Managerial Finance
Mock Exam
Course Introduction
Managerial Finance focuses on the financial decision-making processes within organizations and examines how managers use financial information for planning, control, and strategic purposes. The course covers essential topics such as financial analysis, budgeting, capital structure, investment decisions, risk management, and the assessment of financial performance. Students learn to apply quantitative tools and concepts to real-world financial scenarios, enabling them to evaluate investment opportunities, manage financial resources effectively, and support organizational goals. Emphasis is placed on understanding the role of finance in both short-term and long-term decision-making, as well as on ethical considerations in managerial financial practices.
Recommended Textbook
Fundamentals of Corporate Finance 8th Edition by Richard Brealey
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Chapter 1: Goals and Governance of the Corporation
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Q1) How do corporations ensure that managers' and stockholders' interests coincide?
Answer: Conflicts of interest between managers and stockholders can lead to agency problems. These problems are kept in check by compensation plans that link the well-being of employees to that of the firm; by monitoring of management by the board of directors, security holders, and creditors; and by the threat of takeover.
Q2) When a corporation fails, the maximum that can be lost by an individual shareholder is:
A) the amount of their initial investment.
B) the amount of their share of the profits.
C) their proportionate share required to pay the corporation's debts.
D)the amount of their personal wealth.
Answer: A
Q3) Investment banks like Morgan Stanley or Goldman Sachs:
A) collect deposits and relend the cash to corporations and individuals.
B) help companies sell their securities to investors.
C) design and sell insurance policies for businesses.
D)lend to corporations and investors in commercial real estate.
Answer: B
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3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) In 2012, U.S. corporate and foreign bonds totaled:
A) less than $500 billion.
B) about $3 trillion.
C) about $7 trillion.
D)more than $12 trillion.
Answer: D
Q2) Excess cash held by a firm should be:
A) reinvested by the firm in projects offering the highest rate of return.
B) reinvested by the firm in projects offering rates of return higher than the cost of capital.
C) reinvested by the firm in the financial markets.
D)distributed to bondholders in the form of extra coupon payments.
Answer: B
Q3) The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment.
A)True
B)False
Answer: True
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Chapter 3: Accounting and Finance
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Q1) Assume tax rates on single individuals are 10% on taxable income up to $9,075, 15% on income of $9,076 to $36,900 and 25% on income of $36,901 to $89,350. What is the tax liability for a single individual with $52,000 of taxable income, which includes $2,000 of dividends?
A) $8,856.25
B) $9,103.50
C) $8,603.50
D)$8,356.25
Answer: A
Q2) Which one of the following statements is correct for a corporation with a negative net income in both the present and the last fiscal year?
A) This year's loss can be carried back, but last year's loss cannot be used.
B) Neither of the losses can be used to reduce taxes.
C) Both losses can be carried forward but not backward.
D)Both losses can be carried forward and backward, within certain time limits.
Answer: D
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Chapter 4: Measuring Corporate Performance
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Q1) The inventory turnover ratio times the average days in inventory equals 365.
A)True
B)False
Q2) In each of the following cases, explain briefly which of the two companies is likely to be characterized by the higher ratio.
a. Debt-equity ratio: an electronics store or a tour operator
b. Payout ratio: BigBookstore or HomeRobots
c. Ratio of sales to assets: a restaurant or a car rental company
d. Average collection period: The Power Company or Joe's FastFood
Q3) Which of these assets is generally considered to be the most liquid?
A) Buildings
B) Land
C) Finished goods inventory
D)Accounts receivable
Q4) What may make simple comparisons of financial ratios misleading?
Q5) Which of the following is the least effective measure of operating performance?
A) ROC
B) ROA
C) ROE
D)All of these are equally ineffective measures of operating performance.
Page 6
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Chapter 5: The Time Value of Money
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Q1) If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate?
A) 4.02%
B) 10.02%
C) 14.50%
D)15.19%
Q2) Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you could only earn 8% rather than the 11% you had hoped to earn on your savings?
A) $12,211.18
B) $13,609.21
C) $14,006.41
D)$14,614.03
Q3) How should we compare interest rates quoted over different time intervals-for example, monthly versus annual rates?
Q4) Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?
Q5) Discuss the statement, "Money has a time value."
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Chapter 6: Valuing Bonds
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Q1) A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.
A)True
B)False
Q2) An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the investor's rate of return?
