Intermediate Financial Management
Practice Questions
Course Introduction
Intermediate Financial Management provides students with a comprehensive understanding of the core principles and practices that underpin effective financial decision-making within organizations. Building on the fundamentals of finance, the course delves into topics such as cost of capital, financial analysis, capital budgeting, risk and return evaluation, and capital structure decisions. Students will also explore topics like dividend policy, working capital management, and long-term financial planning. Through case studies, problem-solving exercises, and real-world applications, the course equips students with analytical tools and managerial insights essential for evaluating investment opportunities and optimizing financial strategies in dynamic business environments.
Recommended Textbook
Intermediate Financial Management 13th 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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Q1) If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.
A)True
B)False
Answer: True
Q2) You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:
A) a futures market transaction.
B) a primary market transaction.
C) a secondary market transaction.
D) a money market transaction.
E) an over-the-counter market transaction.
Answer: C
Q3) One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
A)True
B)False
Answer: True
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Chapter 2: Risk and Return-Part I
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Q1) Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
\(\begin{array}{lccc}
\text { Stock} & \text { Investment}& \text { Beta} \\
\mathrm{A} & \$ 50,000 &0.95\\
\mathrm{B} & 50,000 &0.80\\
\mathrm{C} & 50,000&1.00 \\
\mathrm{D} & 50,000&1.20 \\
\text { Total }& \$ 200,000
\end{array}\)
What is the portfolio's beta?
A) 0.938
B) 0.988
C) 1.037
D) 1.089 E) 1.143
Answer: B
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Chapter 3: Risk and Return-Part II
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Q1) Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)
A) stock b must be a more desirable addition to a portfolio than stock a.
B) stock a must be a more desirable addition to a portfolio than stock b.
C) the expected return on stock a should be greater than that on stock b.
D) the expected return on stock b should be greater than that on stock a.
E) when held in isolation, stock a has greater risk than stock b.
Answer: C
Q2) Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?
A) standard deviation; correlation coefficient.
B) beta; variance.
C) coefficient of variation; beta.
D) beta; beta.
E) variance; correlation coefficient.
Answer: C
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Chapter 4: Bond Valuation
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Q1) Which of the following statements is CORRECT?
A) the most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) the most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) if the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D) inverted yield curves can exist for treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E) the higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
Q2) If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
A) a 1-year bond with an 8% coupon.
B) a 10-year bond with an 8% coupon.
C) a 10-year bond with a 12% coupon.
D) a 10-year zero coupon bond.
E) a 1-year zero coupon bond.
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Chapter 5: Financial Options
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Q1) Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?
A) the options with the $25 strike price will sell for less than the options with the $35 strike price.
B) the options with the $25 strike price have an exercise value greater than $5.
C) the options with the $35 strike price have an exercise value greater than $0.
D) if cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
E) the options with the $25 strike price will sell for $5.
Q2) 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
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Chapter 6: Accounting for Financial Management
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Q1) Which of the following statements is CORRECT?
A) one way to increase eva is to achieve the same level of operating income but with more investor-supplied capital.
B) if a firm reports positive net income, its eva must also be positive.
C) one drawback of eva as a performance measure is that it mistakenly assumes that equity capital is free.
D) one way to increase eva is to generate the same level of operating income but with less investor-supplied capital.
E) actions that increase reported net income will always increase net cash flow.
Q2) The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.
A)True
B)False
Q3) Total net operating capital is equal to net fixed assets.
A)True
B)False
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8
Chapter 7: Analysis of Financial Statements
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Q1) Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?
A) 7.32
B) 7.70
C) 8.09
D) 8.49
E) 8.92
Q2) Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?
A) use cash to reduce accounts payable.
B) borrow using short-term notes payable and use the proceeds to reduce accruals.
C) borrow using short-term notes payable and use the proceeds to reduce long-term debt.
D) use cash to reduce accruals.
E) use cash to reduce short-term notes payable.
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Page 9
Chapter 8: Basic Stock Valuation
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Q1) A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?
A) $23.11 million
B) $23.70 million
C) $24.31 million
D) $24.93 million
E) $25.57 million
Q2) Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
A) all common stocks, regardless of class, must have the same voting rights.
B) all firms have several classes of common stock.
