Intermediate Financial Management
Pre-Test Questions
Course Introduction
Intermediate Financial Management explores the fundamental theories and practical applications of financial decision-making within business organizations. Building upon basic finance concepts, this course delves into topics such as risk and return analysis, capital budgeting, cost of capital, financial statement analysis, working capital management, and long-term financing strategies. Students will learn to analyze investment opportunities, optimize capital structures, evaluate financial performance, and understand the implications of financing and dividend decisions. Through case studies and problem-solving exercises, the course aims to strengthen analytical skills and prepare students to make informed financial decisions in a dynamic business environment.
Recommended Textbook
Financial Management for Decision Makers 2nd Canadian Edition by Peter Atrill
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Pressure to increase returns to shareholders has
A) Grown in response to fewer global investment opportunities
B) Grown due to the relative ease of moving funds to any opportunity in the world
C) Not changed in the past decade
D) Decreased because of the stability of the North American economy
E) Decreased in response to availability of better information through technology
Answer: B
Q2) When finance department staff provide information to ensure that business plans are achieving expected profit levels and cash flow, they are performing the function of
A) Risk Management
B) Financial Control
C) Investment Project Appraisal
D) Capital Market Assessment
E) Asset Management
Answer: B
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Chapter 2: Accounting - the Language of Business
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Q1) When an asset, which had been in use for several years, is sold at a price that exceeds the balance in the UCC account but is less than book value
A) The excess amount is called CCA
B) The excess amount is called is a capital gain
C) The excess amount is called recaptured CCA
D) The excess amount reduce taxable income
E) The excess amount is not considered income
Answer: C
Q2) Accumulated amortization is grouped under A) Liabilities with other expense accruals
B) Shareholders equity and serves to reduce its value
C) Long-term liabilities as a penitentiary
D) Expenses on the income statement
E) Capital assets as a contra account
Answer: E
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Chapter 3: Financial Planning and Pro Forma Financial Statements
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Sample Questions
Q1) An increase in accumulated depreciation is
A) Not a source of cash inflow or outflow
B) A source of cash inflow from financing activities
C) A source of cash outflow from financing activities
D) A source of cash inflow from operating activities
E) A. source of cash outflow from operating activities
Answer: A
Q2) Argo Heating Ltd. manufactures air conditioners. For 100,000 air conditioners, direct material, direct labour, and direct overhead was $2,000,000, $6,000,000, and $ 4,000,000 respectively. The air conditioners sell for $280 each. Factory rent was $400,000 and advertising was another $500,000. Management salaries totalled $2,000,000. Which of the following is the breakeven point for Argo Heating?
A) 10,357 units
B) 18,125 units
C) 24,167 units
D) 42,857 units
E) 75,000 units
Answer: B
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Chapter 4: Analyzing and Interpreting Financial Statements
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Sample Questions
Q1) Which of the following pairs of ratios would reveal over trading best?
A) Revenue to capital employed and return on equity
B) Operating profit margin and average payment period for payables
C) Acid test and revenue to capital employed
D) Acid test and average payment period for payable
E) Operating profit margin and acid test
Q2) Blauker Auto Sales & Service Ltd's accounts make $27,740,000 purchases on credit each year. The level of its accounts payable is $2,660,000. Due to a slowdown in car sales, Blauker would like to extend its accounts payables to 45 days. If Blauker would have to pay 7% per annum for short-term financing, how much interest will the company save in a year by extending its payment period?
