Managerial Finance
Mock Exam
Course Introduction
Managerial Finance explores the principles and practices necessary for effective financial decision-making in business organizations. The course covers topics such as financial statement analysis, budgeting, capital structure, risk evaluation, time value of money, and investment appraisal. Emphasis is placed on applying financial concepts to real-world management scenarios, enabling students to assess financial performance, plan for long-term financial needs, and make strategic choices that maximize organizational value. Through case studies and simulations, students develop analytical and critical thinking skills vital for financial managers in dynamic business environments.
Recommended Textbook Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
A) shareholder proposal
B) leveraged buyout
C) shareholder action
D) hostile takeover
E) merger
Answer: D
Q2) Windsor Windows earns $4.50 per share before taxes.The corporate tax rate is 30%,the personal tax rate on dividends is 15%,and the personal tax rate on non-dividend income is 40%.What is the total amount of taxes paid per share if the company pays a $2.00 dividend but all of the shares are held in a tax-free savings account?
A) $0.30
B) $2.15
C) $1.35
D) $1.65
E) $0.80
Answer: C
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) Consider the above Income Statement for CharmCorp.All values are in millions of dollars.If CharmCorp has 6 million shares outstanding,and its managers and employees have stock options for 1 million shares,what is its diluted EPS in 2015?
A) $1.42
B) $1.67
C) $2.00
D) $2.33
E) $3.71
Answer: C
Q2) The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP)and verifies that the information reported is reliable is the
A) TSX Enforcement Board.
B) Accounting Standards Board.
C) provincial securities commission.
D) auditor.
E) GAAP commission.
Answer: D
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) How can we take a financial decision with cash flows occurring at different points in time?
Answer: We need to transform the cash flows to a single point in time either through present value (PV)computations or through future value (FV)computations,thus bringing all of them at the same point in time to perform simple algebraic computation.
Q2) A vintner is deciding when to release a vintage of sauvignon blanc.If it is bottled and released now,the wine will be worth $2.2 million.If it is barrel aged for a further year,it will be worth 20% more,though there will be additional costs of $500,000,realized at the end of the year.If the interest rate is 7%,what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?
A) He will earn $600,000 less if he releases the wine now.
B) He will earn $200,000 more if he releases the wine now.
C) He will earn $107,000 less if he releases the wine now.
D) He will earn $80,000 more if he releases the wine now.
E) He will earn $500,000 less if he releases the wine now.
Answer: B
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Chapter 4: The Time Value of Money
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Q1) If the interest rate is 10%,then which investment(s),if any,would you take and why?
Q2) James is a law student who wishes to understand how a perpetuity works.His grandfather invested in a perpetual bond 25 years ago,which pays $15,000 annually at a 12% interest rate.What was the present value of the cash flows of this perpetuity when it was purchased?
A) $84,753.35
B) $150,000
C) $125,000
D) $133,928.57
E) $16,800
Q3) Alex buys a consol (perpetual bond)for $90,000.This consol promises him a fixed cash flow of $10,000 every year,forever,starting at the end of the year.If the current market rate is 10%,what is the net present value of his purchase?
A) $10,000
B) $100,000
C) $90,000
D) $80,000
E) $190,000
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6
Chapter 5: Interest Rates
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Q1) The yield curve is typically
A) downward sloping.
B) upward sloping.
C) flat.
D) inverted.
E) fluctuating.
Q2) Assuming that you have made all of the first 24 payments on time,then the outstanding principal balance on your SUV loan is closest to:
A) $31,250
B) $20,300
C) $19,200
D) $32,000
E) $29,000
Q3) You decide to take out a 30-year mortgage for $445,000 at 6% APR.What are your monthly payments?
A) $2,622.69
B) $2,646.96
C) $2,694.06
D) $2,688.32
E) $2,667.99
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Chapter 6: Bonds
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Q1) Which of the following bonds is trading at a premium?
A) a five-year bond with a $2000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semi-annually
B) a ten-year bond with a $4000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semi-annually
C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semi-annually
D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
E) a 20-year bond with a $5000 face value whose yield to maturity is 10.0% and coupon rate is 6.5%
Q2) The face value of a 30-year coupon bond is $100,000.If it pays $1,500 every 3 months,what is its coupon rate?
