Managerial Finance Practice Exam
Course Introduction
Managerial Finance focuses on the principles and techniques necessary for effective financial decision-making within organizations. The course covers key topics such as financial statement analysis, budgeting, working capital management, capital structure, risk assessment, and the valuation of investment projects. Emphasis is placed on applying financial concepts to real-world business scenarios, enabling students to analyze financial information critically and support strategic planning and organizational growth. Through case studies and practical exercises, students gain a comprehensive understanding of how managers use financial data to make informed decisions that drive long-term value creation.
Recommended Textbook Fundamentals of Corporate Finance 10th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) From a liability point of view,what is the difference between investing in a sole proprietorship and a general partnership?
Answer: Both a sole proprietor and a general partner have unlimited liability for the firm's debts.However,as a sole proprietor you should be totally aware of all the business dealings of the firm.In a general partnership,you may or may not handle the financial transactions and thus are accepting the responsibility for actions taken not only by yourself,but those of your partners.
Q2) A business created as a distinct legal entity and treated as a legal "person" is called a:
A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)unlimited liability company.
Answer: A
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Chapter 2: Financial Statements,Taxes,and Cash Flow
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Q1) Which of the following is (are)included in the market value of a firm but are excluded from the firm's book value?
I.value of management skills
II.value of a copyright
III.value of the firm's reputation
IV.value of employee's experience
A)I only
B)II only
C)III and IV only
D)I, II, and III only
E)I, III, and IV only
Answer: E
Q2) Which one of the following accounts is the most liquid?
A)inventory
B)building
C)accounts receivable
D)equipment
E)land
Answer: C
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Page 4
Chapter 3: Working With Financial Statements
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Q1) Relationships determined from a firm's financial information and used for comparison purposes are known as:
A)financial ratios.
B)identities.
C)dimensional analysis.
D)scenario analysis.
E)solvency analysis.
Answer: A
Q2) Which one of the following statements is correct?
A)If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B)Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C)The debt-equity ratio can be computed as 1 plus the equity multiplier.
D)An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E)An increase in the depreciation expense will not affect the cash coverage ratio.
Answer: E
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of the firm's capacity.What is the full capacity level of sales?
A)$31,755
B)$36,250
C)$48,667
D)$51,333
E)$54,500
Q2) Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent.The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales.What is the pro forma net income?
A)$303.33
B)$327.18
C)$405.60
D)$438.70
E)$441.10
Q3) A)What are the assumptions that underlie the internal growth rate and B)what are the implications of this rate?
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Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) Shelley won a lottery and will receive $1,000 a year for the next ten years.The value of her winnings today discounted at her discount rate is called which one of the following?
A)single amount
B)future value
C)present value
D)simple amount
E)compounded value
Q2) At an interest rate of 10 percent and using the Rule of 72,how long will it take to double the value of a lump sum invested today?
How long will it take after that until the account grows to four times the initial investment?
Given the power of compounding,shouldn't it take less time for the money to double the second time?
Q3) You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?
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Page 7
Chapter 6: Discounted Cash Flow Valuation
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Q1) You just acquired a mortgage in the amount of $249,500 at 6.75 percent interest,compounded monthly.Equal payments are to be made at the end of each month for thirty years.How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year.)
A)$925.20
B)$1,206.16
C)$1,403.44
D)$1,511.21
E)$1,548.60
Q2) You have some property for sale and have received two offers.The first offer is for $89,500 today in cash.The second offer is the payment of $35,000 today and an additional $70,000 two years from today.If the applicable discount rate is 11.5 percent,which offer should you accept and why?
A)You should accept the $89,500 today because it has the higher net present value.
B)You should accept the $89,500 today because it has the lower future value.
C)You should accept the first offer as it has the greatest value to you.
D)You should accept the second offer because it has the larger net present value.
E)It does not matter which offer you accept as they are equally valuablE.
