Course Introduction
Managerial Finance
Chapter Exam Questions
Managerial Finance introduces students to the essential concepts and techniques needed to make informed financial decisions within organizations. The course covers financial statement analysis, budgeting, working capital management, cost of capital, capital budgeting, and risk assessment. Emphasizing practical applications, students learn to evaluate investment opportunities, manage resources effectively, and understand the financial implications of managerial decisions. The course also explores the interrelationship of finance with other business functions, equipping students with the analytical tools necessary for effective financial planning and policy-making in a managerial context.
Recommended Textbook
Practical Financial Management 7th Edition by
William R. Lasher
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Page 2
Chapter 1: Foundations
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Sample Questions
Q1) The S-corporation was designed to address the concerns of shareholders of large, publicly traded companies that wanted to avoid the double taxation of their income.
A)True
B)False
Answer: False
Q2) The CFO is the person primarily responsible for judging the financial viability of projects proposed by other executives.
A)True
B)False
Answer: True
Q3) Companies sometimes create liabilities that exceed their assets when they lose a lawsuit.
A)True
B)False
Answer: True
Q4) A stockbroker is licensed to trade securities on behalf of investors.
A)True
B)False Answer: True
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Q1) Which of the following does not cause accounting profit and cash flow to differ?
A) Depreciation
B) Sales made on credit
C) Payroll expense
D) Inventory purchased, but not yet sold
Answer: C
Q2) A decrease in financial leverage results in a larger tax liability because interest is tax deductible.
A)True
B)False
Answer: True
Q3) Which of the following causes accounting profit and cash flow to differ?
A) Payroll expense
B) Cash sales
C) Depreciation
D) Inventory purchased and sold
Answer: C
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Page 4
Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) A use of cash would be generated by which of the following?
A) An increase in accounts receivable
B) A decrease in inventory
C) An increase in accounts payable
D) An increase in accrued expenses
Answer: A
Q2) Average values are most appropriate in ratio analysis when:
A) the ratio reflects an activity that goes on throughout the year.
B) the company is relatively stable.
C) the company is growing rapidly.
D) Both a & b
E) Both a & c
Answer: E
Q3) Changes to net working capital are categorized as:
A) cash flow from operating activities.
B) cash flow from investment activities.
C) cash flow from financing activities.
D) None of the above
Answer: A
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Page 5
Chapter 4: Financial Planning
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Sample Questions
Q1) Top down plans are often overly aggressive and unrealistic calling for performance the company cannot achieve. Bottom up planning, on the other hand, tends to produce plans that don't call out the best the organization can do. Where do these tendencies come from, and why do they exist. Describe an ideal planning process in terms of top down and bottom up.
Q2) Business planning that focuses on the next year and includes detailed revenue targets, profit objectives and compensation systems is called:
A) strategic planning.
B) operational planning.
C) budgeting.
D) forecasting.
E) this level of detail is included in all of the business planning levels.
Q3) Considering each action independently and holding other things constant, which of the following would DECREASE new debt financing needed?
A) A decrease in the dividend payout ratio
B) A decrease in the tax rate
C) A decrease in fixed assets
D) Both a & b
E) All of the above
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Page 6
Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Assuming a project is expected to last fifteen years, which form of funding would be most consistent with the idea of maturity matching?
A) Fifteen-year bonds issued in the money market
B) Fifteen-year bonds issued in the capital market
C) Stock issued in the capital market
D) Stock issued in the money market
Q2) The term structure of interest rates or yield curve is the pattern of interest rate yields for debt securities that are similar in all respects except for differences in:
A) tax status.
B) liquidity.
C) risk of default.
D) term or maturity.
Q3) The interest rates we observe on financial instruments are based on the following components:
A) the real risk-free rate.
B) inflationary expectations.
C) risk premiums.
D) All the above
E) None of the above
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Chapter 6: Time Value of Money
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Sample Questions
Q1) An increase in the frequency of compounding will increase the future value of an investment if all other factors are held constant.
A)True
B)False
Q2) You want to purchase a boat that costs $40,000. You want to finance as much of the purchase as possible with a 5-year bank loan at 12% compounded monthly, but can only afford loan payments of $750 per month. How much will you need as a down payment to buy the boat? (Round to the nearest dollar)
A) $3,523
B) $4,637
C) $5,147
D) $6,284
Q3) You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund that earns about 11 percent per year and decide to invest in it. How much must you save each year to obtain your goal?