C) all common stock, regardless of class, must pay the same dividend.
D) some class or classes of common stock are entitled to more votes per share than other classes.
E) all common stocks fall into one of three classes: a, b, and c.
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Chapter 9: Corporate Valuation and Financial Planning
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Q1) 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
Q2) If a firm's capital intensity ratio (A0*/S0) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
A)True
B)False
Q3) Based on the projections, Decker will have
A) a financing surplus of $36
B) a financing deficit of $36
C) a financing surplus of $255
D) a financing deficit of $255
E) zero financing surplus or deficit
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) an example of an agency cost is when an outside investor is only willing to pay less for stockbecause she thinks the original owner will consume too many perquisites.
B) an example of an agency cost is when the board of directors pays a dividend to shareholders.
C) an example of an agency cost is when an attorney hires an expert witness for a trial.
D) the commission required by the federal housing agency for a small business loan is an example ofan agency cost.
E) an example of an agency cost is the salary of the agent hired to work for the principal.
Q2) 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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12
Chapter 11: Determining the Cost of Capital
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Q1) You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity. You have obtained the following data: (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20, P0 = $35.00, and gL = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?
A) 1.13%
B) 1.50%
C) 1.88%
D) 2.34%
E) 2.58%
Q2) When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs.
A)True
B)False
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Ellmann Systems is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. \(\begin{array}{lccc} r& 9.00\%\\
\text { Year: } &0& 1 & 2 & 3 \\
\text { FCF: } & -\$ 1000 & \$ 500 & \$ 500& \$ 500 \end{array}\)
A) $265.65
B) $278.93
C) $292.88
D) $307.52
E) $322.90
Q2) If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.
A)True
B)False
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Page 14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following statements is CORRECT?
A) if a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. thus, cannibalization is dealt with by society through the antitrust laws.
B) if cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. otherwise, the calculated npv will be biased downward.
C) if cannibalization is determined to exist, then this means that the calculated npv if cannibalization is considered will be higher than the npv if this effect is not recognized.
D) cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself.
E) if a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. thus, cannibalization is dealt with by society through the antitrust laws.
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Page 15
Chapter 14: Real Options
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Q1) Refer to data for Steppingstone Incorporated (SI). Now assume that one year from now SI will know if the Z 45 has become the industry standard. Also assume that after receiving the cash flows at t = 1, SI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option?
A) $0
B) $2,075
C) $4,067
D) $8,945
E) $10,745
Q2) Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
A)True B)False
Q3) Real options affect the size, but not the risk, of a project's expected cash flows.
A)True B)False
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16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?
A) its access to the capital markets increases.
B) its r&d efforts pay off, and it now has more high-return investment opportunities.
C) its accounts receivable decrease due to a change in its credit policy.
D) its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.
E) its earnings become more stable.
Q2) MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.
A)True
B)False
Q3) Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.
A)True
B)False
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17
Chapter 16: Capital Structure Decisions
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Q1) Two operationally similar companies, HD and LD, have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD's return on invested capital (ROIC) exceeds its after-tax cost of debt, (1-T)rd. Which of the following statements is CORRECT?
A) hd should have a higher times interest earned (tie) ratio than ld.
B) hd should have a higher return on equity (roe) than ld, but its risk, as measured by the standard deviation of roe, should also be higher than ld's.
C) given that roic > (1-t) rd, hd's stock price must exceed that of ld.
D) given that roic > (1-t) rd, ld's stock price must exceed that of hd.
E) hd should have a higher return on assets (roa) than ld.
Q2) A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.
A)True
B)False
Q3) The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
A)True
B)False
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Which of the following statements concerning the compressed adjusted present value (APV) model 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 in the compressed apv model is greater than the levered cost of equity under mm's original (with tax) assumptions.
C) for a given d/s, the wacc in the compressed apv model is greater than the wacc under mm's original (with tax) assumptions.
D) the total value of the firm is independent of the amount of debt it uses.
E) the tax shields should be discounted at the unlevered cost of equity.
Q2) Using the data for Sallie's Sandwiches and the compressed adjusted present value model, what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
A) 12.0%
B) 13.9%
C) 14.4%
D) 16.0%
E) 16.9%
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Page 19
Chapter
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Q1) Which of the following statements about listing on a stock exchange is most CORRECT?
