Financial Management
Study Guide Questions
Course Introduction
Financial Management is a course that explores the principles and techniques necessary for effective financial decision-making within organizations. It covers key topics such as financial analysis, planning, and control; capital budgeting; risk assessment; time value of money; cost of capital; working capital management; and sources of financing. Students learn how to interpret financial statements, evaluate investment opportunities, and develop strategies for maximizing shareholder value, all while considering ethical and global perspectives. The course equips learners with analytical and practical tools essential for responsible financial management in both corporate and non-corporate settings.
Recommended Textbook
Foundations of Finance 7th Edition by Arthur J. Keown
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17 Chapters
2496 Verified Questions
2496 Flashcards
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) The sole proprietorship has no legal business structure separate from its owner.
A)True
B)False Answer: True
Q2) Your friend,John,believes that since capital markets are efficient,he doesn't need to read the financial press or be involved in stock research before purchasing stocks for his portfolio.He simply throws darts at the stock pages and buys the stocks the darts hit.Is stock research and analysis important when buying and selling stocks in an efficient market?
Answer: Yes! Efficient capital markets theory suggests that investors will not be able to outperform the market in the long-run using just publicly available information.This is due to the fact that market prices very quickly adjust to information.If an investor only knows what all other investors know,then he or she cannot use that information to earn abnormal returns.However,an uninformed investor can certainly underperform the market.
Q3) The goal of profit maximization ignores the risk of financial decisions
A)True
B)False
Answer: True
Page 3
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Chapter 2: The Financial Markets and Interest Rates
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148 Flashcards
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Sample Questions
Q1) If a corporation wants a guarantee that all of its shares of stock will be sold,it should use which of the following distribution methods?
A) competitive bid purchase
B) privileged subscription with no standby agreement
C) commission or best-efforts contract
D) direct sale
Answer: A
Q2) If provided the nominal rate of interest (r)of 7.4% and the anticipated rate of inflation (i)of 4.5%,what is the real rate of interest (R)?
Answer: r = R + i + Ri
.074 = R + .045 + (.045)(R)
.074 - .045 = 1.045R
.029 = 1.045R
R = .02775 = 2.
78%
Q3) The vast majority of corporate bond business takes place over the counter. A)True
B)False
Answer: True
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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110 Flashcards
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Sample Questions
Q1) The balance sheet reflects the accounting equation: Assets = Liabilities + Owners' Equity.
A)True
B)False
Answer: True
Q2) A firm's income statement reports the results from operating the business for a period of time,while the firm's balance sheet provides a snapshot of the firm's financial position at a specific point in time.
A)True
B)False
Answer: True
Q3) If a company's cash balance increases during the year,and the company also reports positive net income,then the company's retained earnings balance must increase.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) A high debt ratio can be favorable because higher leverage may result in a higher return on equity.
A)True
B)False
Q2) Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?
A) the firm's average collection period is likely to fall
B) the firm's accounts receivable turnover might rise
C) the firm's sales might decrease
D) all of the above
Q3) Company A has a higher day's sales outstanding ratio than Company B.Therefore,
A) Company A sells more on credit than Company B
B) Company A has a higher percentage of cash to credit sales than Company B
C) Company A must be collecting its accounts receivable faster than Company B, on average
D) Other things being equal, Company B has a cash flow advantage over Company A
Q4) The current ratio and the acid test ratio both measure financial leverage.
A)True
B)False
Q5) Discuss five limitations to ratio analysis.
Page 6
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) A retirement home in Florida costs $200,000 today.Housing prices in Florida are increasing at a rate of 4% per year.Joe wants to buy the home in 8 years when he retires.Joe has $25,000 right now in a savings account paying 8% interest per year.Joe wants to make eight equal annual deposits into the savings account starting today.How much must each deposit be so Joe will have enough money in his savings account to buy the retirement home when he retires?
Q2) The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.
A)True
B)False
Q3) If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?
A) 18,151
B) 14,356
C) 16,987
D) 15,555
Q4) The present value of a deferred annuity .
A)True
B)False
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.
A)True
B)False
Q2) Most stocks have betas between A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
Q3) The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.
A)True
B)False
Q4) Discuss whether the standard deviation of a portfolio is,or is not,a weighted average of the standard deviations of the assets in the portfolio.Fully explain your answer.
Q5) The slope of the characteristic line of a security is that security's Beta.
A)True
B)False
8
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Which of the following bond provisions will make a bond more desirable to investors,other things being equal?
A) The bond is convertible.
B) The bond is callable.
C) The coupon rate is lower.
D) The bond is subordinated.
Q2) A company with a bond rating of BBB is more likely to have which of the following qualities compared to a company with a bond rating of B?
A) greater reliance on equity financing
B) high variability in past earnings
C) little use of subordinated debt
D) small firm size
Q3) The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is 100¾.The closing price for that bond was $100.75.
A)True
B)False
Q4) A mortgage bond is secured by a lien on real property.
A)True
B)False
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Baseheart,Inc.expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future.Therefore,the value of the stock to an investor with a required return of 12% is:
A) $3.00
B) $18.33
C) $20.83
D) $30.00
Q2) If a common stockholder cannot personally attend the meeting of shareholders then their votes are lost.
A)True
B)False
Q3) Johnstown Supply Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Johnstown Supply Corporation stock.
A) 12.48%
B) 15.65%
C) 13.64%
D) 16.12%
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) All else equal,an increase in beta results in
A) an increase in the cost of retained earnings.
B) an increase in the cost of newly issued common stock .
C) an increase in the after-tax cost of debt.
D) an increase in the cost of common equity, whether or not the funds come from retained earnings or newly issued common stock.
Q2) The cost of debt measures the cost of a bank loan,while the cost of preferred stock is used as a proxy for the cost of a new bond issue.
