Financial Management
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Course Introduction
Financial Management is a foundational course that introduces students to the core concepts, principles, and tools used in the effective management of financial resources within an organization. Topics covered include time value of money, risk and return, capital budgeting, financial analysis, working capital management, cost of capital, and capital structure. The course emphasizes the decision-making process of financial managers in maximizing firm value, with applications in both personal and corporate finance. Students will engage in case studies, real-world problem solving, and learn to utilize financial information to support strategic business decisions.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.
B) In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.
C) A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
D) Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.
E) A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.
Answer: D
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3
Chapter 2: Financial Statements, cash Flow, and Taxes
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Sample Questions
Q1) Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year,even though the cash on its balance sheet increased?
A) The company repurchased 20% of its common stock.
B) The company sold a new issue of bonds.
C) The company made a large investment in new plant and equipment.
D) The company paid a large dividend.
E) The company had high amortization expenses.
Answer: B
Q2) The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.
A)True
B)False
Answer: True
Q3) Total net operating capital is equal to net fixed assets. A)True
B)False
Answer: False
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4
Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000,and it had 225,000 shares outstanding.What dividend per share should it declare?
A) $2.14
B) $2.26
C) $2.38
D) $2.50
E) $2.63
Answer: D
Q2) Considered alone,which of the following would increase a company's current ratio?
A) An increase in accounts payable.
B) An increase in net fixed assets.
C) An increase in accrued liabilities.
D) An increase in notes payable.
E) An increase in accounts receivable.
Answer: E
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Chapter 4: Time Value of Money
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Sample Questions
Q1) You have purchased a U.S.Treasury bond for $3,000.No payments will be made until the bond matures 10 years from now,at which time it will be redeemed for $5,000.What interest rate will you earn on this bond?
A) 3.82%
B) 4.25%
C) 4.72%
D) 5.24%
E) 5.77%
Q2) Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)
A)True
B)False
Q3) Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.
A)True
B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?
A) $923.22
B) $946.30
C) $969.96
D) $994.21
E) $1,019.06
Q2) For bonds,price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
A)True
B)False
Q3) Which of the following bonds has the greatest interest rate price risk?
A) A 10-year, $1,000 face value, zero coupon bond.
B) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C) All 10-year bonds have the same price risk since they have the same maturity.
D) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
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Page 7
Chapter 6: Risk and Return
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Sample Questions
Q1) Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35.What would the portfolio's new beta be?
A) 1.17
B) 1.23
C) 1.29
D) 1.36
E) 1.43
Q2) The CAPM is built on historic conditions,although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data,they are not subject to changes in future volatility.This is one of the strengths of the CAPM.
A)True
B)False
Q3) A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.
A)True
B)False
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Page 8
Chapter 7: Valuation of Stocks and Corporations
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Q1) Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? \(\text {\underline{ A} }\) \(\text {\underline{ B} }\) \(\begin{array}{lcc}
\text { Price } & \$ 25 & \$ 40 \\
\text { Expected growth } & 7 \% & 9 \% \\
\text { Expected return } & 10 \% & 12 \% \end{array}\)
A) The two stocks could not be in equilibrium with the numbers given in the question.
B) A's expected dividend is $0.50.
C) B's expected dividend is $0.75.
D) A's expected dividend is $0.75 and B's expected dividend is $1.20.
E) The two stocks should have the same expected dividend.
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9
Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.
A)True
B)False
Q2) Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45,what would your pre-tax net profit be?
A) -$3.10
B) $16.90
C) $17.75
D) $22.50
E) $25.60
Q3) If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
B) The cost of new equity (r<sub>e</sub>) could possibly be lower than the cost of reinvested earnings (r<sub>s</sub>) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
C) A firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.
D) The component cost of preferred stock is expressed as r<sub>p</sub>(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
E) In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.
