Financial Planning Exam Review
Course Introduction
Financial Planning is a comprehensive course that introduces students to the fundamental principles and practices essential for effective management of personal and professional finances. The course covers topics such as budgeting, savings, investment strategies, risk management, retirement planning, tax planning, and estate planning. Through case studies and real-world scenarios, students learn how to develop and implement customized financial plans that align with individual goals and changing economic circumstances. Emphasis is placed on ethical considerations and the use of financial planning tools to support sound decision-making for long-term financial security.
Recommended Textbook
Principles of Managerial Finance Brief 6th Edition by Lawrence
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15 Chapters
2750 Verified Questions
2750 Flashcards
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Page 2
J. Gitman
Chapter 1: The Role of Managerial Finance
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133 Verified Questions
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Sample Questions
Q1) Profit maximization as the goal of the firm is NOT ideal because A) profits are only accounting measures.
B) cash flows are more representative of financial strength.
C) profit maximization does not consider risk.
D) profits today are less desirable than profits earned in future years.
Answer: C
Q2) A high earnings per share (EPS) does not necessarily translate into a high stock price.
A)True
B)False Answer: True
Q3) The likelihood that managers may place personal goals ahead of corporate goals is called the agency problem.
A)True
B)False Answer: True
Q4) Dividend payments change directly with changes in earnings per share.
A)True
B)False Answer: False
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Trading is carried out in the Over-the-Counter (OTC) Exchange by
A) the competitive bid process.
B) the competitive bid process and the negotiation process.
C) the auction process.
D) an investment banker.
Answer: B
Q2) Primary and secondary markets are markets for short-term and long-term securities, respectively.
A)True
B)False
Answer: False
Q3) Capital markets are for investors who want a safe temporary place to deposit funds where they can earn interest and for borrowers who have a short term need for funds.
A)True
B)False
Answer: False
Q4) Meese Paper Distributors, Inc. has before-tax earnings of $1,900,000. Calculate the amount of the total tax liability.
Answer: Meese Paper Distributors 11ea8000_f9fc_f072_846e_e7b964b43c3e_TB2928_00
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) In a cross-sectional comparison of firms operating in several lines of business, the industry average ratios of any of the firm's product lines may be used to analyze the multiproduct firm's financial performance.
A)True
B)False Answer: False
Q2) Earnings per share represent the dollar amount earned and distributed to shareholders.
A)True
B)False Answer: False
Q3) ________ analysis involves the comparison of different firms' financial ratios at the same point in time.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative
Answer: B
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) The pro forma accumulated retained earnings amount is ________. (See Table 4.5)
A) $90,000
B) $175,000
C) $140,000
D) $130,000
Q2) Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.
Q3) The primary purpose in preparing a cash budget is
A) for profit planning.
B) for cash planning.
C) for risk analysis.
D) to estimate sales.
Q4) At the end of May, the firm has an ending cash balance of ________. (See Table 4.3)
A) $9,000
B) $16,750
C) $14,250
D) $12,000
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Assume you have a choice between two deposit accounts. Account X has an annual percentage rate of 12.25 percent but with interest compounded monthly. Account Y has an annual percentage rate of 12.20 percent with interest compounded continuously. Which account provides the highest effective annual return?
Q2) Mr. Knowitall has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr. Knowitall choose if his opportunity cost is 9 percent?
Q3) Timothy borrows $6,930 from the bank. For a four-year loan, the bank requires annual end-of-year payments of $2,281.86. Calculate the interest rate on the loan.
Q4) Calculate the present value of an annuity of $3,900 each year for four years, assuming an opportunity cost of 10 percent.
Q5) When computing an interest or growth rate, the rate will increase the larger the future value, holding present value and the number of periods constant.
A)True
B)False
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Chapter 6: Interest Rates and Bond Valuation
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224 Flashcards
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Sample Questions
Q1) The ________ is the annual rate of interest earned on a security purchased on a given date and held to maturity.
A) term structure
B) yield curve
C) risk-free rate
D) yield to maturity
Q2) A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.
A) bond debenture
B) warrant
C) sinking fund
D) bond indenture
Q3) The less certain a cash flow, the ________ the risk, and the ________ the present value of the cash flow.
A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher
Q4) Explain liquidity, default risk, and maturity risk premiums.