A) 9.00%
B) 9.23%
C) 9.65%
D)10.26%
Q3) If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years, what will be the real value of the principal at maturity?
A) $1,000.00
B) $1,030.00
C) $1,060.90
D)$1,061.36
Q4) Describe two bond characteristics that increase a bond's price sensitivity to changes in market rates of interest.
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Chapter 7: Valuing Stocks
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Q1) What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?
A) $67.60
B) $62.08
C) $68.64
D)$73.44
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%?
A) $22.86
B) $28.00
C) $42.00
D)$43.75
Q3) Market efficiency implies that security prices impound new information quickly. A)True B)False
Q4) How do you estimate expected rates of return in the constant-growth dividend discount model?
Q5) How does competition among investors lead to efficient markets?
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) A project's payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then the project's payback period will:
A) be reduced.
B) be increased.
C) be unchanged.
D)change but the discount rate must be known to determine the nature of the change.
Q2) Given a particular set of project cash flows, which one of the following statements must be correct?
A) There can be only one NPV for the project, even with multiple discount rates.
B) There can be only one IRR for the project.
C) There can be more than one IRR for the project.
D)There can be only one profitability index for the project, even with multiple discount rates.
Q3) The ratio of net present value to initial investment is known as the:
A) net present value.
B) internal rate of return.
C) payback period.
D)profitability index.
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Q1) Which one of the following is a situation where a new project will require a cash investment in net working capital?
A) Inventory levels will be reduced when the project is introduced.
B) All sales related to the project will be cash sales to a subsidiary.
C) The project will increase inventory more than accounts payable.
D)The project will require additional inventory which will be financed by a supplier.
Q2) Suppose you finance a project partly with debt. You should neither subtract the debt proceeds from the project's required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.
A)True
B)False
Q3) The modified accelerated cost recovery system (MACRS) allows an increase:
A) in total depreciation over the asset's life.
B) in annual depreciation during earlier years.
C) in real but not nominal depreciation expense.
D)in the asset's depreciable cost basis.
Q4) How can the cash flows of a project be computed from standard financial statements?
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Chapter 10: Project Analysis
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Q1) Which one of the following industries has the highest level of operating leverage?
A) Steel
B) Paper
C) Hotels
D)Machinery
Q2) Which one of the following appears to be a more likely result from using sensitivity analysis?
A) Agreement on the appropriate discount rate
B) Determination of whether to finance with debt or equity
C) Isolation of the pivotal factor in project profitability
D)Selection of the best capital budgeting project
Q3) If forecasted sales exceed the accounting break-even level but are less than the economic break-even level, the project has a:
A) positive NPV but earns less than the discount rate.
B) negative NPV but earns more than the discount rate.
C) net loss on the income statement.
D)net profit on the income statement.
Q4) Discuss decision trees, including how they can be useful and how they can be risky.
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Q1) Historically speaking, the market risk premium in Italy has been higher than that of the United States.
A)True
B)False
Q2) Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What nominal rate of return did she earn?
A) 11.16%
B) 14.23%
C) 12.09%
D)10.55%
Q3) For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks.
A)True
B)False
Q4) The variance of a stock's returns can be calculated as the:
A) average value of deviations from the mean.
B) average value of squared deviations from the mean.
C) square root of the average value of deviations from the mean.
D)sum of the deviations from the mean.
Page 13
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) A stock's risk premium is equal to the:
A) expected market return times beta.
B) Treasury bill yield plus the expected market return.
C) risk-free rate plus the expected market risk premium.
D)expected market risk premium times beta.
Q2) Why do stock market investors seem to ignore unique risks when calculating expected rates of return?
A) There is no method for quantifying unique risks.
B) Unique risks are assumed to be diversified away.
C) Unique risks are compensated by the risk-free rate.
D)Beta includes a component to compensate for unique risk.
Q3) If a company with a low credit rating invests in a low-risk project, it should discount the cash flows at a relatively high cost of capital.
A)True
B)False
Q4) The required risk premium for any given investment is defined by the security market line.
A)True
B)False
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) How are the costs of debt and equity calculated?
Q2) What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the respective costs for these components are 6% after tax, 12% after tax, and 18% before tax? The firm's tax rate is 35%.
A) 9.48%
B) 11.16%
C) 12.00%
D)15.60%
Q3) There are two costs of debt finance. The explicit cost of debt is the rate of interest that bondholders demand. But there is also an implicit cost, because higher levels of debt increase the required rate of return to equity.