A) $16,226
B) $53,200
C) $186,200
D) $239,400
E) $1,757,880
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6
Chapter 5: The Time Value of Money
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Q1) Rekka Resin Moulding Inc.'s earnings before tax (EBT) has declined between 3% and 7% in each of the past five quarters. The company is trying to finance the purchase of a $55,000 injection moulding machine. The Kelowna-Picton Credit Union has made the best offer at 8.5%, 2.5% over Prime. At the same time, Penticton Injection Inc. a company with steady earnings growth, has received financing for a similar project with the loan provided at .75% under Prime. Due to its declining earnings Rekka will be facing
A) A risk premium of 3.25%
B) An opportunity cost of $4,675
C) A risk premium of $4,675
D) An opportunity cost of 3.25%
E) An opportunity cost of 2.5%
Q2) As a bond approaches within weeks of its maturity date, its market price
A) Approaches zero
B) Rises or drops below the face value of the bond based on current interest rates
C) Is equal to the face value of the bond plus the total interest earned
D) Approaches the face value of the bond
E) Is equal to the future value of the stream of interest payments
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Chapter 6: Making Capital Investment Decisions
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Q1) A carpet manufacturer, whose discount rate is 10%, can purchase texturizing equipment for $1,250,000 to process yarn. Incremental income before straight line depreciation from sales of texturized carpets is projected over the next five years as $95,000, $165,000, $357,000, $725,000 and $315,000, respectively. The company believes that the fashion will pass and demand in Year 6 will all but disappear. The machine can be sold at the end of Year 5 for $250,000. What should you advise the company to do?
A) Purchase the equipment as NPV is $86,952.
B) Not purchase the equipment as NPV is ($54,784).
C) Purchase the equipment as ARR is 10.9%.
D) Not purchase the equipment as the ARR is only 9.3%.
E) Purchase the equipment as both the NPV and ARR are negative.
Q2) What is the primary factor in the creation of positive cash flow?
A) Expense reduction
B) Increases in sales revenue
C) Effective investment appraisal
D) An expanding economy
E) Product innovation
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Page 8
Chapter 7: Making Capital Investment Decisions: Further Issues
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Sample Questions
Q1) The Maritime Cannery Company is considering a new machine that costs $100,000. It will last three years and management feels there are two possible cash flow possibilities each year, depending on whether the country is in recession or not. Year 1: 70% chance of $40,000 and 30% chance of $20,000; Year 2: 60% chance of $50,000 and 40% chance of $30,000; Year 3: 80% chance of $60,000 and 20% chance of $20,000. What is the expected net present value of the new machine if the company's discount rate is 6%?
A) ($78,000)
B) ($6,583)
C) $6,000
D) $13,116
E) $28,000
Q2) The validity of the data on which objective probabilities are based always suffers from the situation that
A) The data is historical and may not describe the future
B) The expert input being used can be, in reality, wrong
C) Opinions can be biased by irrelevant factors
D) The data was recorded for other purposes
E) The data required is not available
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Chapter 8: Financing a Business 1: Sources of Funds
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Q1) A company has 16 million common shares outstanding and on Dec. 31st, declared a year-end net income after tax of $48 million. It pays a fixed dividend of $1.20 on its 4.8 million preferred shares outstanding. The company's has expanded rapidly and traded steadily at a price/earnings ratio of 32. Four years ago, it issued $42 million worth of debt at 4% compounded annually with a convertible feature that could be exercised December 31st of year 4 of the loan at a price of $84.00. If the company issues new shares to the bondholders, what is the dilution in current earnings per share if maximum conversion occurs?
A) No dilution as the current market price of the share is too low for conversion to take place.
B) Earning per share will drop by 8.0 cents per share after full conversion.
C) No dilution as the current market price of the share is too high for conversion to take place.
D) No dilution will occur as the liquidation of the loan through conversion will boost net income after tax.
E) Earnings per share will drop by 9.1 cents per share after full conversion.
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Chapter 9: Financing a Business 2: Raising Long-Term Funds
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Q1) Details of a government bailout of a large Canadian auto parts company signed late on Friday were released to the press on Monday. If the market reflects a strong form of efficiency, when would a change in share price reflecting the news of the bailout have happened?
A) At the time when agreement was reached on the details of the plan.
B) At the time when the government was first approached for a bailout.
C) On the Friday that the deal was signed.
D) On the Monday that the deal was officially announced.
E) At the time the government and the auto parts company sat down to talk.
Q2) Pioneer Logging owns a tug boat to manage floating booms of felled trees off the Queen Charlotte Islands. The boat was purchased in February of 2006 for $128,000. If the rate for the asset class is 15%, what is the amount of CCA (capital cost allowance) that the company can claim on their 2008 income tax return?