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent.The bonds make semiannual payments.The yield-to-maturity on these bonds is 9.2 percent.What is the current bond price?
A)$985.55
B)$991.90
C)$1,042.16
D)$1,089.02
E)$1,098.00
Q2) A sinking fund is managed by a trustee for which one of the following purposes?
A)paying interest payments
B)early bond redemption
C)converting bonds into equity securities
D)paying preferred dividends
E)reducing coupon rates
Q3) Bonds issued by the U.S.government:
A)are considered to be free of interest rate risk.
B)generally have higher coupons than those issued by an individual state.
C)are considered to be free of default risk.
D)pay interest that is exempt from federal income taxes.
E)are called "munis".
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Chapter 8: Stock Valuation
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Q1) Upper Crust Bakers just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 percent per year.If you are planning to buy 1,000 shares of this stock next year,how much should you expect to pay per share if the market rate of return for this type of security is 12 percent at the time of your purchase?
A)$37.33
B)$38.16
C)$38.83
D)$41.91
E)$42.00
Q2) Marie owns shares of Deltona Productions preferred stock which she says provides her with a constant 14.3 percent rate of return.The stock is currently priced at $45.45 a share.What is the amount of the dividend per share?
A)$6.00
B)$6.25
C)$6.50
D)$6.60
E)$7.00
Q3) Explain why small shareholders should prefer cumulative voting over straight voting. To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) The Square Box is considering two projects,both of which have an initial cost of $35,000 and total cash inflows of $50,000.The cash inflows of project A are $5,000,$10,000,$15,000,and $20,000 over the next four years,respectively.The cash inflows for project B are $20,000,$15,000,$10,000,and $5,000 over the next four years,respectively.Which one of the following statements is correct if The Square Box requires a 13 percent rate of return and has a required discounted payback period of 3.5 years?
A)Both projects should be accepted.
B)Both projects should be rejected.
C)Project A should be accepted and project B should be rejected.
D)Project A should be rejected and project B should be accepted.
E)You should be indifferent to accepting either or both projects.
Q2) The profitability index (PI)of a project is 1.0.What do you know about the project's net present value (NPV)and its internal rate of return (IRR)?
Q3) How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?
Q4) Explain the differences and similarities between net present value (NPV)and the profitability index.
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Chapter 10: Making Capital Investment Decisions
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Q1) You own a house that you rent for $1,100 a month.The maintenance expenses on the house average $200 a month.The house cost $219,000 when you purchased it 4 years ago.A recent appraisal on the house valued it at $239,000.If you sell the house you will incur $14,000 in real estate fees.The annual property taxes are $4,000.You are deciding whether to sell the house or convert it for your own use as a professional office.What value should you place on this house when analyzing the option of using it as a professional office?
A)$211,800
B)$221,000
C)$225,000
D)$235,000
E)$239,000
Q2) Changes in the net working capital requirements:
A)can affect the cash flows of a project every year of the project's life.
B)only affect the initial cash flows of a project.
C)only affect the cash flow at time zero and the final year of a project.
D)are generally excluded from project analysis due to their irrelevance to the total project.
E)reflect only the changes in the current asset accounts.
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Page 12
Chapter 11: Project Analysis and Evaluation
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Q1) What is operating leverage and why is it important in the analysis of capital expenditure projects?
Q2) Mountain Gear can manufacture mountain climbing shoes for $15.25 per pair in variable raw material costs and $18.46 per paid in variable labor costs.The shoes sell for $135 per pair.Last year,production was 170,000 pairs and fixed costs were $830,000.What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 10,000 pairs?
A)$149,500
B)$287,600
C)$337,100
D)$380,211
E)$1,164,100
Q3) Which one of the following statements concerning variable costs is correct?
A)Variable costs minus fixed costs equal marginal costs.
B)Variable costs are equal to fixed costs when production is equal to zero.
C)An increase in variable costs increases the operating cash flow.
