Managerial Finance Exam Questions
Course Introduction
Managerial Finance focuses on the principles and practices that guide financial decision-making within organizations. The course explores topics such as financial analysis, planning and control, capital budgeting, risk assessment, and funding strategies, emphasizing how managers use financial information to make informed operational and strategic decisions. Students learn to interpret financial statements, evaluate investment opportunities, assess the cost of capital, and understand the impact of financial markets and institutions on corporate finance. Practical applications and case studies are used to illustrate how financial tools and techniques can be leveraged to maximize organizational value and achieve long-term business objectives.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) One drawback of switching from a partnership to the corporate form of organization is the following:
A) it subjects the firm to additional regulations.
B) it cannot affect the amount of the firm's operating income that goes to taxes.
C) it makes it more difficult for the firm to raise additional capital.
D) it makes the firm's investors subject to greater potential personal liabilities.
E) it makes it more difficult for the firm's investors to transfer their ownership interests.
Answer: A
Q2) Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction. A)True
B)False
Answer: True
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3
Chapter 2: Risk and Return-Part I
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Q1) An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
A)True
B)False
Answer: False
Q2) Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant
A) the required return on both stocks would increase by 1%.
B) the required return on portfolio p would remain unchanged.
C) the required return on stock a would increase by more than 1%, while the return on stock b would increase by less than 1%.
D) the required return for stock a would fall, but the required return for stock b would increase.
E) the required return on portfolio p would increase by 1%.
Answer: E
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Chapter 3: Risk and Return-Part II
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Q1) Suppose that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Talcott Inc.'s beta is 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. Calculate the required rate of return for Talcot Inc.
A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%
Answer: D
Q2) If the returns of two firms are negatively correlated, then one of them must have a negative beta.
A)True
B)False Answer: True
Q3) The slope of the SML is determined by the value of beta. A)True
B)False
Answer: False
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Chapter 4: Bond Valuation
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Q1) Which of the following statements is CORRECT?
A) long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
B) if interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
C) relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.
D) long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
E) one advantage of a zero coupon treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
Q2) The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
A)True
B)False
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Chapter 5: Financial Options
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Q1) 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
Q2) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
Q3) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
A)True
B)False
Q4) If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income after taxes Meric uses the same depreciation expense for tax and stockholder reporting purposes.
A) $3,284.55
B) $3,457.42
C) $3,639.39
D) $3,830.94
E) $4,022.48
Q2) In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.
A)True
B)False
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Chapter 7: Analysis of Financial Statements
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Q1) Which of the following statements is CORRECT?
A) an increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.
B) the ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the dso or the inventory turnover ratio.
C) if two firms have the same roa, the firm with the most debt can be expected to have the lower roe.
D) an increase in the dso, other things held constant, could be expected to increase the total assets turnover ratio.
E) an increase in the dso, other things held constant, could be expected to increase the roe.
Q2) Refer to the data for Pettijohn Inc.What is the firm's P/E ratio? A) 12.0
12.6
13.2
13.9
14.6
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Chapter 8: Basic Stock Valuation
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Q1) Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?
A) 6.62%
B) 6.82%
C) 7.03%
D) 7.25%
E) 7.47%
Q2) Lance Inc.'s free cash flow was just $1.00 million. If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?
A) $17.28
B) $17.70
C) $18.13
D) $18.57
E) $19.01
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Chapter 9: Corporate Valuation and Financial Planning
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Q1) Which of the following statements is CORRECT?
A) if a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's afn to be negative.
B) if a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual afn must, mathematically, exceed the previously calculated afn.
C) higher sales usually require higher asset levels, and this leads to what we call afn. however, the afn will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
D) dividend policy does not affect the requirement for external funds based on the afn equation.
E) the sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. in other words, it is the growth rate at which the firm's afn equals zero.
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) an agency problem occurs when an owner/manager sells stock to an outsider but continues to consume perquisites.
B) firms borrowing money have greater flexibility to use that money when there are debt covenants.
C) when lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's wacc can decrease.
D) a lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
Q2) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 11: Determining the Cost of Capital
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Q1) The lower the firm's tax rate, the lower will be its after-tax cost of debt and also its WACC, other things held constant.
A)True
B)False
Q2) Refer to the data for the Collins Group. What is the best estimate of the after-tax cost of debt?
A) 4.64%
B) 4.88%
C) 5.14%
D) 5.40%
E) 5.67%
Q3) The cost of debt, rd, is normally less than rs, so rd(1 T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd(1-T).
A)True
B)False
Q4) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Watts Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. \(\begin{array} { l c c c c c }
& r = 10.00 \% \\
\text { Year } &0& 1 & 2 & 3 & 4 \\
\text { Cash flows } & - \$ 850 & 300 & 320 & 340 & 360 \end{array}\)
A) 14.08%
B) 15.65%
C) 17.21%
D) 18.94%
E) 20.83%
Q2) No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.
A)True
B)False
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Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.
A)True
B)False
Q2) Kasper Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
A) $5,558
B) $5,850
C) $6,143
D) $6,450
E) $6,772
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Chapter 14: Real Options
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Q1) Refer to data for Steppingstone Incorporated. Based on the above information, what is the Z 90's expected net present value?
A)$6,678
B)$3,251
C) $15,303
D) $20,004
E) $45,965
Q2) Real options affect the size, but not the risk, of a project's expected cash flows.
A)True
B)False
Q3) Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
A)True
B)False
Q4) The option to abandon a project is a real option, but a call option on a stock is not a real option.
