Fundamentals of Financial Management
Mock Exam
Course Introduction
Fundamentals of Financial Management introduces students to the essential principles and practices involved in the effective management of financial resources within a business. The course covers core topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and financial planning. Emphasis is placed on practical applications and decision-making tools that help managers optimize the use of funds and enhance organizational value. By exploring foundational concepts and real-world case studies, students gain a solid understanding of how financial strategies support the overall objectives of a business enterprise.
Recommended Textbook
Principles of Managerial Finance Brief 7th Edition by Lawrence J. Gitman
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The board of directors is typically responsible for ________.
A) approving strategic goals and plans
B) managing day-to-day operations
C) arranging finance for approved long-term investments
D) maintaining and controlling the firm's daily cash balances
Answer: A
Q2) Marginal analysis states that financial decisions should be made and actions should be taken only when ________.
A) marginal revenue equals marginal cost
B) benefits equal costs
C) added benefits exceed added costs
D) added benefits are greater than zero
Answer: C
Q3) Which of the following is a measure of profit maximization to shareholders?
A) the timing of returns
B) earnings per share
C) current assets
D) market risk premium
Answer: B
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) The money market is a financial relationship created by a number of institutions and arrangements that allows suppliers and demanders of long-term funds to make transactions.
A)True
B)False
Answer: False
Q2) Dividends received by a corporation on an investment in the common and preferred stock of another corporation,where ownership in the dividend paying corporation is less than 20%,is subject to 70 percent exclusion for tax purposes.
A)True
B)False
Answer: True
Q3) All dividend income received by a corporation is exempted from taxation. A)True
B)False
Answer: False
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) ABC Corp.extends credit terms of 45 days to its customers.Its credit collection would likely be considered poor if its average collection period was ________.
A) 30 days
B) 36 days
C) 44 days
D) 57 days
Answer: D
Q2) Typically,higher coverage ratios are preferred,but a very high ratio may indicate under-utilization of fixed-payment obligations,which may result in unnecessarily low risk and return.
A)True
B)False
Answer: True
Q3) Net profit after taxes is ________.
A) gross profits minus operating expenses
B) sales revenue minus cost of goods sold
C) EBITDA minus interest
D) EBIT minus interest and taxes
Answer: D
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) Under MACRS,an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period.The depreciation expense in year 5 is ________.
A) $10,000
B) $12,000
C) $21,000
D) $ 9,000
Q2) In the statement of cash flows,cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.
A)True
B)False
Q3) The pro forma net fixed assets amount is ________.(See Table 4.5)
A) $500,000
B) $575,000
C) $600,000
D) $650,000
Q4) In cash budgeting,the impact of depreciation is reflected in a reduction in tax payments.
A)True
B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) James plans to fund his individual retirement account,beginning today,with 20 annual deposits of $2,000,which he will continue for the next 20 years.If he can earn an annual compound rate of 8 percent on his deposits,the amount in the account upon retirement will be ________.
A) $19,636
B) $91,524
C) $98,846
D) $21,207
Q2) John borrowed $12,000 to buy a new car and expects to pay $564.87 per month for the next 2 years to pay off the loan.What is the loan's rate of interest?
Q3) An annuity with an infinite life is called a(n)________.
A) perpetuity
B) primia
C) option
D) deep discount
Q4) Marc has purchased a new car for $15,000.He paid $2,500 as down payment and he paid the balance by a loan from his hometown bank.The loan is to be paid on a monthly basis for two years charging 12 percent interest.How much are the monthly payments?
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) The yield curve in an economic period where lower future inflation is expected would be ________.
A) upward-sloping
B) flat
C) downward-sloping
D) exponential
Q2) In a bond indenture,the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.
A)True
B)False
Q3) A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.
A)True
B)False
Q4) A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
A)True
B)False
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Chapter 7: Stock Valuation
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Sample Questions
Q1) An underwritten issue of common stock is one in which a firm purchases insurance to cover unexpected losses suffered by shareholders.
A)True
B)False
Q2) Emmy Lou,Inc.has an expected dividend next year of $5.60 per share,a growth rate of dividends of 10 percent,and a required return of 20 percent.The value of a share of Emmy Lou,Inc.'s common stock is ________.
A) $28.00
B) $56.00
C) $22.40
D) $18.67
Q3) In an efficient market,securities are typically in equilibrium,which means that they are fairly priced and that their expected returns equal their required returns.
A)True
B)False
Q4) Interest paid to bondholders is tax deductible.
A)True
B)False
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Chapter 8: Risk and Return
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Sample Questions
Q1) ________ is the extent of an asset's risk.It is found by subtracting the pessimistic outcome from the optimistic outcome.
