Questions
Q1) Which of the following is an effect of an over optimistic sales forecast?
A) High inventory turnover ratios
B) High costs for depreciation
C) Low costs for storage
D) High rates of return on equity
E) Low levels of plant and equipment
Q2) Everything else equal, a firm can reduce its operating breakeven point by:
A) increasing its fixed costs.
B) decreasing the selling price of the product that is sold.
C) increasing the contribution margin.
D) increasing the variable cost per unit.
E) decreasing the earnings per share.
Q3) Excess capacity means more external financing is required to support increases in operations than would be needed if a firm previously operated at full capacity.
A)True
B)False
Q4) Better management of inventory results in a more frequent turnover of products.
A)True
B)False
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