A)True
B)False
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Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following statements is correct?
A) if a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
B) the stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
C) large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
D) a dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.
E) the tax code encourages companies to pay dividends rather than retain earnings.
Q2) If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.
A)True
B)False
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Chapter 16: Capital Structure Decisions
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Q1) Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity. This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?
A) $14.42
B) $19.36
C) $23.91
D) $28.85
E) $35.62
Q2) The firm's target capital structure should be consistent with which of the following statements?
A) minimize the cost of debt (rd).
B) obtain the highest possible bond rating.
C) minimize the cost of equity (rs).
D) minimize the weighted average cost of capital (wacc).
E) maximize the earnings per share (eps).
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
A)True
B)False
Q2) Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is Kitto's value of equity?
A) $1,492,000
B) $1,529,300
C) $1,567,533
D) $1,606,721
E) $1,646,889
Q3) Refer to the data for NorthWest Water (NWW). What is the NPV if NWW refunds its bonds today?
A) $1,746,987
B) $1,838,933
C) $1,935,719
D) $2,037,599
E) $2,241,359
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Chapter
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Q1) Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another.
A)True
B)False
Q2) Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.
A)True
B)False
Q3) 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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Chapter 19: Lease Financing
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Q1) A sale and leaseback arrangement is a type of financial, or capital, lease.
A)True
B)False
Q2) 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.
Q3) Assume that a piece of leased equipment has a relatively high rather than low expected residual value. From the lessee's viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.
A)True
B)False
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Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion value?
A) $698.15
B) $734.89
C) $773.57
D) $814.29
E) $857.14
Q2) Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's straight-debt value?
A) $684.78
B) $720.82
C) $758.76
D) $798.70
E) $838.63
Q3) Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
A)True
B)False
22
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Because money has time value, a cash sale is always more profitable than a credit sale.
A)True B)False
Q2) As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
A)True B)False
Q3) Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.
A)True B)False
Q4) If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).
A)True B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) Which of the following is not correct?
A) a more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.
B) collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.
C) typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.
D) a lax collection policy will frequently lead to an increase in accounts receivable. E) collection policy is how a firm goes about collecting past-due accounts.
Q2) The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.
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 Cartwright holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?
A) 12,088
B) 3,175
C) 15,750
D) 13,675
E) 8,124
Q2) Refer to Exhibit Palmer Pens. What is the firm's EOQ?
A) 26,833
B) 30,040
C) 43,987
D) 13,563
E) 21,456
Q3) Refer to Exhibit Cartwright Computing. What is the economic ordering quantity for chips?
A) 12,088
B) 3,175
C) 6,243
D) 13,675
E) 8,124
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Chapter 24: Enterprise Risk Management
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Q1) Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.
A)True
B)False
Q2) The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.
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
Q4) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Bankruptcy laws have been used to help reach settlements in major product liability lawsuits. By using financial projections to show that contingent claims against the company jeopardize its existence, agreements are reached, partially satisfying claimants, and allowing the firm to continue operating.
A)True
B)False
Q2) 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
Q3) In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) 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
Q2) Firms use defensive tactics to fight off undesired mergers. These tactics do not include
A) getting a white squire to purchase stock in the firm.
B) getting white knights to bid for the firm.
C) repurchasing their own stock.
D) changing the bylaws to eliminate supermajority voting requirements.
E) raising antitrust issues.
Q3) A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
A)True
B)False
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Chapter 27: Multinational Financial Management
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Q1) Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
A) $14.79
B) $63.00
C) $74.55
D) $85.88
E) $147.88
Q2) Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?
A) 7.92%
B) 4.13%
C) 6.00%
D) 8.25%
E) 12.00%
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Chapter 28: Time Value of Money
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Q1) Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?
A) 7.48
B) 8.80
C) 10.35 D) 12.18 E) 14.33
Q2) Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.
A)True
B)False
Q3) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
A)True
B)False
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Chapter 29: Basic Financial Tools: A review
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Source URL: https://quizplus.com/quiz/6753
Sample Questions
Q1) Which of the following statements is CORRECT?
A) the slope of the security market line is beta.
B) any stock with a negative beta must in theory have a negative required rate of return, provided rrf is positive.
C) if a stock's beta doubles, its required rate of return must also double.
D) if a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.
E) if a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
Q2) What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?
A) $1,537.69
B) $1,618.62
C) $1,699.55
D) $1,784.53
E) $1,873.76
Q3) Diversification will normally reduce the riskiness of a portfolio of stocks.
A)True
B)False
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Page 31
Chapter 30: Pension Plan Management
Available Study Resources on Quizplus for this Chatper
10 Verified Questions
10 Flashcards
Source URL: https://quizplus.com/quiz/6754
Sample Questions
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) Which of the following statements about defined contribution plans is incorrect?
A) in general, employees can choose the investment vehicle under a defined contribution plan. thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.
B) in a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.
C) defined benefit plans are used more often by large corporations than by small companies.
D) the pbgc insures a portion of pension benefits.
E) a defined contribution plan places the risk of poor pension portfolio performance on the employee.
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Chapter 31: Financial Management in Not for Profit
Businesses
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10 Verified Questions
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Source URL: https://quizplus.com/quiz/6755
Sample Questions
Q1) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q2) Since not-for-profit firms do not pay taxes, they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
Q3) The primary goal of investor-owned firms is shareholder wealth maximization, while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example, to provide health care services to the communities served.
A)True
B)False
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