A)True
B)False
Q4) The company cost of capital is the minimum acceptable rate of return for any project the firm undertakes.
A)True
B)False
Q5) How do firms compute the weighted-average cost of capital?
Q6) What happens when the capital structure of a firm changes?
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Chapter 14: Introduction to Corporate Financing
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Q1) Which one of the following statements is typically correct for a going-concern firm?
A) Book value of equity exceeds market value of equity.
B) Market value of equity exceeds book value of equity.
C) Book value of equity equals market value of equity.
D)No typical relationship exists between book and market values of equity.
Q2) Wheat's Market just issued $350,000 of new common stock at a price of $20 a share.
How will this transaction affect the equity accounts on the firm's balance sheet if the par value is $1 per share?
A) The common stock account will increase by $350,000.
B) The common stock account will decrease by $17,500.
C) Paid in surplus will increase by $332,500.
D)Paid in surplus will increase by $350,000.
Q3) All of the following are true of retained earnings except:
A) it is the difference between paid-in capital and the total dividends paid.
B) it represents the amount of new capital shareholders indirectly contributed.
C) it is equal to earnings times the quantity one minus the payout ratio.
D)it is the amount of earnings plowed back into the firm.
Q4) What procedures are used for elections to a firm's board of directors and other matters put to shareholders?
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Chapter 15: How Corporations Raise Venture Capital and Issue Securities
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Q1) An IPO was offered to the public at $18 a share with the issuing firm receiving $16.50 of that amount. The issuer incurred $750,000 in legal and administrative costs. At the end of the first trading day, the stock was priced at $22.40 a share. What was the total dollar cost, including both direct and indirect costs, of issuing the securities if 225,000 shares were offered?
A) $1,687,500
B) $1,540,000
C) $2,077,500
D)$1,087,500
Q2) Discuss the potential agency issue that arises when managers issue new equity securities.
Q3) Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. What is the cost of underpricing?
A) $81 million
B) $91 million
C) $101 million
D)$111 million
Page 17
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Chapter 16: Debt Policy
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Q1) Leverage will _____ shareholders' expected return and ______ their risk.
A) increase; decrease
B) decrease; increase
C) increase; increase
D)increase; do nothing to
Q2) MM's proposition II without taxes states that the:
A) expected return on equity increases as financial leverage increases.
B) expected return on assets decreases as expected return on debt decreases.
C) firm's capital structure is irrelevant to the firm's overall value.
D)greater the proportion of equity, the higher the expected return on debt.
Q3) Costs of financial distress are greater when a firm increases its:
A) intangible assets as a percentage of total assets.
B) tangible assets as a percentage of total assets.
C) net working capital.
D)retained earnings.
Q4) Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress.
Q5) According to MM, restructuring the firm will not change its overall value.
A)True
B)False
Page 18
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Chapter 17: Payout Policy
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Q1) Discuss the concept of dividend signaling.
Q2) Corporations may have a legitimate preference for dividends over capital gains because:
A) capital gains have a 50% tax rate.
B) dividends received by corporations are not taxable.
C) 30% of dividends received by corporations are exempt from taxation.
D)70% of dividends received by corporations are exempt from taxation.
Q3) How does the information content of a repurchase program differ from that of a dividend increase? Which signal has the more lasting result?
Q4) Investors often interpret a stock split announcement as a signal of management's confidence in the future.
A)True
B)False
Q5) Managers have been characterized as reluctant to increase dividends if:
A) dividends were increased in the preceding year.
B) earnings have permanently increased.
C) the dividend increase cannot be sustained.
D)the dividend payout ratio exceeds 20%.
Q6) Discuss the concept of dividend "smoothing."
Page 19
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Chapter 18: Long-Term Financial Planning
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Q1) Increased needs for net working capital are:
A) recognized in pro forma balance sheets.
B) totally absorbed by retained earnings.
C) typically financed with short-term debt.
D)ignored due to their great variability.
Q2) If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of 0.75 then:
A) debt must increase by $300,000.
B) equity must increase by the full $400,000.
C) debt must increase by $171,429.
D)equity must increase by $100,000.
Q3) Alternative "what if?" scenarios can be easily accommodated in financial planning by use of:
A) sustainable growth models.
B) planning outputs.