A) $20,000.00
B) $3,749.98
C) $4,370.13
D) $2,000.00
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Page 8
Chapter 7: The Valuation and Characteristics of Bonds
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Q1) Morell Corp has a callable bond outstanding. The call provision guarantees that the bond won't be called in the first ten years of its life, and if it is called thereafter the bondholder will be compensated with an extra year's interest at the 12% coupon rate. The bond is now five years into its 25 year life. The market interest rate has fallen to 6%, so it is likely that the bond will be called as soon as the contract allows. What should the bond sell for today?
A) $1,255.91
B) $1,345.20
C) $1,693.44
D) $1,120.00
Q2) Which of the following is used to determine the periodic future cash flows from a bond?
A) Coupon rate
B) Current yield
C) Yield to maturity
D) Maturity
Q3) A record of owners of bearer bonds is kept by a transfer agent.
A)True
B)False
Q4) Why are bond ratings so important to companies?
Page 9
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?
A) No, because the stock is overpriced by $1.75.
B) No, because the stock is overpriced by $3.85.
C) Yes, because the stock is underpriced by $1.75.
D) Yes, because the stock is underpriced by $3.85.
Q2) How is preferred stock similar to bonds?
A) Constant payment
B) Pays both principal and interest to investor
C) Fixed maturity date
D) Both a & c
E) All of the above
Q3) A widely held company is usually owned by many stockholders, some of which have significant levels of ownership.
A)True
B)False
Q4) Jan bought a stock at $70 per share and sold it for $84. While she owned it, she received a $5 per share dividend. What was her percentage return?
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Chapter 9: Risk and Return
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Q1) The CAPM asserts that the only company specific factor affecting required return is:
A) market risk.
B) the risk-free rate.
C) investment risk.
D) risk aversion.
Q2) The slope of the security market line is a reflection of the risk tolerance or level of risk aversion of the investment community. As the line becomes steeper, investors become more risk averse and demand higher risk premiums.
A)True
B)False
Q3) Risk aversion does not mean that investors avoid risk entirely. Rather, they will accept risk if they are adequately compensated by additional expected return.
A)True
B)False
Q4) The wider the distribution of returns, the smaller is the investment's risk. A)True
B)False
Q5) Explain systematic risk and unsystematic risk.
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) An outlay of $180,000 is expected to yield the following cash flows: Year Net Cash Flow
1 75,000
2 55,000
3 60,000
4 25,000
5 15,000
6 10,000
The cost of capital is 12 percent. What is the NPV?
A) $8,505
B) $5,070
C) $3,525
D) $2,982
Q2) If a project's NPV is negative:
A) the project earns less than the cost of capital.
B) the investment will not add value or contribute to shareholder wealth.
C) the present value of expected cash outflows is greater than the present value of expected cash inflows.
D) All of the above
Q3) What are some of the practical reasons for capital rationing?
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Page 12
Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) The dollar amount of interest charges is:
A) always considered in the net cash flow calculation.
B) normally not considered in the net cash flow calculation.
C) always considered as a part of the net investment.
D) None of the above
Q2) A major responsibility of the financial analyst is to ensure that only reasonable cash flow estimates are used in capital budgeting.
A)True
B)False
Q3) The value of resources used in a capital budgeting project should be measured in terms of their:
A) acquisition cost.
B) historical cost.
C) opportunity cost.
D) depreciated cost.
Q4) Taxes are important in capital investment evaluation because they affect the accounting profits generated by an investment.
A)True
B)False
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Chapter 12: Risk Topics and Real Options in Capital Budgeting
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Sample Questions
Q1) Since a firm can be viewed as a collection of projects, taking on projects without consideration of their risk can in the long term:
A) change the firm's risk character.
B) systematically degrade the firm's profitability.
C) make the firm's financial results more volatile.
D) a and c
Q2) Richmond Graphics is a small company contemplating a project with a $5M initial investment. A traditional capital budgeting analysis shows the project to have an NPV of $3.3M. However, a simple decision tree analysis reveals that the project has a 90% probability of an NPV of $4.0M and a 10 % chance of a ($3.0M) loss NPV. Management should probably:
A) accept the project because its traditional NPV is positive.
B) accept the project even though there is some risk because the overwhelming likelihood is that the outcome will be favorable.
C) reject the project because it has some risk.
D) reject the project because it entails a fairly good chance of a loss that could ruin a small company coupled with a likely gain that isn't very large.
Q3) Explain the certainty equivalent approach.
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Chapter 13: Cost of Capital
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Sample Questions
Q1) Assume the following information about a firm's capital components:
\(\begin{array}{lll}
\text { Debt } & \text { Capital Structure } & \text { Cost } \\
\text { Preferred stock } & \$ 20,000 & 8 \% \\
\text { Common stock } & \$ 20,000 & 11 \% \\
& \$ 60,000 & 14 \%
\end{array}\) The firm's WACC is:
A) 11.00%.
