Managerial Finance Exam Bank
Course Introduction
Managerial Finance introduces students to the principles and techniques essential for financial decision-making in business organizations. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Emphasis is placed on applying quantitative methods to analyze financial problems and on using financial information for planning, control, and strategic decision-making. By the end of the course, students will be equipped with the analytical tools to assess the financial health of organizations and support effective management of financial resources.
Recommended Textbook Fundamentals of Corporate Finance 6th Canadian Edition by Richard A Brealey
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Page 2
Chapter 1: Goals and Governance of the Firm
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Sample Questions
Q1) In a partnership form of organization,income tax liability,if any,is incurred by:
A) the partnership itself.
B) the partners individually.
C) Both the partnership and the partners.
D) Neither the partnership nor the partners.
Answer: B
Q2) Provide at least three examples each of real and financial assets that might appear on the balance sheet of General Motors.
Answer: Examples of real assets for General Motors: cash,raw materials inventory,production facilities,tools and machines,finished inventory of automobiles.Examples of financial assets that could have been issued by General Motors: common stock (different classes),preferred stock,corporate bonds,bank loans,et cetera.Of course,GM could show financial assets on the left side of their balance sheet also,such as: short-term investments in government securities,contracts receivable from the financing of their automobiles,or possibly residential mortgages (GM,through its subsidiaries,is a large originator of residential mortgages,although most would eventually be sold in the secondary market).
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) One root of the financial crisis of 2007-2009 was the strict money policies promoted by the U.S.Federal Reserve and other central banks after the technology bubble burst (i.e.,money was relatively expensive during this time).
A)True
B)False
Answer: False
Q2) The financial crisis of 2007-2009 contributed to the largest sovereign default in history by which one of these countries?
A) Italy
B) Portugal
C) Ireland
D) Greece
Answer: D
Q3) The key to the banks' ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.
A)True
B)False
Answer: True
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Chapter 3: Accounting and Finance
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Sample Questions
Q1) Which of the following assets is likely to be considered the most liquid?
A) marketable securities
B) net fixed assets
C) accounts payable
D) inventories
Answer: A
Q2) Which one of the following is an intangible asset?
A) goodwill
B) retained earnings
C) deferred income taxes
D) treasury stock
Answer: A
Q3) Which one of these will increase a firm's cash balance?
A) an increase in inventory
B) a decrease in accounts payable
C) an increase in common stock
D) an increase in new equipment
Answer: C
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Chapter 4: Measuring Corporate Performance
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Sample Questions
Q1) Last year's asset turnover ratio was 2.0.Sales have increased by 25% and average total assets have increased by 10% since that time.What is the asset turnover ratio today?
A) 1.82
B) 2.05
C) 2.15
D) 2.27
Q2) Net working capital is determined from the difference between current assets and current liabilities.
A)True
B)False
Q3) What is the approximate total debt ratio for a firm with a total debt-equity ratio of .65?
A) 35%
B) 39%
C) 54%
D) 65%
Q4) Receivable turnover ratio and asset turnover ratio are both efficiency ratios. A)True
B)False
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) A cash-strapped young professional offers to buy your car with four,equal end of year annual payments of $3,000,beginning 2 years from today (the first payment will be made on the last day of year 2).Assuming you're indifferent to cash versus credit,that you can invest at 10%,and that you want to receive $9,000 for the car,should you accept?
A) Yes; present value is $9,510.08
B) Yes; present value is $11,372.67
C) No; present value is $8,645.09
D) No; present value is $7,461.17
Q2) A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment.What is the loan's APR?
A) 6%
B) 9%
C) 11%
D) 12%
Q3) The Excel function for future value is FV (rate,nper,pmt,PV).
A)True
B)False
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Page 7
Chapter 6: Valuing Bonds
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Sample Questions
Q1) Bonds with a rating of Ba or below by Moody's are referred to as speculative grade,high-yield,or junk bonds.