A) $12,832
B) $13,872
C) $14,076
D) $15,096
E) $16,320
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Chapter 10: The Cost of Capital and the Capital Structure
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Q1) The capital structure for a particular project consists of $500,000 of retained earnings, a $2.5 million bank loan with a net after-tax cost of capital of 5.5%, $2.5 million of common shares with a cost of capital of 8.2%.What is the weighted average cost of capital (WACC) for the project?
A) 4.5
B) 5.6
C) 6.4
D) 7.0
E) 7.3
Q2) Intelligent Corp. (IC) has paid an annual dividend of $2.00 per share ever since it was formed ten years ago. Today IC announced it will start to grow the dividend by 15% per year from now on. If IC's shareholders require a 20% return on common shares, by what percentage should IC's share price jump according to the dividend-based approach to share valuation?
A) 60%
B) 120%
C) 180%
D) 360%
E) 480%
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Chapter 11: Developing a Dividend Policy
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Q1) Which of the following represents a legal restriction on the payment of dividends?
A) The dividend must be paid prior to the ex-dividend date.
B) The total dividend cannot exceed shareholders' equity.
C) A loan covenant which restricts the dividend to 10% of net income.
D) A stock dividend is restricted to Canadian shareholders.
E) A takeover threat limits the dividend a company can pay.
Q2) Beryl Corporation has 15 million common shares outstanding trading on October 1 at a cum dividend price of $22.15 a share. Its EPS at that time, the end of the third quarter, is $1.80 per share. If the ex dividend price drops to $21.95 on Oct. 2, what dividend was declared?
A) No dividend was necessarily declared.
B) $2.7 million
C) $3 million
D) $27 million
E) $30 million
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13
Chapter 12: Managing Working Capital
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Q1) If a company faces a 60-day lead time on orders of a European faucet with an annual demand of 2,190 units, at what inventory level must it reorder to ensure sufficient supply to satisfy average demand?
A) 6
B) 45
C) 60
D) 120
E) 360
Q2) Which of the following combination of factors may affect a firm's investment in working capital?
A) Interest rates, market demand, executive compensation, and the state of the economy.
B) Interest rates, market demand, the seasons, and the state of the economy.
C) Interest rates, market demand, the weather, and the state of the economy.
D) Interest rates, market demand, the political environment, and the state of the economy.
E) Interest rates, market demand, new high tech inventions, and the state of the economy.
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14
Chapter 13: Measuring and Managing for Shareholder
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Q1) Which of the following companies is most committed to the shareholder value approach?
A) Company A, when it decides to expand from a microchip manufacturer to an on-line internet company.
B) Company B, a bank that acts on opportunities to buy other distressed banks cheaply in order to grow its deposit base.
C) Company C, an auto company that focuses on cost cutbacks and pension rollback to improve the bottom line.
D) Company D, a software company that introduces to its mission statement shareholder values initiatives such as salary freezes.
E) Company E, a shipping company that makes short term investments of free cash flows in oil and gas companies.
Q2) Why may EVA be considered a better measure for rewarding managers than SVA?
A) EVA can be fine-tuned to measure an individual's performance.
B) EVA is not as easily manipulated by managers as SVA.
C) EVA values are more comparable from period-to-period than SVA.
D) EVA does not include estimates of future performance.
E) EVA focuses managers on current profits rather than long-term gains.
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Chapter 14: Mergers, Acquisitions, and the Valuation of Shares
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Q1) Craylon Corporation has net income after tax of $4.5 million, cash of $0.5 million, current liabilities of $3.4 million, debt of $6.8 million, retained earnings of $1.5 million, book value for its 5 million common shares of $30 million and a current price/earnings multiple of 18. It is considering the purchase of Dahlia Ltd. whose shares trade at $32.00 and at price/earnings multiple of 24. Craylon plans to offer two of its own shares for one of Dahlia's. What is the disadvantage to this offer?
A) It has higher risk to Craylon and may result in an increase in its cost of capital.
B) It impacts negatively on the company's liquidity and puts short term commitments at risk.
C) It is less attractive to Dahlia as it is implicitly asking shareholders in the target company to bear the risk of the merger's success.
D) It will impact negatively on earnings, diluting long-term shareholder wealth.
E) It is that Dahlia's share price is not as high as the bid price and given the usual premium for mergers, Craylon is paying too much.
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