B) 11.90%.
C) 12.20%.
D) 12.05%.
Q2) The investment opportunity schedule (IOS) and the MCC viewed together identify which capital projects should or should not be undertaken.
A)True
B)False
Q3) Capital structure and component costs should be calculated using:
A) book values for structure and market values for costs.
B) market values for structure and book values for costs.
C) book values for both structure and costs.
D) market values for both structure and costs.
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Which of the following is correct?
A) Capital structure affects both financial leverage and operating leverage.
B) Cost structure affects both financial leverage and operating leverage.
C) Capital structure affects financial leverage and cost structure affects operating leverage.
D) Capital structure affects operating leverage and cost structure affects financial leverage.
E) None of the above is correct.
Q2) Assume the following facts about a single product firm: \(\begin{array}{l}
\text {Selling price per unit }&=\$ 25.00 \\
\text { Variable costs per unit}&=\$ 20.00 \\
\text {Total annual fixed costs }&=\$ 30,000
\end{array}\) What is the firm's annual breakeven volume in sales revenues?
A) $6,000
B) $250,000
C) $150,000
D) $1,500
Q3) DFL equals EBIT / (EBIT - I).
A)True
B)False
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Chapter 15: Dividends
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Q1) A fundamental issue of dividend policy is whether stockholders prefer dividend income or capital gains.
A)True
B)False
Q2) The dividend controversy is whether paying or not paying dividends affects:
A) retired stockholders.
B) stock price.
C) young, affluent stockholders.
D) dividend reinvestment.
Q3) If stockholders have a preference for divided income, the optimal dividend policy is to treat dividends as a residual.
A)True
B)False
Q4) An increase in a firm's payout ratio increases current dividends received by a stockholder at the expense of lower future dividends.
A)True
B)False
Q5) If neither stock splits nor stock dividends offer shareholders anything of economic value, why are both quite popular?
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Chapter 16: The Management of Working Capital Multiple
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Q1) Which of the following accounts is (are) not part of a firm's working capital?
A) Plant and equipment
B) Marketable securities
C) Cash
D) a and c
Q2) Seasonal working capital needs are best financed by:
A) short-term loans.
B) sales of long-term debt.
C) forgoing dividend payments.
D) selling inventories.
Q3) A revolving credit agreement:
A) is similar to a line of credit except that it is binding on the bank.
B) does not guarantee the availability of funds.
C) requires the lender to pay a commitment fee.
D) Both a& c.
E) All of the above
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Chapter 17: The Management of Working Capital
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Q1) Firms are required to commit capital to funding cash balances just as they commit capital to fund inventory, receivables, and fixed assets.
A)True
B)False
Q2) In most companies, the level of working capital needed to operate efficiently varies with sales.
A)True
B)False
Q3) Incremental working capital needed to support seasonal peaks in sales is known as seasonal working capital.
A)True
B)False
Q4) A lockbox system can eliminate processing float.
A)True
B)False
Q5) A lockbox system that accelerates cash collections also decreases a firm's receivables.
A)True
B)False
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Chapter 18: Corporate Restructuring
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Q1) The Antitrust Laws:
A) may prevent mergers.
B) have been enforced with varying strictness at different times by the Justice Dept. and the FTC.
C) are aimed at keeping the economy competitive.
D) All of the above
Q2) In many financial mergers, private equity groups are taking advantage of firms whose market value is less than their intrinsic value.
A)True
B)False
Q3) What type of mergers is generally the subject of antitrust laws?
A) Conglomerate mergers only
B) Vertical mergers only
C) Horizontal mergers only
D) Vertical and horizontal mergers
Q4) Which of the following is true of a strategic merger?
A) It is undertaken to make money by selling the acquired firm piece by piece.
B) It is undertaken to enhance the business position of the acquiring company.
C) It never has an effect on competition in the acquirer's industry.
D) It usually involves business acquisitions in a completely different industry.
Page 20
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Chapter 19: International Finance
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Q1) Which of the following countries does not fall under the Eurozone?
A) Austria
B) Ireland
C) Great Britain
D) Greece
E) Spain
Q2) A recent direct quote for the British pound was $1.6750. How many British pounds can be purchased with $100?
A) 165.70
B) 59.70
C) 0.5970
D) 16.57
Q3) A U.S. company that wants to buy products from a foreign firm must generally buy that country's currency first.
A)True
B)False
Q4) Eurobonds are denominated in a currency other than that of the country in which they are sold.
A)True
B)False
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