A)True
B)False
Q2) A bond has an ask quote of 99.5625 and a bid quote of 99.5475.How much will the bond dealer make on the purchase and resell of a $100,000 bond if they earn a 10% commission?
A) $150
B) $1,500
C) $15
D) $1.50
Q3) What price will be paid for a Canadian Treasury bond with an ask price of 135.4062 if the face value is $100,000?
A) $100,135.41
B) $135,000.41
C) $136,269.38
D) $135,406.20
Q4) The current yield measures the bond's total rate of return.
A)True
B)False
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) Which of the following describes a seasoned offering?
A) an IPO of common stock for a well-known firm
B) an IPO that is offered during the best buying season
C) an additional equity issue from a publicly traded firm
D) any shares traded in the secondary market are seasoned offerings
Q2) What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?
A) $22.86
B) $28.00
C) $42.00
D) $43.75
Q3) The book value of a firm's equity is determined by:
A) multiplying share price by shares outstanding.
B) multiplying share price at issue by shares outstanding.
C) the difference between book values of assets and liabilities.
D) the difference between market values of assets and liabilities.
Q4) Lincoln and Donovan's will pay a dividend of $5 per share in year 1.It sells at $60 a share,and firms in the same industry provide an expected rate of return of 14 percent.What must be the expected growth rate of the company's dividend?
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) What is the decision rule in the case of sign changes that produce multiple IRRs for a project?
A) select the lowest IRR to be conservative.
B) select the highest IRR to maximize the benefits.
C) any or all of the IRRs are justified to use.
D) evaluate the project according to NPV.
Q2) Use of a profitability index to select projects in the absence of capital rationing:
A) will provide the same rankings as an NPV criterion.
B) will maximize NPV, but not IRR.
C) can result in misguided selections.
D) is technically impossible.
Q3) The IRR is the rate of return on the cash flows of the investment,also known as the opportunity cost of capital.
A)True
B)False
Q4) If a project has multiple IRRs,the highest one is assumed to be correct.
A)True
B)False
Q5) Discuss three reasons why a firm may want to impose soft capital rationing.
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Chapter 9: Using Discounted Cash Flow Analysis to Make Investment Decisions
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Sample Questions
Q1) Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.
A)True
B)False
Q2) If a project is expected to increase inventory by $15,000,increase accounts payable by $10,000,and decrease accounts receivable by $1,000,what effect does working capital have during the life of the project?
A) increases investment by $4,000
B) increases investment by $5,000
C) increases investment by $6,000
D) working capital has no effect during the life of the project
Q3) With the half-year rule,the depreciation percentage is lower in the first year than in the second year.This is due to the fact that:
A) the depreciation percentage increases in each year.
B) assets are assumed to be acquired at mid-year.
C) depreciation expense increases at the rate of inflation.
D) declining balance depreciation is less attractive than straight-line depreciation.
Q4) What are the three methods to calculate cash flow from operations?
Page 11
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Chapter 10: Project Analysis
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Sample Questions
Q1) What is the degree of operating leverage of this project?
Q2) Firms that lack competitive advantages will:
A) have difficulty finding positive NPV projects for investment.
B) be forced to capture larger market shares to be profitable.
C) avoid the need to conduct sensitivity analyses.
D) be forced to operate with a high degree of operating leverage.
Q3) Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.
Q4) When management selects production technologies that include a high proportion of fixed costs,they:
A) decrease their DOL.
B) increase their DOL.
C) decrease their NPV break-even level of sales.
D) reduce the NPV of their cash flows.
Q5) Which of the following sources would most likely be responsible for persistent "project cost over-runs"?
A) rapidly rising inflation
B) delays in obtaining contracts and permits
C) lack of raw materials
D) forecasting bias by the sponsoring manager
Page 12
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost
of Capital
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Sample Questions
Q1) When high growth is expected in the economy,an investor should receive higher returns from:
A) cyclical investments.
B) countercyclical investments.
C) stocks with negative correlations.
D) stocks with low standard deviations.
Q2) Stock A has 10 million shares issued and Stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?
A) equal-weightings, like all S&P 500 stocks.