D)Variable costs are inversely related to fixed costs.
E)Variable costs per unit are inversely related to the contribution margin per unit.
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13
Chapter 12: Some Lessons From Capital Market History
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Q1) Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent.Using Blume's formula,what is your best estimate of the future annual returns over the next 5 years?
A)11.18 percent
B)12.27 percent
C)11.84 percent
D)12.66 percent
E)12.46 percent
Q2) Which one of the following statements is correct concerning market efficiency?
A)Real asset markets are more efficient than financial markets.
B)If a market is efficient, arbitrage opportunities should be common.
C)In an efficient market, some market participants will have an advantage over others.
D)A firm will generally receive a fair price when it issues new shares of stock.
E)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.
Q3) You want to invest in an index fund which directly correlates to the overall U.S.stock market.How can you determine if the market risk premium you are expecting to earn is reasonable for the long-term?
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Page 14
Chapter 13: Return,Risk,and the Security Market Line
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Q1) Which one of the following indicates a portfolio is being effectively diversified?
A)an increase in the portfolio beta
B)a decrease in the portfolio beta
C)an increase in the portfolio rate of return
D)an increase in the portfolio standard deviation
E)a decrease in the portfolio standard deviation
Q2) Which of the following statements are correct concerning diversifiable risks?
I.Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities.
II.There is no reward for accepting diversifiable risks.
III.Diversifiable risks are generally associated with an individual firm or industry.
IV.Beta measures diversifiable risk.
A)I and III only
B)II and IV only
C)I and IV only
D)I, II and III only
E)I, II, III, and IV
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Chapter 14: Cost of Capital
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Questions
Q1) Phillips Equipment has 80,000 bonds outstanding that are selling at par.Bonds with similar characteristics are yielding 7.5 percent.The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding.The preferred stock sells for $65 a share.The common stock has a beta of 1.34 and sells for $42 a share.The U.S.Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent.The corporate tax rate is 38 percent.What is the firm's weighted average cost of capital?
A)10.15 percent
B)10.64 percent
C)11.18 percent
D)11.30 percent
E)11.56 percent
Q2) A firm's overall cost of equity is:
A)is generally less that the firm's WACC given a leveraged firm.
B)unaffected by changes in the market risk premium.
C)highly dependent upon the growth rate and risk level of the firm.
D)generally less than the firm's aftertax cost of debt.
E)inversely related to changes in the firm's tax rate.
Q3) Explain how the use of internal equity rather than external equity affects the analysis of a project.
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Chapter 15: Raising Capital
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Q1) What is a prospectus?
A)a letter issued by the SEC authorizing a new issue of securities
B)a report stating that the SEC recommends a new security to investors
C)a letter issued by the SEC that outlines the changes required for a registration statement to be approved
D)a document that describes the details of a proposed security offering along with relevant information about the issuer
E)an advertisement in a financial newspaper that describes a security offering
Q2) The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the: A)gross spread.
B)under price amount
C)filing fee.
D)new issue premium.
E)offer price.
Q3) Explain why there is a tendency for IPOs to be underpriced.
Q4) Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Pete is the CFO of Dexter International.He would like to increase the debt-equity ratio of the firm but is concerned that the firm's shareholders may not be willing to accept additional financial leverage.Pete has come to you for advice.What is your recommendation?
Q2) The interest tax shield has no value when a firm has a: I.tax rate of zero.
II.debt-equity ratio of 1. III.zero debt.
IV.zero leverage.
A)I and III only
B)II and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, and IV only
Q3) In general,the capital structures used by U.S.firms:
A)tend to overweigh debt in relation to equity.
B)generally result in debt-equity ratios between 0.45 and 0.60.
C)are fairly standard for all SIC codes.
D)tend to be those which maximize the use of the firm's available tax shelters.
E)vary significantly across industries.
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Chapter 17: Dividends and Payout Policy
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Q1) Dividend payments are mailed on which one of the following dates?