A) Variance
B) Standard deviation
C) Probability distribution
D) Range
Q2) A ________ 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
Q3) The beta associated with a risk-free asset ________.
A) is greater than 1
B) is less than 1
C) is equal to 0
D) is between 0 and 1
Q4) Stocks are less riskier than either bonds or bills.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Use of the capital asset pricing model (CAPM)in measuring the cost of common stock equity differs from the constant-growth valuation model in that it directly considers the firm's risk as reflected by beta.
A)True
B)False
Q2) The constant-growth model uses the market price as a reflection of the expected risk-return preference of investors in the market place.
A)True
B)False
Q3) In calculating the cost of common stock equity,the model which describes the relationship between the required return and the nondiversifiable risk of the firm is
A) the constant-growth model
B) the NPV model
C) the variable growth model
D) the capital asset pricing model
Q4) The cost of retained earnings will always equal the cost of preferred stock.
A)True B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Economic value added is the difference between an investment's net operating profit after taxes and the accounting profit.
A)True B)False
Q2) Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one eliminates the others from further consideration.
A)True
B)False
Q3) ________ projects do not compete with each other; the acceptance of one ________ the others from consideration.
A) Capital; eliminates B) Independent; does not eliminate C) Mutually exclusive; eliminates D) Replacement; eliminates
Q4) If a project's payback period is less than the maximum acceptable payback period,we would accept it.
A)True
B)False
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Page 12
Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow.The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000.The machine has an original purchase price of $80,000,installation cost of $20,000,and will be depreciated under the five-year MACRS.Net working capital is expected to decline by $5,000.The firm has a 40 percent tax rate on ordinary income and long-term capital gain.The terminal cash flow is ________.
A) $5,800
B) $7,800
C) $8,200
D) $6,200
Q2) Scenario analysis is a behavioral approach that evaluates the impact on a firm's return through simultaneous changes in a number of variables.
A)True B)False
Q3) Summarize the incremental after-tax cash flow (relevant cash flows)for years t = 0 through t = 5.(See Table 11.4)
Q4) Evaluate the projects using risk-adjusted discount rates.(See Table 11.9)
Page 13
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock.The firm's tax rate is 40 percent on ordinary income.If the EBIT is expected to be $200,000,two EBIT-EPS coordinates for the firm's existing capital structure are ________.
A) ($36,000, $0) and ($200,000, $3.04)
B) ($48,000, $0) and ($200,000, $1.82)
C) ($0, $48,000) and ($200,000, $1.82)
D) ($152,000, $3.50) and ($150,000, $1.82)
Q2) The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.
A) the debt holders are the true owners of the firm
B) equity capital has a fixed return
C) long-term debt has a fixed return and a maturity date
D) dividend payments are tax-deductible
Q3) Revenue stability affects ________.
A) dividend risk
B) maturity risk
C) business risk
D) interest rate risk
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Page 14
Chapter 13: Payout Policy
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Sample Questions
Q1) Tangshan Mining has common stock at par of $200,000,paid-in capital in excess of par of $400,000,and retained earnings of $280,000.In states where the firm's legal capital is defined as the par value of common stock,the firm could pay out ________ in cash dividends without impairing its capital.
A) $200,000
B) $680,000
C) $600,000
D) $880,000
Q2) An excess earnings accumulation tax is levied when ________.
A) shareholders receive dividends which exceed a firm's earnings
B) firms do not pay dividends in order to delay the owners' tax liability
C) firms do not pay dividends to reinvest in the firm
D) earnings exceed accumulated dividends over the years
Q3) Which of the following is considered in designing a dividend policy that is favorable to wealthy owners?
A) the tax status of the firm's owners
B) the political risk of the firm
C) the liability of the firm's owners
D) the reinvestment risk of the firm
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Page 15
Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.
A)True
B)False
Q2) If a firm's credit period is decreased,the sales volume,the investment in accounts receivable,and the bad debt expenses can be expected to increase.
A)True
B)False
Q3) The firm's annual financing costs of conservative financing strategy are ________.(See Table 14.1)
A) $22,775
B) $26,075
C) $26,775
D) $21,175
Q4) A firm's credit terms cover ________.
A) credit standards
B) lines of credit
C) cash discount period
D) credit scoring
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.
A)True
B)False
Q2) Financing that matures in one year or less and has specific assets pledged as collateral is called ________.
A) unsecured long-term financing
B) unsecured short-term financing
C) secured short-term financing
D) secured long-term financing
Q3) The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan rate.
A) lower than
B) the same as
C) unrelated to
D) higher than
Q4) Bessey Aviation has just sold an issue of 30-day commercial paper with a face value of $5,000,000.The firm has just received $4,958,000.What is the effective annual interest rate on the commercial paper?
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