Q2) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Page 11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Corner Jewelers,Inc.recently analyzed the project whose cash flows are shown below.However,before the company decided to accept or reject the project,the Federal Reserve changed interest rates and therefore the firm's WACC.The Fed's action did not affect the forecasted cash flows.By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's expected NPV can be negative,in which case it should be rejected.
\[\begin{array} { l c c c c }
\text { Old WACC: } & \text { 8.00\% } & \text { New WACC: } & 11.25 \% \\
\text { Year } & 0 & 1 & 2 & 3 \\
\text { Cash flows } & - \$1,000 & \$ 410 & \$ 410 & \$ 410 \end{array}\]
A) -$59.03
B) -$56.08
C) -$53.27
D) -$50.61
E) -$48.08
Q2) Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
Page 12
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Which of the following statements is CORRECT?
A) An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase.
B) The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
C) Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
D) Identifying an externality can never lead to an increase in the calculated NPV.
E) An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
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13
Chapter 12: Corporate Valuation and Financial Planning
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Sample Questions
Q1) The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.
A)True
B)False
Q2) Two firms with identical capital intensity ratios are generating the same amount of sales.However,Firm A is operating at full capacity,while Firm B is operating below capacity.If the two firms expect the same growth in sales during the next period,then Firm A is likely to need more additional funds than Firm B,other things held constant.
A)True
B)False
Q3) Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital.Consequently,the firm should make arrangements with its suppliers to use as much of this credit as possible.
A)True
B)False
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14
Chapter 13: Agency Conflicts and Corporate Governance
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Sample Questions
Q1) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q2) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Last week,Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split,its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant,what is the best estimate of the stock's post-split price?
A) $50.00
B) $52.50
C) $55.13
D) $57.88
E) $60.78
Q2) If a firm adheres strictly to the residual dividend policy,the issuance of new common stock would suggest that
A) the dividend payout ratio is increasing.
B) no dividends were paid during the year.
C) the dividend payout ratio is decreasing.
D) the dollar amount of investments has decreased.
E) the dividend payout ratio has remained constant.
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
Page 16
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
B) Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.
C) Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.
D) Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms' costs of capital.
E) Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.
Q2) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Sample Questions
Q1) Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30.The change is meant to meet competition,so no increase in sales is expected.The average accounts receivable balance will probably decline as a result of this change.
A)True
B)False
Q2) Famous Farm's payables deferral period (PDP)is 50 days (on a 365-day basis),accounts payable are $100 million,and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?
A) 4.73
B) 5.26
C) 5.84
D) 6.42
E) 7.07
Q3) Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.
A)True
B)False
Page 18
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Chapter 17: Multinational Financial Management
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Q1) Which of the following is NOT a reason why companies move into international operations?
A) To develop new markets for the firm's products.
B) To better serve their primary customers.
C) Because important raw materials are located abroad.
D) To increase their inventory levels.
E) To take advantage of lower production costs in regions where labor costs are relatively low.
Q2) Suppose one U.S.dollar can purchase 144 yen today in the foreign exchange market.If the yen depreciates by 8.0% tomorrow,how many yen could one U.S.dollar buy tomorrow?
A) 155.5 yen
B) 144.0 yen
C) 133.5 yen
D) 78.0 yen
E) 72.0 yen
Q3) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
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Q1) The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price.Since this dilutes the value of the public stockholders,it "carves out" some of their value.
A)True
B)False
Q2) Suppose a company issued 30-year bonds 4 years ago,when the yield curve was inverted.Since then long-term rates (10 years or longer)have remained constant,but the yield curve has resumed its normal upward slope.Under such conditions,a bond refunding would almost certainly be profitable.
A)True
B)False
Q3) Going public establishes a market value for the firm's stock,and it also ensures that a liquid market will continue to exist for the firm's shares.This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. \(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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21
Chapter 19: Lease Financing
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Q1) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
Q2) Heavy use of off-balance sheet lease financing will tend to
A) make a company appear less risky than it actually is because its stated debt ratio will appear lower.
B) affect a company's cash flows but not its degree of risk.
C) have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
D) affect the lessee's cash flows but only due to tax effects.
E) make a company appear more risky than it actually is because its stated debt ratio will be increased.
Q3) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles
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Q1) The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000)sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?
A) $707.33
B) $744.56
C) $783.75
D) $825.00
E) $866.25
Q2) The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.
A)True
B)False
Q3) Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.