B) B has twice the weighting, to account for having fewer shares.
C) A has twice the weighting, to account for having more shares.
D) they are weighted according to their expected performance.
Q3) The addition of a negative risk asset to a portfolio of assets will:
A) increase the portfolio's expected return.
B) decrease the portfolio's expected return.
C) increase the portfolio's expected volatility.
D) decrease the portfolio's expected volatility.
Q4) Discuss the relationship between risk and return.
Q5) Discuss the concept of a "negative risk asset."
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) What should be the Beta of a replacement stock if an investor wishes to achieve a portfolio Beta of 1.0 by replacing Stock C in the following equally weighted portfolio: Stock A = .9 Beta; Stock B = 1.1 Beta; Stock C = 1.35 Beta?
A) 0.93 Beta
B) 1.00 Beta
C) 1.08 Beta
D) 1.15 Beta
Q2) The average of Beta values for all individual stocks is:
A) greater than 1.0; most stocks are aggressive.
B) less than 1.0; most stocks are defensive.
C) unknown; Betas are continually changing.
D) exactly 1.0; these stocks represent the market.
Q3) Investors expect the market rate of return this year to be 14%.A stock with a Beta of .8 has an expected rate of return on the market portfolio is 11%,is a security with a Beta of 1.25 and an expected rate of return of 11% overpriced or underpriced?
Q4) Why is Beta thought to be a more relevant measure of risk than standard deviation for a diversified investor?
Q5) How can you measure and interpret the market risk,or Beta,of a security?
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Sample Questions
Q1) As a firm changes to a higher debt ratio,debt holders are likely to demand higher rates of return.
A)True
B)False
Q2) Which of the following statements is true?
A) the cost of equity is more difficult to derive than the cost of preferred shares.
B) the firm's shares will not be bid up if the firm does not pay dividends.
C) The DDM cannot be used to value companies who do not pay dividends.
D) equity financing will provide the corporation with a tax shield.
Q3) Capital structure decisions refer to the:
A) dividend yield of the firm's stock.
B) blend of equity and debt used by the firm.
C) capital gains available on the firm's stock.
D) maturity date for the firm's securities.
Q4) The mix of a company's short-term financing is referred to as its capital structure.
A)True
B)False
Q5) Why are investors interested in free cash flow?
Page 15
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Chapter 14: Introduction to Corporate Financing and Governance
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Sample Questions
Q1) Subordinated debt is an example of short-term debt for a firm.
A)True
B)False
Q2) Explain how the founder of a business can eventually lose control of the firm.How can the founder ensure this will not happen?
Q3) What is the net value of common equity for a firm with 3 million shares issued,1 million shares outstanding,$4 million of retained earnings,$2 million of treasury stock at cost,$1 million in additional paid-in capital,and a $1 par value per share?
A) $4 million
B) $6 million
C) $8 million
D) $10 million
Q4) A warrant has an exercise price of $40,and the current stock price is $38.An investor holding this option will purchase the stock only if:
A) the dividend yield on the stock exceeds 10 %.
B) the stock price falls below $38.
C) the stock price rises above $40.
D) the stock price falls to $20 or below.
Page 16
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Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Sample Questions
Q1) What are the net proceeds,gross proceeds and underwriter's spread? How does each affect the funds received by a public firm when debt or equity securities are issued?
Q2) When a public company offers shares to the general public,it does so under a(n):
A) rights issue.
B) initial public offering.
C) shelf registration.
D) general cash offer.
Q3) What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?
A) $4 million
B) $6 million
C) $7 million
D) $8 million
Q4) Studies show that recent returns on venture capital investments have been:
A) negative, on average.
B) zero, on average.
C) nearly 20%, on average.
D) at least 50%, on average.
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Chapter 16: Debt and Payout Policy
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Sample Questions
Q1) The optimal capital structure is met when:
A) additional borrowing results in lower financial distress costs.
B) additional borrowing is offset by the interest tax shield.
C) the tax savings from additional leverage is just offset by the costs of distress.