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Chapter 7: Stock Valuation
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Sample
Questions
Q1) Nico Corporation's common stock currently sells for $180 per share. Nico just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Nico Corporation's stock sell for one year from now?
A) $190.80
B) $187.04
C) $195.40
D) $179.84
Q2) Interest paid to bondholders is tax deductible but interest paid to stockholders is not.
A)True B)False
Q3) If bankruptcy were to occur, stockholders would have prior claim on assets over A) preferred stockholders.
B) secured creditors.
C) unsecured creditors.
D) no one.
Q4) Common stockholders are often referred to as residual claimants.
A)True B)False
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Chapter 8: Risk and Return
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Sample Questions
Q1) The ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.
A) coefficient of variation
B) chi square
C) mean
D) standard deviation
Q2) The slope of the SML reflects the degree of risk aversion; the steeper its slope, the greater the degree of risk aversion.
A)True
B)False
Q3) Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's market risk premium is
A) 7.2 percent.
B) 6.0 percent.
C) 13.2 percent.
D) 10 percent.
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) From a bond issuer's perspective, the IRR on a bond's cash flows is its yield to maturity (YTM); from the investor's perspective, the IRR on a bond's cash flows is the cost to maturity.
A)True
B)False
Q2) In computing the weighted average cost of capital, the target weights are either book value or market value weights based on actual capital structure proportions.
A)True
B)False
Q3) Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be 7.26 percent.
A)True B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Independent projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate any others from further consideration.
A)True
B)False
Q2) Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
A) Yes.
B) No.
C) It depends.
D) None of the above
Q3) The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is -$143.51.
A)True
B)False
Q4) Use the NPV approach to select the best group of projects. (See Table 10.7)
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) The three major cash flow components include the initial investment, non-operating cash inflows, and terminal cash flows.
A)True
B)False
Q2) For Proposal 3, the initial outlay equals ________. (See Table 11.4)
A) $170,400
B) $211,000
C) $196,000
D) $300,000
Q3) If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of
A) constrained capital.
B) wealth optimization.
C) capital rationing.
D) profitability.
Q4) In capital budgeting, risk refers to the chance that a project has a high degree of variability of the initial investment.
A)True
B)False
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) ________ risk is the risk of being unable to cover operating costs.
A) Business
B) Financial
C) Leverage
D) Total
Q2) The use of a dollar breakeven point is important when a firm has more than one product, especially when each product is selling at a different price.
A)True
B)False
Q3) Which plan has a higher degree of financial leverage and financial risk? (See Table 12.1)
Q4) When considering fixed operating cost increases, the financial manager must weigh the increased financial risk associated with greater operating leverage against the expected increase in returns.
A)True
B)False
Q5) Business risk is the risk to the firm of being unable to cover operating costs.
A)True
B)False
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Chapter 13: Payout Policy
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Sample Questions
Q1) The net effect of a stock repurchase is
A) similar to the payment of a stock dividend.
B) similar to a cash dividend.
C) similar to a stock split.
D) similar to a reverse stock split.
Q2) Dividend policy is a form of
A) capital budgeting policy.
B) financing policy.
C) working capital policy.
D) dividend reinvestment policy.
Q3) Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of the firm's stock is unaffected by dividend policy.
A)True
B)False
Q4) Reverse stock splits are initiated when a stock is selling at too low a price to appear respectable.
A)True
B)False
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) An increase in collection efforts will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures.
A) an increase; a decrease; an increase; a decrease
B) an increase; a decrease; a decrease; an increase
C) an increase; a decrease; an increase; an increase
D) a decrease; a decrease; a decrease; an increase
Q2) As credit standards are tightened, sales are expected to ________ and the investment in accounts receivable is expected to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q3) Only the firm's permanent financing requirement (and not the seasonal requirement) is financed with ________ in the aggressive financing strategy.
A) long-term sources
B) short-term sources
C) retained earnings
D) accounts payable
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all lenders for a certain number of days during the year.
A)True
B)False
Q2) A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is
A) 12 percent.
B) 13.3 percent.
C) 13.6 percent.
D) 15.4 percent.
Q3) Tina's Apple Company would like to manufacture and market a new packaging. Tina's has sold an issue of commercial paper for $1,500,000 and maturity of 90 days to finance the new project. Compute the annual interest rate on the issue of commercial paper if the value of the commercial paper at maturity is $1,650,000.
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