C) spreadsheet programs.
D)bond covenants.
Q4) Pro formas are projected or forecasted financial statements.
A)True
B)False
Page 20
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Chapter 19: Short-Term Financial Planning
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Q1) When accounts payable exceed the sum of inventory and accounts receivable, net working capital must be negative.
A)True
B)False
Q2) A firm's inventory period can be estimated by the ratio of inventory to daily output.
A)True
B)False
Q3) Which one of the following would not be considered a use of cash?
A) Dividends
B) Decreased accounts payable
C) Depreciation
D)Increased accounts receivable
Q4) Firms are often known to pay commitment fees to banks for the privilege of receiving a line of credit. Does it make sense for a firm to pay for something that, at least at the present time, it does not know whether it will use?
Q5) How would you develop a model to analyze the benefits and costs of stretching payables? Assume that cash discounts will be forgone and that short-term bank funds are usually available.
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Chapter 20: Working Capital Management
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Q1) Which statement is true about terms of trade credit of 2/10, net 30?
A) A 10% cash discount is offered for payment before 30 days.
B) A 2% cash discount can be taken for payment before the 10<sup>th</sup> of the following month.
C) A 10% cash discount can be taken if paid by the second day after invoicing.
D)No cash discount is offered after the tenth day.
Q2) Which one of the following credit agreements provides the least protection to the seller?
A) Banker's acceptance
B) Time draft
C) Open account
D)Commercial draft
Q3) How much value would be added to a firm that could permanently reduce its collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?
A) $1,000
B) $1,200
C) $10,000
D)$20,000
Q4) What are some of the ways that companies receive payments?
Page 22
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Chapter 21: Mergers, Acquisitions, and Corporate Control
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Q1) If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines), the merger would be classified as a:
A) conglomerate.
B) leveraged buyout.
C) horizontal merger.
D)vertical merger.
Q2) Splitting one firm into four separate firms is an example of a:
A) leveraged buyout.
B) spin-off.
C) management buyout.
D)tender offer.
Q3) Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:
A) proxy fights.
B) leveraged buyouts.
C) shark attractants.
D)poison pills.
Q4) The 1980s were a time of little merger activity.
A)True
B)False
Page 23
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Chapter 22: International Financial Management
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Q1) Assume you can exchange $1 for either C$1.03 or 0.74. How many Canadian dollars can be acquired with one euro?
A) C$0.7622
B) C$1.2900
C) C$1.3919
D)C$0.7184
Q2) If exchange rates adjust to reflect inflation differentials across countries, then: A) the law of one price is voided.
B) spot and forward rates will be equal.
C) nominal interest rates will be equal across countries. D)purchasing power parity holds.
Q3) How do we perform an NPV analysis for projects with cash flows in foreign currencies?
Q4) What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in the United States but only 3% is expected in Spain. The nominal U.S. interest rate is 9%.
Q5) Transaction risk is easily identified and hedged. A)True B)False
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Chapter 23: Options
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Q1) The Financial Accounting Standards Board (FASB) stipulates that companies must use an option valuation model to estimate the fair value of any option grants and then deduct this value when calculating profits.
A)True
B)False
Q2) Convertible bonds give the investor the option to buy the firm's stock in exchange for the value of the underlying bond.
A)True
B)False
Q3) You purchased a stock for $36 a share, a call option with an exercise price of $35 and a premium of $3, and a put option with an exercise price of $35 and a premium of $2. What will be your net profit if you close out all three positions when the stock is selling for $37 a share?
A) -$2
B) $3
C) -$1
D)$2
Q4) What options may be present in capital investment proposals?
Q5) What options may be provided in financial securities?
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Chapter 24: Risk Management
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Q1) Both the seller and the buyer in a futures contract are required to put up margins.
A)True
B)False
Q2) A farmer can hedge the risk of downward movement in the price of his product by:
A) buying a call option.
B) selling a put option.
C) buying a put option.
D)buying a futures contract.
Q3) Why do companies hedge to reduce risk?
Q4) ABC Corp. entered into a currency swap with its bank, providing that ABC borrows $5 million at 10% and swaps for a 12% yen loan. The spot exchange rate is ¥105/$. If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank?
A) ¥1.26 million
B) ¥5.71 million
C) ¥52.50 million
D)¥63.00 million
Q5) Under what conditions can the use of options actually be detrimental to the firm's profitability?
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