D) the present value of the tax shield is greater than the value of an all-equity financed firm.
Q2) Firms facing financial distress may pass up positive NPV projects rather than commit new equity because:
A) they prefer to finance with debt.
B) the benefits may be shared with the bondholders.
C) no cash is available for dividends.
D) there is no interest tax shield associated with equity.
Q3) Calculate the firm's expected return on its assets if its expected return on debt is 10%,their expected return on equity is 20%,and its WACC is 14%.
A) 14%
B) 15%
C) 16%
D) Cannot be calculated
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Chapter 17: Leasing
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Q1) Describe three major differences between operating and financial leases,pointing out how these differences reflect varying lessor and lessee situations.
Q2) If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero,how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%.
A) lessor would ignore this, since this is the lessor's business.
B) lessor would record this as an $80,000 lost tax shield at the end of the lease life.
C) lessor would record the $200,000 as a cost of leasing at the end of the lease.
D) lessor would record the $200,000 as a cost the beginning of the lease.
Q3) Short-term leases are convenient but:
A) often expensive for the lessee.
B) often cheap for the lessee.
C) usually involve second-rate equipment.
D) are not as profitable for the lessor as longer-term ones.
Q4) Provide a critique of two weak or dubious reasons for leasing.
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Chapter 18: Payout Policy
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Sample Questions
Q1) A firm's dividend policy involves a trade-off between:
A) growth versus no growth in investment.
B) high share price versus low share price.
C) internal versus external financing of investment.
D) a large asset base and a small asset base.
Q2) A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.
A) cash
B) earnings
C) earnings before interest and taxes
D) retained earnings
Q3) According to the MM dividend-irrelevance proposition,since investors do not need dividends to convert their shares to cash,they will not pay higher prices for firms with higher dividend payouts.
A)True
B)False
Q4) Compare and contrast share repurchases with dividend payouts.
Q5) A dividend does not accompany stocks that are purchased on the ex-dividend date.
A)True
B)False
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Chapter 19: Long-Term Financial Planning
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Q1) Which of the following might indicate the correct choice of a plug figure if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?
A) External debt must increase by $10,000
B) Dividend payments must decrease by $10,000
C) Cash balances must increase by $10,000
D) The capital budget must decrease by $10,000
Q2) With respect to the balance sheet,an increase in equity of $2,000 with an increase in net income to $2,500,leads us to believe:
A) The firm paid a dividend of $500
B) The firm plowed $500 back into the company
C) $500 went into retained earning
D) Debt increased by $2,000
Q3) Describe the percentage of sales model and its potential pitfalls in the financial planning process.
Q4) List and briefly describe the components of a financial planning model.
Q5) Why do current or fixed assets often not vary proportionately with sales?
Q6) Adaptability is not a desirable feature in financial plans.
A)True
B)False
Page 21
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Chapter 20: Short-Term Financial Planning
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Q1) When a loan is secured by receivables,the firm assigns the receivables to the bank.If the firm fails to repay the loan,the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.
A)True
B)False
Q2) Company which sees a customer pay a $2,500 bill resulting from a previous sale will see a $2,500 increase in cash.
A)True
B)False
Q3) A firm needs spare cash to deal with capital budget appropriations,dividend payments,and other large outlays.The interest rate on bank loans is simply quoted as: A) precautionary motive
B) transactions motive
C) speculative motive
D) simple interest
Q4) CumChan has issued commercial paper with a face value of $250,000 that will mature in 60 days.The present market value of the paper is $242,000.Interest on the paper is,therefore:
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Page 22
Chapter 21: Cash and Inventory Management
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Q1) What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?
A) $100
B) $200
C) $400
D) $430
Q2) The economic order quantity for a product is 500 units.However,new orders require five working-days lead time during which time 60 units will be used.Given this information,the correct economic order quantity is:
A) 440 units.
B) 500 units.
C) 507 units.
D) 560 units.
Q3) Short-term securities have high interest-rate risk.