A) any firm can be listed on the nyse as long as it pays the listing fee.
B) listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
C) listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the sec.
D) the otc is the second largest market for listed stock, and it is exceeded only by the nyse.
E) listing is a decision of more significance to a firm than going public.
Q2) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
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20
Chapter 19: Lease Financing
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Q1) 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.
Q2) A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased
A) is financed with long-term debt.
B) is financed with debt whose maturity matches the term of the lease.
C) is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the wacc.
D) is financed with retained earnings.
E) is financed with short-term debt.
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Page 21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012. At any time prior to maturity on February 1, 2032, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?
A) $40.00
B) $42.00
C) $44.10
D) $46.31
E) $48.62
Q2) Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
A)True
B)False
Q3) A convertible debenture can never sell for more than its conversion value or less than its bond value.
A)True
B)False
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Which of the following statements is CORRECT?
A) 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 strategy because of the inherent risks associated with using short-term financing.
B) if a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
C) net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
D) if a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.
E) net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
Q2) The aging schedule is a commonly used method for monitoring receivables.
A)True B)False
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Page 23
Chapter 22: Providing and Obtaining Credit
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Q1) Refer to Exhibit Reese Brothers. What would be the incremental bad losses if the change were made?
A) $315,000
B) $260,500
C) $260,500 (bad debt losses would decline)
D)$315,000 (bad debt losses would decline)
E) $0 (no change would occur)
Q2) 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
Q3) When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.
A)True
B)False
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Chapter 23: Other Topics in Working Capital Management
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Q1) Refer to Exhibit Cartwright Computing. If the lead time for placing an order is 5 days, and Cartwright holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?
A) 15,570
B) 3,175
C) 12,250
D) 13,675
E) 8,124
Q2) A just-in-time system is designed to stretch accounts payable as long as possible.
A)True
B)False
Q3) Refer to Exhibit Duckett Group. What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?
A) $35,356
B) $7,071
C) $18,493
D) $70,711
E) $53,190
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Chapter 24: Enterprise Risk Management
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Q1) Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?
A) a pays a fixed rate of 9%, b pays libor + 1.5%.
B) a pays a fixed rate of 8.95%, b pays libor + 1.45%.
C) a pays libor plus 1%, b pays a fixed rate of 9.4%.
D) a pays a fixed rate of 7.95%, b pays libor.
E) none of the above answers is correct.
Q2) Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q3) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
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Page 26
Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q2) Which of the following statements is most CORRECT?
A) the primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
B) the basic doctrine of fairness states that all debtholders must be treated equally.
C) since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
D) while a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
E) to a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.
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Chapter 26: Mergers and Corporate Control
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Q1) 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
Q2) Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.
A)True
B)False
Q3) The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.
A)True
B)False
Q4) The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
A)True
B)False
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28
Chapter 27: Multinational Financial Management
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Q1) Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
A) 1 u.s. dollar = 0.6235 canadian dollars
B) 1 u.s. dollar = 0.6265 canadian dollars
C) 1 u.s. dollar = 1.0000 canadian dollars
D) 1 u.s. dollar = 1.5961 canadian dollars
E) 1 u.s. dollar = 1.6039 canadian dollars
Q2) The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.
A)True
B)False
Q3) The United States and most other major industrialized nations currently operate under a system of floating exchange rates.
A)True
B)False
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29
Chapter 28: Time Value of Money
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Sample Questions
Q1) You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?
A) $238,176
B) $250,712
C) $263,907
D) $277,797
E) $291,687
Q2) Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
A)True
B)False
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
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Page 30
Chapter 29: Basic Financial Tools: A review
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Sample Questions
Q1) According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.
A)True
B)False
Q2) The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
A)True
B)False
Q3) A perpetuity pays $85 per year and costs $950. What is the rate of return?
A) 8.95%
B) 9.39%
C) 9.86%
D) 10.36%
E) 10.88%
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Chapter 30: Pension Plan Management
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Q1) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
Q3) Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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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 ( p/ f)rpf, where p is the standard deviation of the project's returns, f is the standard deviation of the firm's returns, and rpf 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.
Q2) Since not-for-profit firms do not pay taxes, they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
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