A)ex-rights date
B)ex-dividend date
C)date of record
D)date of payment
E)declaration date
Q2) Which of the following account balance changes occur as a result of a large stock dividend?
I.increase in common stock
II.decrease in capital in excess of par
III.increase in capital in excess of par
IV.decrease in retained earnings
A)I and III only
B)II and IV only
C)I and IV only
D)II and III only
E)I, III, and IV only
Q3) Identify some real-world factors which might make it more difficult for an individual to effectively create a homemade dividend policy.
Q4) Explain the meaning of the dividend clientele effect and why it is important.
Page 19
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Chapter 18: Short-Term Finance and Planning
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Q1) Interior Designs has an inventory period of 51 days,an accounts payable period of 38 days,and an accounts receivable period of 32 days.Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount.If the new discount is taken,the accounts payable period is expected to decline by 26 days.If the new discount is taken,the operating cycle will be _____ days.
A)52
B)62
C)78
D)83
E)91
Q2) The optimal investment in current assets for an operating firm occurs at the point where:
A)both shortage costs and carrying costs equal zero.
B)shortage costs are equal to zero.
C)carrying costs are equal to zero.
D)carrying costs exceed shortage costs.
E)the total costs of holding current assets is minimized.
Q3) List and describe the three basic types of secured inventory loans.Compare the advantages and disadvantages of these loans.
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Page 20
Chapter 19: Cash and Liquidity Management
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Q1) The Miller-Orr model:
A)recommends selling securities in an amount equal to (U* - C) when the cash balance reaches L.
B)requires that marketable securities be sold whenever the cash balance falls below the target level.
C)bases the optimal level of cash solely on the opportunity costs of holding cash.
D)supports the argument that the target cash balance declines as order costs increase.
E)advocates investing an amount described as (U* - C) in marketable securities when the cash balance reaches U*.
Q2) Your firm spends $54,000 a week to pay bills and maintains a lower cash balance limit of $45,000.The standard deviation of your disbursements is $12,100.The applicable interest rate is 4.5 percent and the fixed cost of transferring funds is $55.What is your opportunity cost of holding cash based on the BAT model?
A)$1,318
B)$1,864
C)$2,204
D)$2,311
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Chapter 20: Credit and Inventory Management
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Q1) Weisbrough United currently has a cash sales only policy.Under this policy,the firm sells 410 units a month at a price of $219 a unit.The variable cost per unit is $140 and the carrying cost per unit is $3.30.The monthly interest rate is 1.3 percent.The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy.What is the net present value of the switch using the one-shot approach?
A)$255,590
B)$296,110
C)$298,470
D)$302,233
E)$305,902
Q2) A cash discount of 2/5,net 30:
A)grants customers 30 days to pay after the discount period expires.
B)offers customers a maximum of 30 days credit.
C)grants free credit for a period of 30 days.
D)charges a higher price to a cash customer than to a customer who pays in 2 days.
E)grants customers 2 days to pay if they want the 5 percent discount.
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Page 22
Chapter 21: International Corporate Finance
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Q1) On Friday evening,Bank A loans Bank B Eurodollars that must be repaid the following Monday morning.Which one of the following is most likely the interest rate that will be charged on this loan?
A)Eurodollar yield to maturity
B)London Interbank Offer Rate
C)Paris Opening Interest Rate
D)United States Treasury bill rate
E)international prime rate
Q2) Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?
A)unbiased forward rates condition
B)uncovered interest parity
C)international Fisher effect
D)purchasing power parity
E)interest rate parity
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) When weighing a decision,Kate places greater emphasis on opinions that match her own than she does on opinions offered by others that disagree with her personal point of view.Kate illustrates which one of the following?
A)frame dependence
B)overconfidence
C)gambler's fallacy
D)confirmation bias
E)overoptimism
Q2) General rules used as the basis for decision making are referred to as:
A)a loss aversion technique.