A)True
B)False
Q4) Discuss the distinction of playing the float versus cheque kiting.
Q5) What is the payment float?
Q6) What is float and why can it be valuable?
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Chapter 22: Credit Management and Collection
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Q1) SamanaCorporation expects to receive $1,500 along with costs of $1,000 on each non-delinquent sale on credit.The probability of collection is 60%.Determine whether credit should be extended.
A) Extend credit - net benefit of $100
B) Extend credit - net benefit of $0
C) Do not extend credit - net detriment of $100
D) Do not extend credit - net detriment of $200
Q2) The purpose of credit analysis is to:
A) Reconcile the accounts receivable balance
B) Modify the terms of trade credit
C) Organize the right side of the balance sheet
D) Decide whether or not to grant credit to a customer
Q3) What effective interest rate is charged to a purchaser receiving terms of 5/10,net 90 if the purchaser avoids the discount and pays in 90 days?
A) 20.00%
B) 22.81%
C) 24.93%
D) 26.37%
Q4) What are the usual steps in credit management?
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Chapter 23: Mergers, Acquisitions, and Corporate Control
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Q1) When an outside group acquires a firm,primarily through the use of borrowed funds,the acquisition is known as a:
A) Management buyout.
B) Tender offer.
C) Leveraged buyout.
D) Successful proxy fight.
Q2) Economies of vertical integration are one possible source of synergy in mergers.
A)True
B)False
Q3) In vertical mergers,the goal is to benefit from the economies of scale.
A)True
B)False
Q4) When shareholders are issued rights to buy shares if a bidder acquires a large stake in the firm is best defined as:
A) Leveraged Buyout.
B) Poison Pill.
C) Shark Repellent.
D) Proxy Contest.
Q5) Why are firms with free cash flow attractive acquisition candidates?
Q6) What are some of the motivations for leveraged buyouts?
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Chapter 24: International Financial Management
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Q1) What is the law of one price? When would you expect it to hold and when would you not expect it to hold?
Q2) The six-month forward quote for German Euro is E1.6/US$,and the spot price of German Euro is 1.7/US$.Which of the following statements is true?
A) Forward discount on German Euro is 6.25%
B) Forward premium on German Euro is 6.25%
C) Forward discount on US$ is 7.25%
D) Forward premium on US$ is 6.25%
Q3) You are importing TV sets worth ¥10,000,000 from a Japanese manufacturer,and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.
A) Buying Japanese Yen in the forward market.
B) Selling Japanese Yen in the forward market.
C) Borrowing Japanese Yen.
D) Do nothing.
Q4) If the International Fisher effect is valid,then real interest rates in all countries should be equal.
A)True
B)False
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Chapter 25: Options
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Q1) Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.
A)True
B)False
Q2) A writer of a call option expects the stock price to:
A) decrease.
B) increase.
C) remain unchanged.
D) cash dividends quarterly.
Q3) A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?
A) Buyer of a call option with exercise price of $65.
B) Buyer of a put option with exercise price of $65.
C) Buyer of a call option with exercise price of $80.
D) Buyer of a put option with exercise price of $85.
Q4) Define and briefly explain the relationship between value of a call option and the following five factors: Stock price,exercise price,interest rate,time to expiration,volatility of stock price.
Q5) What is the payoff to buyers and sellers of call and put options?
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Chapter 26: Risk Management
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Q1) A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?
A) A loss of $1,260 is posted to the account.
B) A gain of $1,260 is posted to the account.
C) A loss of $12,600 is posted to the account.
D) A gain of $12,600 is posted to the account.
Q2) Hedging reduces risk,but it is seldom cost free.
A)True
B)False
Q3) The process of marking a futures contract to market means that:
A) the profitability of the contract is locked in from the onset of the contract.
B) the amount of commodity to be delivered changes as prices change.
C) contracts are closed out as soon as they become unprofitable.
D) profits or losses are posted to the contract daily.
Q4) The swap is the arrangement by two counterparties to exchange one stream of cash flow for another.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 28