A) 1.5%
B) 0.06%
C) 6%
D) 4.5%
E) 15%
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8
Chapter 7: Valuing Stocks
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Q1) Parminder Partners is expected to generate free cash flows of $4 million per year for the next 5 years,after which they are expected to grow at a rate of 3% per year.The firm currently has $2 million of cash,$7 million of debt,and a cost of capital of 8%.If the firm has 10 million shares outstanding,what is Parminder's expected current share price?
A) $6.71
B) $6.29
C) $6.55
D) $7.21
E) $6.51
Q2) The above screen shot from Google Finance shows basic stock information for PepsiCo.If you owned 2000 shares of PepsiCo for the period shown,how much would you have earned in dividend payments?
A) $108.33
B) $120.00
C) $760.00
D) $860.00
E) $1020.00
Q3) How can the dividend-discount model handle changing growth rates?
Q4) What is the difference between common stock and preferred stock?
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Chapter 8: Investment Decision Rules
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Q1) When comparing two projects with different lives,why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?
A) so that you can see which project has the greatest net present value (NPV)
B) so that the projects can be compared on their cost or value created per year
C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter time frame
D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered
E) to avoid complications arising from alternating cash inflows and outflows
Q2) You are trying to decide between three mutually exclusive investment opportunities.The most appropriate tool for identifying the correct decision is
A) net present value (NPV).
B) profitability index.
C) internal rate of return (IRR).
D) incremental internal rate of return (IRR).
E) payback period.
Q3) What is the decision criteria using internal rate of return (IRR)rule?
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Page 10
Chapter 9: Fundamentals of Capital Budgeting
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Q1) A small manufacturer that makes clothespins and other household products buys new injection moulding equipment for a cost of $500,000.This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 15%.If the manufacturer currently makes 75 tons of clothespins per year,which sell at $18,000 per ton,what will be the increase in revenue next year from the new equipment?
A) $20,700
B) $80,500
C) $202,500
D) $857,000
E) $1,350,000
Q2) The balance sheet for a small firm is shown above.All amounts are in thousands of dollars.What is this firm's Net Working Capital?
A) $30,000
B) $40,000
C) $47,000
D) $89,000
E) $42,000
Q3) What are the most difficult parts of capital budgeting?
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Page 11
Chapter 10: Risk and Return in Capital Markets
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Q1) While ________ seems to be a reasonable measure of risk when evaluating a large portfolio,the ________ of an individual security does not explain the size of its average return.
A) volatility, volatility
B) the mean return, standard deviation
C) mode, volatility
D) volatility, compound annual return
E) volatility, mean return
Q2) Ford Motor Company had realized returns of 10%,20%,20%,and 10% over four quarters.What is the quarterly standard deviation of returns for Ford calculated from this sample?
A) 5.77%
B) 5.11%
C) 5.99%
D) 5.00%
E) 6.12%
Q3) Is volatility a reasonable measure of risk when evaluating the investment in a single stock?
Q4) When looking at investment portfolios historically,was there a pattern between returns and volatility?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) If two stocks are perfectly negatively correlated,a portfolio with equal weighting in each stock will always have a volatility (standard deviation)of 0.
A)True
B)False
Q2) Barrick Gold Corp stock has a beta of 2.1.If the risk-free rate is 2.6%,and expected market return is 9%,what is the expected return of Barrick Gold Corp stock,according to the CAPM?
A) 10.8%
B) 10.4%
C) 21.5%
D) 13.4%
E) 16%
Q3) When the returns of two stocks are perfectly positively correlated,then
A) they always move oppositely.
B) they tend to move oppositely.
C) they have no tendency.
D) they tend to move together.
E) they always move together.
Q4) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 12: Determining the Cost of Capital
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Q1) Different divisions with differing lines of business use different costs of capital because their cost of ________ could be different.
A) debt
B) equity
C) capital
D) assets
E) common stock capital
Q2) Xcom Industries will pay a dividend of $0.44 next year,and expects its dividends to grow at 8% per year.The current price of Xom stock is $6.45 per share.What is Xom's cost of equity?
A) 17%
B) 14.8%
C) 6.8%
D) 7.4%
E) 15.4%
Q3) Which of the three costs-debt,preferred stock,and common equity-is most difficult to estimate?
Q4) What is the difference between the effective cost of debt and the cost of debt?
Q5) Why do we use leverage if it increases the risk of a firm?
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Chapter 13: Risk and the Pricing of Options
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Q1) What is a put option?