B)heuristics.
C)self-attribution.
D)narrow framing.
E)confirmation bias.
Q3) Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.
Q4) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
Page 24
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Chapter 23: Enterprise Risk Management
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Q1) By definition,which one of the following contracts is marked to the market on a daily basis?
A)forward contract
B)spot contract
C)hedge
D)swap
E)futures contract
Q2) Farmer Mac owns a large orange grove in Florida.The value of his business is directly related to the price of oranges.Which one of the following is a graphical representation of this price-value relationship?
A)exchange line
B)net present value profile
C)risk profile
D)market line
E)return grid
Q3) What are the primary motives for a hedger and a speculator in the derivatives market?
If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.
Q4) Explain why a swap is effectively a series of forward contracts.
Page 25
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Chapter 24: Options and Corporate Finance
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Q1) Which one of the following describes the maximum value of a call option?
A)strike price minus the initial cost of the option
B)exercise price plus the price of the underlying stock
C)strike price
D)market price of the underlying stock
E)purchase price
Q2) You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share.What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?
A)-$2,840
B)-$1,760
C)-$1,080
D)$1,080
E)$1,760
Q3) Explain how the floor and the ceiling prices for a convertible bond are determined.
Q4) What are the upper and lower bounds for an American call option?
Explain what would happen in each case if the bound was violated.
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Chapter 25: Option Valuation
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Q1) To compute the value of a put using the Black-Scholes option pricing model,you:
A)first have to apply the put-call parity relationship.
B)first have to compute the value of the put as if it is a call.
C)compute the value of an equivalent call and then subtract that value from one.
D)compute the value of an equivalent call and then subtract that value from the market price of the stock.
E)compute the value of an equivalent call and then multiply that value by e<sup>-RT</sup>.
Q2) Give an example of a protective put and explain how this strategy reduces investor risk.
Q3) You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.
A)$6,000.00
B)$6,048.50
C)$6,179.25
D)$6,202.22
E)$6,415.69
Q4) Explain why financial mergers tend to benefit bondholders more than shareholders.
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Chapter 26: Mergers and Acquisitions
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Q1) A potential merger which produces synergy:
A)should be rejected due to the projected negative cash flows.
B)should be rejected because the synergy will dilute the benefits of the merger.
C)has a net present value of zero.
D)creates value and therefore should be pursued.
E)reduces the anticipated net income from the target firm.
Q2) Consider the following premerger information about Firm A and Firm B:
\[\begin{array} { l r r }
& { \text { Firm A } } & { \text { Firm B } } \\
\text { Total earnings } & \$ 930 & \$ 650 \\
\text { Shares outstanding } & 620 & 210 \\
\text { Price per share } & \$ 40 & \$ 20
\end{array}\] Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock.Both A and B have no debt outstanding.What will the earnings per share of Firm A be after the merger?
A)$1.60
B)$1.86
C)$1.95
D)$2.02
E)$2.10
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Chapter 27: Leasing
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72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/57363
Sample Questions
Q1) Green Valley Farms is considering either leasing or buying some new farm equipment.The lessor will charge $27,500 a year for a 5-year lease.The purchase price is $136,000.The equipment has a 5-year life after which time it will be worthless.Green Valley Farms uses straight-line depreciation,has a 32 percent tax rate,borrows money at 10 percent,and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years.What is the net advantage to leasing?
A)$20,574
B)$21,507
C)$22,638
D)$26,283
E)$31,753
Q2) Which one of the following statements is correct concerning taxes and leasing?
A)Tax-deferral is a legitimate reason for leasing.
B)The lessee should be the party with the higher tax bracket.
C)Generally speaking, lessors tend to benefit from leases while lessees do not.
D)If a firm has significant net operating losses, it should be the lessor in a lease.
E)You should only lease an asset if the lease will be fully amortized.
Q3) What are some "good" reasons for opting to lease rather than purchase an asset?
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