A)True
B)False
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Page 23
Chapter 21: Dynamic Capital Structures
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Q1) Other things held constant,an increase in financial leverage will increase a firm's market (or systematic)risk as measured by its beta coefficient.
A)True B)False
Q2) Which of the following statements concerning the MM extension with growth is NOT CORRECT?
A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
C) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
D) The total value of the firm increases with the amount of debt.
E) The tax shields should be discounted at the cost of debt.
Q3) According to MM,in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
A)True B)False
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Chapter 22: Mergers and Corporate Control
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Q1) A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.
A)True
B)False
Q2) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True
B)False
Q3) In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.
A)True B)False
Q4) In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.
A)True B)False
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Chapter 23: Enterprise Risk Management
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Q1) Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09.What is the implied annual interest rate inherent in this futures contract?
A) 6.32%
B) 6.65%
C) 7.00%
D) 7.35%
E) 7.72%
Q2) A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?
A) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
B) Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
C) A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
D) A company can swap fixed interest payments for floating interest payments.
E) A swap involves the exchange of cash payment obligations.
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q2) In the event of bankruptcy under the federal bankruptcy laws,debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders.Moreover,in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
Q3) Bankruptcy plays no role in settling labor disputes and product liability suits.Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks.The portfolio beta is equal to 1.12.You have decided to sell a coal mining stock (b = 1.00)at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00).What is the new beta of the portfolio?
A) 1.1139
B) 1.1700
C) 1.2311
D) 1.2927
E) 1.3573
Q2) If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the low standard deviation stock.
A)True
B)False
Q3) A stock with a beta equal to -1.0 has zero systematic (or market)risk.
A)True
B)False
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Page 28
Chapter 26: Real Options
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Q1) Which of the following is NOT a real option?
A) The option to buy shares of stock if its price goes up.
B) The option to expand into a new geographic region.
C) The option to abandon a project.
D) The option to switch the type of fuel used in an industrial furnace.
E) The option to expand production if the product is successful.
Q2) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q3) Which of the following will NOT increase the value of a real option?
A) An increase in the volatility of the underlying source of risk.
B) An increase in the risk-free rate.
C) An increase in the cost of obtaining the real option.
D) A decrease in the probability that a competitor will enter the market of the project in question.
E) Lengthening the time in which a real option must be exercised.
Q4) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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29 Verified Questions
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Sample Questions
Q1) DSO analysis of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.
A)True
B)False
Q2) The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.
A)True
B)False
Q3) No Tree Too Tall,Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?
A) 9.50%
B) 10.19%
C) 15.22%
D) 16.99%
E) 22.05%
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Sample Questions
Q1) Which of the following would cause average inventory holdings to decrease,other things held constant?
A) The purchase price of inventory items decreases by 50 percent.
B) The carrying price of an item decreases (as a percent of purchase price).
C) The sales forecast is revised downward by 10 percent.
D) Interest rates fall.
E) Fixed order costs double.
Q2) If a company increases its safety stock,then its EOQ will go up.
A)True
B)False
Q3) The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.
A)True
B)False
Q4) A just-in-time system is designed to stretch accounts payable as long as possible. A)True B)False
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Chapter 29: Pension Plan Management
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Sample Questions
Q1) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows.)
A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491
Q2) From a pure cost standpoint,a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
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Chapter 30: Financial Management in Not For Profit
Businesses
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Sample Questions
Q1) Which of the following statements about project risk analysis in not-for-profit firms is incorrect?
A) A project's corporate beta measures the contribution of the project to the overall corporate risk of the firm.
B) A project's corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.
C) A project's corporate beta is defined as ( \(\sigma\)<sub>P</sub>/ \(\sigma\)<sub>F</sub>)r<sub>PF</sub>, where \(\sigma\)<sub>P</sub> is the standard deviation of the project's returns, \(\sigma\)<sub>F</sub> is the standard deviation of the firm's returns, and r<sub>PF</sub> is the correlation among the two sets of returns.
D) In practice, it is usually difficult, if not impossible, to directly measure a project's corporate risk, so project risk analysis typically focuses on stand-alone risk.
E) The market risk of a project is not relevant to not-for-profit firms.
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