Q2) Rose Industries is currently trading for $47 per share.The stock pays no dividends.A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45.If the risk-free interest rate is 6% per year,then calculate the price of a one-year European put option on Luther with a strike price of $45.
Q3) ________ is the relationship between the value of a stock,a bond,and call and put options on the same stock with the same exercise price.
A) Dividend exclusion
B) Limit law
C) Put-call parity
D) Put option equality
E) Option similarity
Q4) The holder of a put option has
A) the obligation to sell a security for a given price.
B) the right to buy a security for a given price.
C) the right to sell a security for a given price.
D) the obligation to buy a security for a given price.
E) the short position in the contract.
Q5) What is the short position of an options contract?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements concerning the volume and number of IPOs issued over time is most accurate?
A) They are cyclical.
B) They tend to rise over time.
C) They tend to fall over time.
D) They remain approximately the same over time.
E) They do not follow any pattern.
Q2) Which of the following statements regarding selling shares to the public is most accurate?
A) The process of selling stock to the public for the first time is called a seasoned equity offering (SEO).
B) Public companies typically have access to much larger amounts of capital through the public markets.
C) By going public, companies prevent their private equity investors from diversifying.
D) An IPO is typically the last time a company needs to raise capital from the public markets.
E) Going public gives current shareholders less liquidity for their shares.
Q3) How many types of seasoned equity offerings are there?
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16
Chapter 15: Debt Financing
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Q1) A company issues a callable (at par)ten-year,7% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to maturity of 3.1%,which is below the yield to call.What is the price of this bond per $100 of face value when it is released?
A) $103.78
B) $100.00
C) $107.00
D) $96.36
E) $133.10
Q2) A firm raising capital by issuing callable bonds instead of non-callable bonds will either have to pay a higher coupon rate or accept lower proceeds.
A)True
B)False
Q3) Bond covenants tend to increase a bond issuer's borrowing costs.
A)True
B)False
Q4) What is a Canada call?
Q5) What are callable bonds?
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Chapter 16: Capital Structure
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Questions
Q1) We discount the cash flows of a levered firm with a different discount rate than the cost of equity of the unlevered firm because
A) leverage decreases the risk of equity of the firm.
B) leverage changes the unlevered cost of equity.
C) leverage increases the risk of equity of the firm.
D) cost of debt decreases in this setting.
E) default risk increases.
Q2) How do capital structure choices differ across industries?
Q3) Financial managers prefer to choose the same debt level no matter which industry they operate in.
A)True
B)False
Q4) By adding leverage,the returns of the firm are split between debt holders and equity holders,but equity-holder risk increases because
A) interest payments can be rolled over.
B) dividends are paid first.
C) debt and equity have equal priority.
D) interest payments have first priority.
E) interest payments are so high.
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Chapter 17: Payout Policy
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Q1) Because ________ are seen as an implicit commitment,they send a ________ signal of financial strength to shareholders.
A) dividends, strong
B) dividends, weak
C) repurchases, strong
D) repurchases, weak
E) spin-offs, strong
Q2) If Luther invests the excess cash in Treasury bills,then the dividend per share next year will be closest to:
A) $5.00
B) $5.25
C) $4.75
D) $1.05
E) $4.50
Q3) Explain the different effects on a firm's share price for a dividend payment versus a share repurchase.
Q4) What are the different ways a firm can repurchase shares?
Q5) Why might a firm choose a spinoff instead of selling a division and distributing the cash?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) How do we know if expansion is a good idea for the firm?
Q2) A firm has an EBITDA forecast of $150,000 in 5 years.If its EBITDA multiple is 9 and the discount rate is 5%,what is the PV of the firm's terminal value?
A) $1.06 million
B) $1.35 million
C) $1.15 million
D) $150,000
E) $117,530
Q3) Why is EBITDA multiple used for valuation rather than sales or earnings?
Q4) Internal growth rate indicates whether a planned investment will increase or decrease firm value.
A)True
B)False
Q5) What is common starting point for forecasting?
Q6) What are a firm's options when it generates more cash than planned?
Q7) The goal of the financial manager is to maximize the value of the shareholder's stake in the firm.
A)True
B)False
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Chapter 19: Working Capital Management
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Q1) Your firm purchases goods from its supplier with a discount of 2%,and a discount period of 10 days.If the effective annual cost of forgoing the discount is 44.59%,what is the length of the credit period?
A) 10 days
B) 20 days
C) 30 days
D) 40 days
E) 50 days
Q2) Which of the following best describes short-term debt issued by banks that are insured up to $100,000?