A)True
B)False
Q3) In capital budgeting analysis,when computing the weighted average cost of capital,the CAPM approach is typically used to find which of the following?
A) Market value weight of equity
B) Pretax component cost of debt
C) After-tax component cost of debt
D) Component cost of internal equity
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11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) The payback period ignores the time value of money and therefore should not be used as a screening device for the selection of capital budgeting projects.
A)True
B)False
Q2) Project A has an internal rate of return (IRR)of 15 percent.Project B has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is most correct?
A) Both projects have a positive net present value (NPV).
B) Project A must have a higher NPV than project B.
C) If the required return were less than 12 percent, Project B would have a higher IRR than Project A.
D) Project B has a higher profitability index than Project A.
Q3) The internal rate of return is
A) the discount rate that makes the NPV positive.
B) the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
C) the discount rate that makes NPV negative and the PI greater than one.
D) the rate of return that makes the NPV positive.
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Page 12
Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) Crighton Industries is considering the purchase of a new machine that will cost $250,000,plus an additional $10,000 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to have a salvage value of $30,000 at the end of year five.Crighton's income tax rate is 40%.The additional net working capital from this project of $50,000 is expected to return to its pre-project level upon termination.What is the non-operating terminal cash flow of the machine?
A) -$32,000
B) $48,000
C) $68,000
D) $80,000
Q2) If bankruptcy costs and/or shareholder underdiversification are an issue,what measure of risk is relevant when evaluating project risk in capital budgeting?
A) Total project risk
B) Contribution-to-firm risk
C) Systematic risk
D) Capital rationing risk
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Page 13
Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Which of the following would be considered the firm's optimal capital structure?
A) Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15%
B) Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18%
C) Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17%
D) Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20%
Q2) Optimal capital structure is:
A) the mix of permanent sources of funds used by the firm in a manner that will maximize the company's common stock price.
B) the mix of all items that appear on the right-hand side of the company's balance sheet.
C) the mix of funds that will minimize the firm's cost of equity capital.
D) the mix of funds that will maximize the firm's interest tax shield.
Q3) Stan's Cans,Inc.expects to earn $150,000 next year after taxes on sales of $2,200,000.Stan's manufactures only one size of garbage can.Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece.Stan's tax rate is currently 34%.
a.What are the firm's expected fixed costs for next year?
b.What is the break-even point in units?
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Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) A corporation announces a large increase in its annual dividend,but its stock price declines.This could result from
A) residual dividend theory.
B) Bird-in-the-Hand Theory.
C) perfect capital markets.
D) MM's indifference theorem.
Q2) All of the following are methods available to a corporation that desires to repurchase stock except:
A) offering to employees who own an interest in the firm.
B) open market.
C) tender offer to all existing stockholders.
D) offer to one or more major stockholders on a negotiated basis.
Q3) Which of the following is true if dividend policy is irrelevant?
A) Perfect capital markets exist.
B) The clientele effect exists.
C) The information effect exists.
D) Tax deferral on capital gains exists.
Q4) A stock split is defined as a stock dividend exceeding 25%.
A)True
B)False
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) Spontaneous financing is financing obtained at the last minute due to poor financial planning.
A)True
B)False
Q2) The first step involved in predicting financing needs is
A) project the firm's sales revenues and expenses over the planning period.
B) estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C) determining the firm's financing needs throughout the planning period.
D) estimating the cost of debt.
Q3) A set of estimates which corresponds to the worst and best case outcomes is often desired in preparing a financial forecast.
A)True B)False
Q4) The percent of sales method provides a more detailed plan for future financing needs than the cash budget because both pro forma income statements and balance sheets are used in the analysis.
A)True B)False
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) A floating lien,chattel mortgage,or terminal warehouse receipt have which of the following in common?
A) They all pledge accounts receivables as security.
B) They have nothing in common.
C) They are all unsecured forms of financing.
D) They all use inventory to secure a loan.
Q2) The hedging principle is used to address the issue of how much short-term financing a firm should use.
A)True
B)False
Q3) Which of the following statements regarding a line of credit is true?
A) The purpose for which the money is being borrowed must be stated by the borrower.
B) A line of credit agreement usually fixes the interest rate that will be applied to any extensions of credit.
C) A line of credit agreement is a legal commitment on the part of the bank to provide the stated credit.
D) Such agreements usually cover the borrower's fiscal year.
Q4) Discuss the risk-return tradeoff experienced in working-capital management.
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Page 17
Chapter 16: Current Asset Management
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Sample Questions
Q1) Marketable securities are only those security investments the firm can convert into cash balances within one year.
A)True
B)False
Q2) The purpose of work-in-process inventory is to ensure that machine failures and work stoppages in one operation do not affect other operations.
A)True
B)False
Q3) Alexis Jewelry expects to have $35 million in credit sales during the coming year.In spite of a national distributing system,all remittances are sent to the home office.A proposed system can eliminate 3 days of float,releasing funds which,when invested,will earn 6.5 percent.What annual savings can Alexis Jewelry expect if the system is implemented?
Use a 365-day year.
Q4) One advantage of zero balance accounts is an increase in disbursing float.
A)True
B)False
Q5) What are the most important types of current assets?
List your answer in order of declining liquidity.
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Chapter 17: International Business Finance
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Sample Questions
Q1) Except for the effects of small transaction costs,the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity.What is the name of this theory?
A) the purchasing power parity theory
B) the Bobby Fisher effect
C) interest rate parity theory
D) the law of one price
Q2) Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.
A)True
B)False
Q3) The objective of hedging strategy is to have a zero net asset position in a foreign currency.
A)True
B)False
Q4) The U.S.dollar is the most frequently traded currency in foreign currency markets,accounting for over 40% of total trading.
A)True
B)False
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