A) certificates of deposit
B) repurchase agreements
C) banker's acceptances
D) commercial paper
E) bearer deposit notes
Q3) What are the five Cs of Credit?
Q4) What is a firm's cash cycle?
Q5) What is "just-in-time" inventory management?
Q6) What are the three reasons why a firm holds cash?
Q7) What is the collection float?
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Chapter 20: Short Term Financial Planning
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Q1) What is the term used for a short-term,unsecured debt sold by a large company to investors without using an intermediary?
A) commercial paper
B) direct paper
C) dealer paper
D) unsecured paper
E) junk bond
Q2) Firms need short-term financing to deal with seasonal working capital requirements,negative cash flow shocks,or positive cash flow shocks.
A)True
B)False
Q3) During which of the following months are the firm's working capital needs the greatest?
A) April
B) June
C) September
D) October
E) November
Q4) What are loan origination fees and what effect does it have on the loan?
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Chapter 21: Risk Management
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Q1) ________ is the sensitivity of a firm's assets and liabilities to interest rate changes.
A) Asset mismatch
B) Gamma
C) Duration
D) Vega
E) Basis risk
Q2) Heinz uses 2000 tons of corn syrup each year as an ingredient in its tomato ketchup products.Heinz is concerned about the increase in prices of corn-based products and purchases a fixed-price contract to buy corn syrup at $10,000 per ton.What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $10,000 per ton over the next year?
A) +$5 million
B) -$5 million
C) $0
D) -$10 million
E) +$10 million
Q3) How does insurance allow firms to increase their use of debt financing?
Q4) How does insurance allow firms to reduce issuance costs?
Q5) What is the purpose of a deductible?
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Chapter 22: International Corporate Finance
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Q1) The amount of the taxes paid in dollars for the Irish operations is closest to:
A) $20.5 million
B) $5.1 million
C) $29.5 million
D) $50.0 million
E) $23.0 million
Q2) A Canadian firm is planning to make an investment in Japan.The firm estimates that the project will generate a single cash flow of 10 million JPY after one year.If the one year forward exchange rate is 105 JPY/CAD,and the Canadian cost of capital is 7.5%,what is the PV of the project cash flow?
A) $112,994
B) $94,351
C) $102,381
D) $88,594
E) $95,238
Q3) Why do purely domestic businesses,with no international operations and no imports or exports,still need to be aware of FX markets?
Q4) What is the importer-exporter dilemma?
Q5) What is covered interest parity?
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Chapter 23: Leasing
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Q1) If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat inferior position than the lender if the firm defaults.
A)True
B)False
Q2) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a finance lease?
Q3) Generally speaking,if the asset's CCA deductions are slower than its lease payments,there are tax gains from a true tax lease if the lessor is in a higher tax bracket than the lessee.
A)True
B)False
Q4) If Danby's borrowing cost is 7%,and its tax rate is 35%,what is the amount of the lease-equivalent loan for the crane?
A) $96,747
B) $369,671
C) $348,253
D) -$363,441
E) $75,329
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Chapter 24: Mergers and Acquisitions
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Q1) Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $42 per share and has a premerger value of $4 billion,while Mackinac is trading for $28 per share and has a premerger value of $1.5 billion dollars.If Greentree's maximum offer is 0.75 shares for each Mackinac share,what are the projected synergies from the merger?
A) $1.125 billion
B) $1.5 billion
C) $500 million
D) $187.5 million
E) $259.5 million
Q2) What is the difference between a friendly takeover and a hostile takeover?
Q3) What is a poison pill,and how does it prevent a hostile takeover?
Q4) A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a
A) white knight.
B) classified board.
C) poison pill.
D) golden parachute.
E) recapitalization.
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Chapter 25: Corporate Governance
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Q1) According to the findings of researchers in the field,which of the following is most likely to be an effective board of directors?
A) a small board with a large proportion of directors who are not employed by the company or other companies with which it does business
B) a small board with a large proportion of directors who are employed by the company or another company that has a business relationship with the company
C) a large board on which most directors have served a long time
D) a large board on which most directors are employees
E) a small board with a small proportion of outside directors
Q2) Activist investors can only achieve their goals by putting their issues to a shareholder vote.
A)True
B)False
Q3) The optimal level of sensitivity of a manager's compensation to the firm's performance depends on the manager's level of risk aversion.
A)True
B)False
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